How to Find and Measure Product-Market Fit
Hundreds of businesses have experienced the following scenario: they thought they came up with a groundbreaking idea and rushed straight to bringing it to life. But the truth is, even the best product might not receive broad acceptance.
Unfortunately, numerous companies and startups failed MVP product launch because they didn't do their homework and find product-market fit. Recent statistics show that the two main reasons for such failure are shortage of funds and lack of market need (38% and 35% correspondingly). Ultimately, a product can't just be appealing as there are many more components for success.
But you can and should learn from the startup mistakes of other entrepreneurs. On this page, we answer the question "what is product-market fit", explain how it lays the foundation for fast growth, and how to find and measure it.
What Is Product-Market Fit (PMF)?
The product-market fit definition implies that a company has delivered a quality product that is relevant to the market and is accepted by the target audience because it brings value, satisfies their needs, and is affordable. In this case, product-market fit indicates that the customers are buying, using, and willingly spreading the word about the product, which paves the way for its sustainability and growth.
As you might have guessed, it makes sense for a business to define product-market fit before proceeding to product development, as it is a vital step that determines the early success of a product and the company overall. It's all about:
- finding the right niche at the right time;
- confirming that the audience is big enough to sustain the idea (e.g., ready to buy the product);
- learning whether there's need for a business pivot;
- and fine-tuning the product to match the customers' pain points, desires, and financial state.
The following pyramid was created by Dan Olsen, author, entrepreneur, and expert in product management. The pyramid helps to illustrate that product-market fit is the nucleus layer between the market and the product. Each layer is codependent.
But how does a startup reach this middle ground?
- As the first step, you need to ensure that there are enough people who'll be interested in the product you're offering and ready to buy it.
- Secondly, you need to mold your product. Does it fulfill the users' needs and solve their pain points or problems?
- Thirdly, can your product sustain itself, and will it bring back the expected profit?
As you see, product-market fit isn't just a startup term or buzzword. To understand all that and find product-market fit, you must conduct market research, collect data and feedback, and iterate the product around the gathered findings to reach customer satisfaction. Of course, the duration and complexity of this process will differ based on the product itself. Is it something entirely new or more or less familiar to the audience? This is just one of the variables.
Why Does Product-Market Fit Matter?
A business or startup shouldn't underestimate the importance of product-market fit. It doesn't go down to just finding and pitching to investors to raise funds. You'd probably want to invest in a solution that'll bring back ROI, grow to become a success, and scale further, right? Well, that won't happen if you create something no one wants to buy.
So you have to be sure that you have the right value proposition. Note that finding product-market fit will allow you to generate more precise and creative ideas and assemble better teams to produce something that people will actually need.
The new product idea can have different roots. For instance, it may be:
- an attempt to use your existing product differently or pitch it to another audience or market;
- born as a branch or spin-off of your existing solution;
- a new solution created entirely from scratch.
But in any case, if there's no demand for the product you're planning to build, you won't make it far. Sadly, many examples of product-market fit absence led to devastating failure.
One of them was Quibi, a video streaming mobile platform that shut down less than half a year after its launch in 2020, having spent over 2 billion USD. While the idea of such a bite-size content service that is "mobile-first" seemed genius, the solution couldn't meet user needs and expectations. The same could have happened if the market was overcrowded or occupied.
Hence, for a startup, product-market fit is crucial because it can fuel you to success. The two can't exist apart from each other, and PMF should be your primary objective as its absence is the second most widespread reason adding to the startup failure rate.
How to Find Product-Market Fit: Where Do You Start?
There are multiple paths you can take at this point. To help you begin your journey, here are 5 steps to find product-market fit that we recommend following.
Step 1: Discover Your Target Audience and Their Needs
Going through the project discovery phase is a pivotal moment that can become a safety net both for startups and established businesses. So, first things first. Who are you going to sell the product to?
You need to find out who these people are and build user personas around those who resonate with what your product or service offers. You must take their needs, desires, pain points, and experiences into account; they are your primary focus.
Step 2: Study the Market
You might have generated hypotheses that your product will be a game changer. But what's already out there on the market?
Remember that while the product may seem awesome, there must be market demand for it. So as you try to find product-market fit, you must consider the market strength and size along with what users expect to have proof of concept (POC).
Dig deep and analyze the existing solutions. These can be competitors or analogs that you can "put on the scale" regarding their effectiveness and issues. Then make conclusions, fall back on them, and make improvements.
Step 3: Think About Your Value Proposition
You have to define your product and what it will be like while finding product-market fit. What will make it stand out? Why will people want to give it a shot?
At this stage, you need a concept that you'll later iterate to become the product version that everyone wants to get. List the major issues to be solved and the opportunities to approach them effectively (they'll form the basis of your offerings and your business or startup digital marketing strategy).
Step 4: Work on Your MVP
Now that you've prepared an initial vision of the pilot version, you need to work on the minimum viable product. Which set of features do you need to make the product great? Shortlist the must-haves and proceed to MVP development. Make sure everything's well-polished before you present the MVP to the world.
This will pave the way to how to determine product-market fit further on. As time goes, you'll analyze feedback, look into collected data, and make changes to what you've launched, achieving a minimum lovable product or even its sellable version.
Step 5: Analyze the Product After its Launch
You'll continue molding the solution further on after it's launched. This is the beta version you're showing real buyers, so collect feedback, monitor user behavior, and analyze the findings after actual users give it the first run. Then work on product feature prioritization to decide which features need to be made to improve and scale the product.
Finding Product-Market Fit: Pre-PMF Tips
The steps described above may seem like a lot to handle at the early stages of startup development. What if your business or startup budget is so limited that you can't afford to undergo such a process? What if you aren't sure your product idea is worth it in the first place? There are additional ways to test the water. Let's call it preliminary PMF determination.
For instance, you can go for community engagement methods via social media. You may start an Instagram page introducing your product and send direct messages or surveys to test product-market fit. But will this method give solid results? To be fair, such findings might not be comprehensive enough to draw full-scale conclusions.
Similarly, you can opt for running paid ads on Facebook or other social media relevant to your audience. If people are interested in the ads, you may use the number of clicks to see whether there's demand for the product. Yet mind that this method might not provide the full panorama of user intent. Remember that some of these may be clicks by mistake or out of curiosity. So, again, if you opt for only this tactic, it may not be enough to determine what is product-market fit for you.
Therefore, for spot-on results, we'd definitely recommend using the 5-step method of how to find product-market fit described earlier instead of these pre-product-market fit tactics. You have to launch a product with real users to know for sure if you have PMF. It'll give a more precise overview that'll allow for making data-backed decisions and safeguard you from project budget drain.
What Are the Signs of Good Product-Market Fit?
Falling back on the previous 5-stage product-market fit checklist, launching a product is the best way to see how it's accepted.
If you have a minimum viable product, the following indicators can highlight your progress after MVP release:
- You manage to attract customers that pay for your product; their number only grows.
- You have a steady sales stream.
- Many of your customers continue using the product over an extensive period of time and come back for more (customer retention is visible).
- The product receives many referrals, bringing in a lot of additional sales.
- The customer acquisition cost (CAC) is low compared to lifetime value, signaling organic growth.
- You have decent user engagement and get good product feedback.
- You feel your product is already good enough, so you can switch the focus from tweaking the product to finding more ways to distribute it.
Signals That You Lack Product-Market Fit
If you don't see the signs described above, it looks like you didn't find product-market fit (at least not yet).
- The target audience doesn't gain value from the product.
- The sales cycle is extensive, and the lead conversions are not impressive.
- You don't have many customers, and their number isn't growing at the expected pace.
- You often see cases of page abandonment or people leaving after the free trial period.
- No one is talking about the product (lack of word-of-mouth discovery), or there are many negative user reviews.
Importantly, these signs and signals must be backed by metrics for product-market fit. They provide proof that you're on the right track. For example, even with Facebook Touch, if you're not seeing positive metrics for product-market fit, it's a sign that you need to rethink your approach.
How to Measure Product-Market Fit
Okay, but how do you know that people are enjoying the product? Assessing product-market fit is not a simple undertaking. There are still many estimates at this point, but there are numerous ways of measuring product-market fit and MVP testing methods. Obviously, no single combination of indicators will answer all the questions at once, but we can split them into qualitative and quantitative.
Qualitative Ways to Measure Product-Market Fit
One of them is hearing your customers out. You may collect opinions if you decide to build in public, hold in-depth interviews with your users, or run surveys (via email send-outs or specially-designed MVP tools that help to embed questionnaires and forms straight into the product). At the MVP stage, it is vital to communicate with that segment of the audience who actually interacted with the product to find out their opinion.
You'd be surprised how much you can learn from such feedback. For example, what if the product has usability flaws or other inconsistencies that spoil the experience? Or perhaps the product is missing a vital feature that would make a difference. Finding answers to such product development questions and getting such insights allows for generating ideas, altering the business strategy, and improving the product.
Are your customers sharing the word about your product? Browse the reviews they're giving and the lead source, i.e., how did new customers find you (was it organically, say, thanks to word-of-mouth?).
Similarly, various startup tools used for analytics can also give valuable insights. For example, by using data visualization means like heat maps and click maps, you can discover which areas of the solution cause issues or confusion. Maybe rethinking your navigation will help users find what they need faster? Or you shouldn't ask for credit card details straight on? Hence, you can boost the product by omitting the roadblocks that cause users to hit the "X" and close the page.
Major Product-Market Fit Metrics
Of course, there are also quantitative methods of validating product-market fit. Let's look at some tangible metrics and more analytics-based indicators that can shed light on the real picture once you start gathering information and collecting data reports.
If you decide to go the entire way and launch an MVP, consider giving attention to the following product-market fit KPIs to highlight what areas to change and adapt.
1. Daily Active Users (DAU) and Monthly Active Users (MAU)
Start by using startup analytics solutions (for example, Mixpanel or Amplitude) for tracking how many active users you have on a daily and monthly basis. Is their number growing? Great! If not, it looks like something you're doing isn't right. There can be various reasons for churn: something's wrong with the product or its distribution channels. In any case, dive deeper to find out why.
2. Conversion Rate
Are the customers willing to buy your product or service? Nothing speaks better than the conversion rate when it comes to how to determine product-market fit. But don't be intimidated by a small percentage, as even a 2-3% conversion rate may be a good indicator.
It depends on the industry, product, its price, and numerous other factors. Possibly, if your product costs hundreds of dollars and 5 out of 100 leads make a purchase, this is a nice start.
3. Customer Retention
Having existing customers return to you is arguably even more important than acquiring new ones. Notably, only consistent and long-term customer retention will lead you to the persistent growth of active users.
Who are returning clients? For instance, it can be the number of users who've downloaded an application and used it regularly for a month or more.
The actual customer retention rate that's considered decent will also differ based on the industry, ranging on average from 6 to 35%. But a very low rate can be a red flag, showing that you're spending more on getting customers than keeping them.
4. Lifetime Value (LTV) to Customer Acquisition Cost (CAC)
Customer acquisition cost is among the most important product performance metrics. It shows how much you spent on getting a paying client. Divide the marketing and sales costs by the number of clients you've won to calculate CAC.
This metric is usually paired with lifetime value, signaling how much you've earned throughout the entire time after acquisition. LTV considers gross rate, average monthly payment rate, and churn rate.
You're doing great if the lifetime value is 2.5 or 3 times higher than the customer acquisition rate. At least this estimate is something worth aiming for.
5. Referral Score
Also called the net reporter score (NRS), it determines the likelihood of a customer recommending your product to friends, family, colleagues, or others. It is not the most important product-market fit metric. But it reflects aspects that influence the product (i.e., customer service, quality satisfaction, client loyalty, etc.).
To find out the rate, you need to collect and calculate the users' scores according to their 1-10 responses of how likely they are to recommend your product. Those whose answers are 0 to 6 are called "detractors"; they're not likely to promote your product. Consider 7-8 answers as "passive promoters" and 9-10s as "active promoters".
The NRS formula is quite simple: subtract the percentage of "active promoters" from "detractors". If you're at 30% and above, this is not bad, while 70% and up is excellent.
Final Thoughts on How to Get Product-Market Fit
To summarize, those startups who want to build a valuable business need to focus on both attracting investment and finding product-market fit. You have to know whether there is market demand for your idea and if people really need what you're offering and are satisfied with it. This factor may be fundamental in the long run.
Yet you have to understand that achieving product-market fit is continuous work with lots of trial and error. Frankly, you can obtain the most spot-on PMF results after a year or more, so you need to be ready to put in the time.
The bottom line is that if people are buying or using your product to the expected extent, then you have product-market fit. Launching a product and analyzing data like conversions, growth, and profitability is the best way to validate your product and know for sure. But this is also the more expensive and time-consuming way to do it.
Running surveys or using tactics like ads for learning intent could be a quicker alternative, yet it may not bring you a solid answer. These methods are more suitable for determining pre-product-market fit. So this is a tradeoff that you should be aware of early on, and we advise you to aim at finding a balance.
Based on Upsilon's ample experience with early-stage startups, we'd say that doing research and building an MVP is an optimal way to go, especially for those businesses that are just at the beginning of their path. So if you're unsure how to find product-market fit or don't know where to start with your MVP, feel free to contact our experts, we'd be glad to assist!