Product market fit

How do we know that our products and services are what the customer really needs or wants? Yes, this is a simple question, but finding the correct product for the correct market is always one of the first things that any business should find out, whether at the beginning of its work or every time they offer a new product. Now, what is this product market fit? This term means that you offer a product in the right market that can satisfy it.

Product-market fit refers to the degree of alignment between a product or service and the specific needs and preferences of its target market. It is a measure of how well a product satisfies customer demands and achieves market success, indicating that there is a strong match between what the market wants and what the product offers.

What is product-market fit?

The mailchimp website defines, product-market fit as “it means being in a good market with a product that can satisfy that market. When an entrepreneur identifies a need in the market and builds a solution that customers want to buy, that’s product-market fit.”

It looks like a piece of cake, doesn’t it? Is it really that easy? Does that mean you produce something or provide a service to the market that you think is suitable and that’s it? Well, the process is a little more complicated than this. Finding an ideal market for your products is much more difficult than it seems. I mean, take a look at the definition of product market fit, being in a good market with a product that can satisfy that market, what is this good market? Well, a market may be good for me, but not good for you! So the meaning of “good” depends on people.

Now, how are they going to define this “good market”? Well, we will talk about this in the next subtitles, but to be honest, product market fit is a term that many experts cannot really put their finger on its exact meaning. Well, yes, we have a definition that almost everyone tries to analyze this market according to it, but I personally believe that it is very difficult, because Marc Andreessen coined this phrase anyway.

Several people explained this in their own language, for example, Paul Graham says that product marketing fit means “you have produced something that someone wants.” Or Sam Altman says this phrase means “users spontaneously tell others to use your product”. People’s comments on social networks like Twitter are the most interesting, many say “you can feel it!” Yes, well, you know when you produce a product and customers come to you and want to buy it from you and investors offer to invest in your product, it means you have found a good market! This is very good and ideal, but this does not happen for all products and services. Yes, this happens to some companies, like Apple, but smaller businesses have to work harder to find their product market fit. The dark side of this story is that many times you can’t measure product market fit, and when you can’t measure, it gets hard to understand exactly where you are at, on the road of prospecting, marketing and sales.

Honestly, based on my experience and many other CEOs, getting the first 10 customers is really the hardest challenge you will face. I mean the first ten people do not mean your mother, your siblings, your neighbors, your aunts, your uncles, your friends, etc. it means strangers who are currently paying for your product. It’s tough and I can say that it took three months for CUFinder to find these 10 people, maybe even more! Hard to believe, isn’t it? But even giant brands like Coca-Cola experienced this challenge. Of course, the legend that this brand sold only 25 bottles in the first year is probably one of the motivational exaggerations, but it is said that the first year of Coca-Cola was really an investment disaster.

Honestly, when we found these ten people, I said by myself that “Finally, we’ve reached Product Market Fit.” Well, it wasn’t like that at all, we were just starting the journey. Later I found out that you must have at least 1000 customers to be able to make such a claim! Those ten people are actually just to understand what problem you are solving for the customers. Of course, this 1000 people can be more or less, as we mentioned, a good market depends on your product, industry, and business size.

Let me clear something right here: you are not your market. So, please consult others before producing anything, since You are not Mr. Know It All, please consult with prospects and other entrepreneurs. Believe me, this can greatly advance your production and lets you avoid wasting a lot of time and money. Another point is that you should not think that those initial customers are the same as your market. No, they are not, these people are usually more welcoming to new things, but most of the later customers are looking for a stable product, not a beta version.

just because someone buys a product the second it comes to the market, does not mean that the product is fit. Many people just buy a service to test it. This issue is especially common in internet services such as CUFinder. So perches do not always mean market fit. You should also keep in mind that your customers change over time. Yes, we always have new customers at the top of the prospecting funnel, and we must lead them to purchase and loyalty by providing attractive offers. At the same time, there are a number of customers who have been using our services and products for years. They grow and change, so the product should improve and change with them to keep these people in the circle of loyal customers.

Why is product market fit really important? Honestly, one of the biggest problems that companies have is that they think they can find a good market, but they don’t! The importance of this issue is that before starting and investing ( money, time, and resources), you must make sure that there are people out there who want to pay for your product or service. Your sales team shall focus on strategic goals rather than constantly worrying about finding initial customers. Once you find the right fit for your product, you can use many marketing strategies, such as word of mouth, to grow your database of prospects and seek more connections on Linkedin and other social media platforms. Meanwhile, without the product market fit, you have to do a lot of paid advertising, which may not have the desired result.

How to find product market fit

So, how should we find this product market fit? As mentioned, this is a difficult task. According to statistics, 20% of startups fail in the first year and 60% of them get bankrupt after three years. There are several reasons for this issue, but one of the main ones is that they invest in a product without identifying the market fit of their product, then they find out that it does not have enough customers and they only wasted their resources. The product-market fit should be the first thing they check because it is a proven fact that businesses that find a good product market fit have a higher chance of success than others.

To avoid this failure it is strongly suggested to understand the problems your product can solve, it can be done by focusing on some areas which we will discuss.

Define your target customers

It is vital to determine target customers whom probably will benefit from using your services and products. It is suggested to have an ideal customer profile in each market segment to help your team to know who they should seek. Sean Higgins, the BetterYou CEO, believes that this process has four stages: analyzing your product or service, familiarizing yourself with the competition, choosing segment criteria, and performing research. The last stage is to define your ideal customer persona, identify which part of the persona you are targeting, do market research, etc.

Information gathering

This one is a really important step. You see, data is the torch that lightens your path and stops you from going sideways and getting lost and/or wasting your time and resources on some false hope.

Talk to customers. It’s not hard and strange, is it? Let me say that you should talk to every one of your consumers, even to those who are not happy with you. I mean, yes, it’s easy to talk to satisfied and happy customers and let them appreciate and thank you for your product. It feels great, but is it also productive? No, that’s why you should talk to those who probably don’t like or are not satisfied with you and your brand. They are the ones who help you fix the shortcomings of your product or service. Who are these customers? Well, they are those who filed a complaint after their purchase, contacted customer support, canceled their purchase, did not continue using the service after the trial period ended, etc.

Let them tell you why they think your products and services are not good for them or why they think your competitors are better. For example, ask them what disappointed them the most about your product. What do they think should be changed in your product to encourage them to use it? etc. These kinds of questions reveal the worst defects and problems of your product and service and will help you a lot in improving it faster and of course growing your brand ASAP. I know this makes you feel like crap, it’s hard to hear and accept criticism, but believe me, it helps you grow. Do you remember when you were growing up, and your legs always used to hurt? Growing up is always painful, doesn’t really matter if you are growing physically or financially.

As Hubspot states “Collect a large enough data sample to provide meaningful feedback. Consider, too, that face-to-face conversations will often generate feedback that online surveys will not.”

Focus

Don’t be everywhere in the place at once. As a startup, you probably have a limited budget, and trying to sell your product to a huge population, probably will have no result but a financial disaster. It is much better to dive deep into one industry and even better a specific section of that industry, for instance, if you are concentrating in the healthcare industry, go for selling skin care products. When you prove yourself as a professional expert in that industry by publishing valuable content on LinkedIn, Instagram, Facebook, and other platforms, it is much easier to stimulate domination in viral speed.

Specify your value proposition

As mentioned above, it is very important to identify the pain points of the customers that your product can soothe. Also, it is important to determine how to outperform your competitors and surprise your customers. Identify your challenges and draw a road map.

For instance, CUFinder, as an email-finding service, has a clear value proposition to help customers achieve the best CRM possible, without having to waste a long time and a huge amount of money for gathering prospects, customers, etc. data.

Measuring and test

This one is such an important step that we decided to have a separate subtitle for it. You need to test and measure everything from prices to your performance. Today we can test everything, do A/B tests, measure the performance of our competitors, and do other things. But honestly, many of us are afraid to try some issues such as price, packaging, shipping, etc. This is exactly where everyone speeds down and you should speed up. Try your market and taste it with prices, packaging, providing different offers, etc. You are a startup, a toddler who curiously tries everything to know the world around him.

Narcissism is dangerous

Just as Narcissus drowned for her egotism, you too can drown in self-satisfaction. Don’t assume that just because you’ve found a product market fit, you’ll always have it. Customers and their needs change with time, and you need to keep an eye on the market. Taking a look at the market changes during the Corona pandemic is enough to see how much business has changed since the peak of this disease. Also, I must remind you to move faster. You are not in a friendly meeting, the market, the sale, and the whole process of finding product market fit is a marathon. You have to coordinate your changing speed with your audience and competitors, otherwise, you will fail.

Product market fit the framework: example of success and failure

So, we talked about what product-market fit is and how you can find it. It means that you are producing a product that you are sure has a large enough market. For instance, let’s say you are creating an application that lets people do their banking transactions for free. Isn’t that a perfect idea? Sure, but did someone already create a similar app? It is not that valuable if they did and since the customers are already using some similar apps that they learned to trust, there will not be enough demand for your application. If you change it and add some features to your application that nobody already thought of, like being able to pay for public transportation, food, etc. people will probably get attracted to your product and will even be willing to pay for its subscription. That is product-market fit.

This can be the line between success and failure in the market. Seems a bold statement, but it is true according to my own and so many other entrepreneurs’ experiences. When a product or service does not help people in solving some specific problem, people would not pay for it. For instance, it is ridiculous to try to sell a beauty product to people who work in the mining industry. We want to sell our product for profit, right? Well, just because you produced something, the market doesn’t come to you, you are to chase it. A product market fit will let you avoid wasting time and money, for you get to ensure that people will pay for your product and that you found the correct market.

But can everybody find the correct product-market fit? Unfortunately, no! That is why a huge number of startups lose the game very soon. They usually try to solve problems that are not there. You need to know your target audience, their needs, their problems, and their concerns, then decide what can solve their problems that they are willing to pay for. A product-market fit is like the time you spend learning how to swim before entering the ocean.

still, you need to know that there is no 100% guarantee that you get successful even after finding the correct product market fit. Your product might simply get less appealing to the customers and that means less demand. There are some common mistakes people make when defining the product market fit:

1. Going to the ocean before learning how to swim is deadly. Many startups start producing their assumed perfect product before getting any feedback from customers, which can lead to failure.
2. Speed matters. You are to move fast in the market, if you wait for too long to receive enough feedback, it can get too late to apply the necessary changes and the ultimate product can lead to failure.
3. Startups have a limited budget. That is why so many of them try to do everything by themselves and never look for help from experts, which can lead to huge mistakes and loss of time and money.
4. Learn from your mistakes. It might seem like a cliché, but we should really learn from our mistakes. Especially SMEs have few chances to make mistakes and when they do not learn from them and keep repeating them, they obviously are doomed.
5. We said that you are to present something new to attract people and persuade them to pay for your product but to be honest, there are no benefits in being so much different than others in an industry, except if you are a huge corporation like Apple.
6. Not involving the customers can harm you. They can give some really great advice to optimize your service and product, so why not?
7. Don’t try to be appealing to everyone and all. Trying to make everyone interested in your product can backfire and that can really damage your brand reputation.
8. It is better to try to produce a professional and precise product for a specific problem than to be the jack of all trades. It just lowers your product’s demand.

All right, let’s see some success and failure examples here:

Airbnb

Airbnb is one of the most popular ways to book accommodation that is used in many countries of the world. But it has not always been so professional and popular. This brand has come a long way to where it is today and in 2021 it won second place in this industry with 6 million properties and 300 million users. This is the result of the Airbnb team’s hard work and of course finding the right PMF. But how did they do it? Well, it is said that the founders of this brand, Joe Gebbia and Brian Chesky, decided to host some designers in their house in order to pay the rent of their apartment in San Francisco. For this, they designed a website where they introduced themselves as a catering service provider to the participants of one of the famous US design conferences, IDSA. This was a great opportunity for them because, contrary to their expectations, many people requested to stay at their apartment. This gave them the idea to start a cheap apartment rental service. They soon found people who wanted to rent (demand), and a large number of applicants to rent (supply). This means that they found Product Market fit for their business, and this caused the rapid growth of this service all over the world. Although this idea was very risky, these two people first tried it in a cheaper way and then tried to consider the opinion of the audience to optimize their service.

Dinnr

It was in 2012 that Adil Mohammed and Michal Bohans found Dinnr. It allowed the customers to select a recipe, order, and receive the ingredients at the defined measure on the same day. They just needed to have a kitchen, oil, salt, and pepper. Dinnr was not a restaurant, they just used to provide the ingredient base on every recipe. They shut down the website in 2014, for there was no real need for this service from the very beginning. I mean, some people might like the idea of having needed ingredients to cook at their door, it is just faster (I do!) but most of us can just go to the local supermarket and buy the ingredients cheaper and faster. When we don’t feel like preparing the ingredients that mean we don’t feel like or have the time to cook and prefer to have a ready-made meal. That meant a low-profit margin for Dinnr and they had to shut down the website. The problem was that they did not do the market research and the product-market fit correctly, or at all! well, how should we measure it?

How to measure product market fit?

When you are developing a product or service, it is very important to understand the concept of product market fit and be able to find and measure it. As I mentioned above, there is not really a precise definition of what product market fit is, since somebody coined the term. Yet, it is a really vital thing for any business. That is why it is so important to know if you reached the product market fit or not. But since it is a concept, not numbers, it can be hard to measure; that is why people use standards. Let’s see what they are, shall we?

Product-market fit criteria by Marc Andreessen

Marc Andreessen believes you always feel that PMF is not happening. You feel when the customers do not understand the value of your product or service, there is no mouth-to-mouth marketing happening, you do not see prospecting database growth, the sales process is getting too long, etc. All of these that are to occur after finding product market fit are not happening and you can feel it. When it does, people buy your products and services like hotcake, your prospecting database will probably grow so fast that you have no choice but to add your servers and have to employ more employees for your marketing and sales teams, etc. that is an approach to measure your product market fit.

Product-market fit criteria by Sean Ellis

Perfect for startups, this method essentially asks customers how they want to feel if they use a product again. “Product-market fit requires that at least 40% of customers say they would be “very disappointed” without your product. I have determined this from over a hundred startups. The percentage of satisfied customers of companies struggling to survive is always below 40%, while the satisfied customers of strong startups are more than 40%,” says Sean Ellis.

Sean Ellis has obtained a definition of the concept of product-market fit with a survey approach. This survey is designed to provide you with an objective measure to get a feel for any scaling decisions you may have, as well as provide you with important qualitative information. The main question in this survey is:

How would you feel if you could no longer use this product?

I get very upset.

I feel somewhat sad.

I don’t get upset.

I haven’t used this product in a while.

If you find that more than 40% of your users say they would get “very upset” if they could no longer use your product, there is a huge opportunity for you to build sustainable growth and customer scale. This criterion of 40% is obtained from the top selection among 100 start-up businesses that were above this criterion and were usually able to scale their customers, and those that were below this criterion were facing problems.

It is recommended that you do this survey randomly with the following people.

Those who use your product regularly.

Those who have used your product at least two times.

Those who have used your product for at least two weeks.

To measure product-market fit in each new release, you should have this survey for your new users who have experienced the value of your product. You must categorize your users based on their interest in the product and seriously examine the needs of those people and understand what is important to them and makes the product more attractive. You should also listen to the users who are somewhat upset if they can’t use your product (the ones who can live without your product or service). It enables you to improve your product to such an extent that using it becomes an unconditional thing in this category’s life.

Pay less attention to the comments of users who will not be upset if they cannot use your product since it is very rare for them to convert into regular customers. However, you can ask them what you could improve in your product to make it better. What problem have they been unable to solve with your product or service? What do they think should be changed to improve the product? Invest in what people like about your product and create your roadmap.

Product-market fit based on DAU/MAU

The concept of DAU means daily active users and the concept of MAU means monthly active users. This approach was proposed by Andrew Chen. DAU/MAU is a popular measure of user engagement, usually, apps with a ratio of daily active users to monthly active users above 20% are good, and those above 50% are world-class. This is one of the criteria measured by Facebook, which has caused other platforms to use this key performance indicator for comparison.

One of the positive points of this indicator is that it has a clear definition and easy calculation. Also, the existence of a quantitative criterion allows you to determine the people who find the most value in the product/service. But you have to remember that the way of calculating this measure can vary for different products. For example, there is a big difference between how people use LinkedIn and Shopify, even though they are both universal applications.

Cohort Retention Rate

Cohort retention rate measures the share of customers who are still paying for a product after a specified period of time (often eight weeks). This criterion is suitable for companies that have a fixed customer base and have previous customer data. But it is less commonly used for startups or new products, yet it can be a valuable indicator.

Retention Rate is often presented as a simple line graph, with time on the X-axis and the amount of active and paying customers on the Y-axis. It shows how many customers buy from us consistently over time. The product diagram shows that after some time, some of your customers buy from you consistently and you have a product-market fit (thry are happy). the second diagram shows the ones who are also regular but their purchase amount is not increasing. And the last line shows the customers’ activity/purchase reaches zero, which means that there is no product-market fit for them.

Net Promoter Score

It is a measure that shows how likely users are to recommend your product to others. NPS is a performance measure that can be used to collect customer feedback and indirectly measure customer satisfaction and loyalty. You can measure how likely your users are to recommend your product to a friend.

Customer Lifetime Value Ratio

This metric weighs the amount of money you spend to acquire a customer against the amount of revenue you get from them in return. The customer lifetime value measure, which can be one of the strongest indicators for adjusting the product market, is calculated as follows:

1. Calculating LTV: Gross profit percentage × average monthly payment divided by churn rate

2. CAC calculation: sales and marketing costs divided by new customers

3. LTV/CAC: CAC means the cost of attracting a new customer and LTV is the return of income that a customer generates during his relationship with the company. Finally, comparing the ratio of customer value to the cost of attracting it, that is, LTV/CAC, shows you the amount of value that a customer has compared to the cost of attracting him/her. You have found the product and market fit when you can get them at a lower cost than what the customers are worth to you.

Now, if you want to calculate the PMF of your products faster, more effectively, and more reliably, make sure to bear these points in mind:

• Note that the exact value of PMF cannot be measured: Before stepping into the world of PMF measurement, you should know that an accurate and comprehensive PMF measure cannot be calculated. Determining the PMF can help you understand your overall market fit, but you should not consider it as a precise unit of measurement like air temperature. In addition, PMF has other aspects to consider.
• Use a combination of different quantities and scales: Combining different quantities and scales helps to better understand PMF. The best way to assess PMF is to use a survey (which we covered). But if you have launched the product on the market, you should also check sales statistics, customer retention, customer churn, and other metrics.
• Evaluate the different segments of your audience: Perhaps your market research has introduced you to an “ideal” target audience. But if you are in the initial stage of developing your business, it is better to spend time evaluating the product-market fit to check different types of demanding audiences. You may find that some of your audience has a higher or lower PMF than you expected.
• Use product evaluation questionnaires: They are an ideal tool for calculating PMF, because they can evaluate customers’ desires, needs, expectations, etc. Using short answer questionnaires, enables you to measure customer preferences and see your product from their eyes.
• Ask questions that can be quantified: Design at least some of the questions in the questionnaires quantitatively. For example, ask customers, “How likely are you to buy this product?” Then have them express their answer with a number between 1 and 5 (1 being the least and 5 being the most). Quantitative questions like these enable you to assign a numerical value to the answers and evaluate them objectively.
• Ask open-ended questions as well: Naturally, it is also important to ask a number of open-ended questions. Customers can express their opinions in more complete sentences through these questions. Although it takes more time, you will yet be aware of the issues that numbers cannot express.
• Use automation as much as you can: Automation is a key factor in this process. Because running the questionnaire manually takes a lot of work and needs a lot of time. Using the right tool, you can regularly register customer questionnaires and check the results without spending tens of hours.
• Test frequently: Make sure to test PMF frequently. If you want to constantly redesign and improve your product, you need to be aware of the PMF value at each stage of its evolution. If customers continue to use your product, you need to know when and why they will change their behavior.
• There will not be common questions: There is some freedom of action in terms of matching the product with the market. You don’t have to ask every question that other brands ask. Because even with your direct competitors who have the same target market as you, you don’t necessarily have common goals.

Related Questions & Answers

Why is product-market fit important?

Product-market fit is crucial for the success of a business because it determines whether a product or service meets the needs and demands of a specific target market. It signifies the alignment between what the market wants and what the product offers.

Having a strong product-market fit is important for several reasons. First, it validates the viability of the product and its potential to attract and retain customers. It ensures that there is a clear demand and market opportunity for the product, increasing the likelihood of customer adoption and revenue generation. Second, it helps businesses differentiate themselves from competitors by addressing the unique pain points and preferences of the target market. This competitive advantage allows businesses to stand out and capture a larger market share. Third, a strong product-market fit leads to customer satisfaction and loyalty. When a product truly meets the needs and expectations of customers, they are more likely to become repeat buyers, refer others, and provide valuable feedback for product improvement. Ultimately, achieving product-market fit is essential for sustainable growth and profitability in today’s competitive business landscape.

Match the product/market fit stage to its description

Product/Market Fit Stage Description:

1. Initial Idea: This stage refers to the early conceptualization of a product or service. It involves generating ideas and hypotheses about the potential market and its needs, but without substantial validation or evidence of demand.
2. Customer Development: In this stage, businesses actively engage with potential customers to gather feedback, validate assumptions, and refine their product or service offering. The focus is on understanding customer pain points, preferences, and willingness to pay.
3. Early Adoption: At this stage, businesses have identified an initial group of customers who show a strong interest in the product or service. These early adopters provide valuable insights and feedback, helping the business refine its offering further.
4. Scaling: Scaling occurs when a business successfully expands its customer base and revenue. The product or service has gained significant traction in the market, and the business is focused on growth and capturing a larger market share.
5. Market Dominance: This stage represents a position of strength and leadership in the market. The business has established a significant presence, and its product or service has become the go-to solution for the target market. Market dominance is characterized by high customer loyalty, brand recognition, and a sustainable competitive advantage.

Matching the descriptions to the product/market fit stages:

1. Initial Idea: The early conceptualization of a product or service.
2. Customer Development: Actively engaging with potential customers to gather feedback and refine the offering.
3. Early Adoption: Identifying an initial group of interested customers and gathering feedback.
4. Scaling: Successfully expanding the customer base and revenue.
5. Market Dominance: A position of strength and leadership in the market.

Conclusion

Product market fit is one of the most important things you need to do before starting your mass production. It is vital that many business experts believe that many startups fail in the first year to the first three years because they did not find it correctly and it is true at least to some extent. When you find the correct product market fit, you are ensuring that there are enough customers out there to buy your product or use your service after you present it to the market. That stops wasting time, budget, and other resources and increases the profit as much as possible since you have found your own kind in the process. So please take your time to find the best product market fit.

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