How to find product-market fit

Finding product-market fit is crucial in the product development process. Although not a new term and one which in theory sounds easy, it remains among the biggest challenges for start-ups and a key cause for their failures.

So what exactly is product-market fit? How do we find product-market fit, and how do we measure it? Let's try answering these demanding questions.

Product-market fit definition

It was Marc Andreessen who in 2007 coined the term "product-market fit". Andreessen is a successful entrepreneur and investor and also a co-founder of Andreessen Horowitz - a VC firm investing both in start-ups and established companies. 

He has invested in numerous successful global ventures like Facebook, GitHub, and LinkedIn. Being the ubiquitous names those are, they illustrate Andreessen's formidable prowess in the product development process.

According to Marc, "product-market fit means being in a good market with a product that can satisfy that market". In other words, it doesn't matter how brilliant you think your idea is. The idea will find the product-market fit only if people really need it and are ready to pay for it.

Meanwhile, a great number of start-ups either don't bother to find product-market fit, don't know how to find it, or simply do it wrong. For which they inevitably pay a very high price.

According to The Top 12 Reasons Startups Fail by CB Insights, lack of product-market fit is at the top of the list and takes 2nd place. Based on the cited analysis of 111 post-mortems since 2018, as many as 35% of start-ups fail as a result of "no market need" for their product.

The question of why people who want a product with X features get a product with Y features they do not need remains an eternal mystery.

So let's see if we can disenchant how to determine product-market fit.

Main goal: find a product-market fit!

One thing we would stress from the outset is that there exists no single, magic product-market fit template applicable to each or any business -- if only due to the complexity of the product or cultural differences in the markets. 

Nevertheless, as we at Software House believe in the effectiveness of lean methodology, our preference is the Lean Product Process by Dan Olsen. 

It's also described in a book titled "The Lean Product Playbook", which starts with a product-market fit pyramid consisting of 5 layers divided into 2 areas. 

Product area:

• UX
• Feature set
• Value proposition
• Market area:
• Underserved needs
• Target customer

According to Olsen, product-market fit is a result of matching underserved needs with the right product (located between "Value Proposition" and "Underserved Needs" below). He suggests a 6-step process starting at the bottom of the pyramid, going up.

Source: Dan Olsen, "The Lean Product Playbook"

Step 1: Determine your target customer

The success of your product very much depends on target customers. They will decide whether to buy your product or not. That's why it's absolutely crucial to determine who the target audience is.

Methods such as market segmentation and defining the buyer persona will help. Once you've established your target audience, it's a good idea to focus on and define the bridgehead market as well as to quantify the total addressable market (TAM).

Why is this important? Because even the approximate size of the market will answer the question of whether you are going in the right direction and/or have the potential for growth.

Step 2: Identify underserved customer needs

After determining who the target customers are, it's time to determine what their needs are. As there are already plenty of products on the market, it's very important that you dig deep to discover their desires, dreams, and unmet needs. 

For this, workshops, interviews and the importance/satisfaction matrix all provide crucial assistance.

Step 3: Define your value proposition

Now it's time to decide what features your product should represent in order to conquer the hearts of this target audience. It's essential here that you focus only on those functions that will satisfy these unmet needs. 

They need only be things that will enable your product to stand out from the competition; qualities to make it superior to any similar product already on the market.

This is your value proposition.

Step 4: Specify your minimum viable product (MVP) feature set

Based on step 3, then, you must define the characteristics of your MVP. This can be challenging, given the ongoing temptation to overdo your number of features. Here, however, it's a classic case of less being more. 

You must focus on strategic features only so that you can start testing and collect feedback as soon as possible. There will be time for further development and improvements later.

Step 5: Create your MVP prototype

Before you invest money in the final product, the first thing to do is to create an MVP prototype. MVP has to be functional, reliable, and usable. You should also prepare testing hypotheses and scenarios.

You will find more information on MVP (what it is and how to build it) in this previous blog post: What is a minimum viable product and how is it built?

Step 6: Test your MVP with customers

Once you have your MVP ready, you can test it with this target audience. Here, it is crucial you ensure a well planned and structured process, as you will need to know how to use the feedback you gain and to understand its impact on your product. 

You must be ready and open to introducing changes to your product. Only in this way will you be able to satisfy a customer's underserved and unmet needs. In other words, to find your product-market fit.

How to measure product-market fit

According to Marc Andreessen, you can always feel when the product-market fit is and isn't happening.

In the first case, there is demand for the product, the company doesn't have to worry about revenues required for further team recruitment, and the brand is becoming increasingly popular on the market.

Otherwise, Andreessen continues: "...customers aren’t quite getting value out of the product, word of mouth isn’t spreading, usage isn’t growing that fast, press reviews are kind of “blah”, the sales cycle takes too long, and lots of deals never close."

Although the signs of product-market fit can be obvious, the product-market fit must still be measured.

Here's what we suggest:

Product market fit: examples of metrics

The 40 per cent rule by Sean Ellis

According to this rule, ask your customers how they would feel if they could no longer use your product, then provide them with the following 3 responding options:

"very disappointed"

"somewhat disappointed"

"not disappointed"

Then you need to measure the percentage of users who answer “very disappointed.”

If at least 40% respond this way, you have a product-market fit.

Customer Lifetime value

This metric is linked to the profitability of your business. It captures how much profit the company generates from the customer. The higher the metric is, the better. It means the company is generating profits needed for further development and expansion.

Bounce Rate

This metric represents the percentage of users who visit your website but leave without any actions (e.g. without buying any products). The higher your bounce rate, the more likely it is that you don't have a product-market fit.

However, to confirm this, you should analyze the reasons for which users leave the website.

Average time spent on the website per user

In this case, a higher metric means it's most likely the user’s experience is satisfying and that consumers like your product. This puts you in a winning position in terms of achieving product-market fit.

However, there is no data indicating what the average time spent on the website should be. This very much depends on the complexity of your offer and the content presented on your website. 

Therefore, it's good to make regular weekly, monthly and annual observations for comparing data.

Pages per visit

Again, a high number in the Pages per Visit metric means that the user’s experience with your product is good and that the consumer is interested in what is presented on your website. It is more measurable evidence of product-market fit.

Retention rate

If your retention rate is high, it means that the user returns to your product. This is ideal in terms of product-market fit and presents a good opportunity to grow your business. It indicates that customers are sufficiently fond of your product and feel no need to search for alternatives.

Find your product-market fit with Startup Development House

You already know that once you find a product-market fit you can succeed in the market. Achieving product-market fit can also guarantee you exponential, organic growth driven by word-of-mouth -- one of the most effective and cheapest of marketing tools. 

If you want to introduce a product that will stand out from the competition, you must focus on this element of the product development process. Remember that each day, the market is literally flooded with new products. But your customers do not want just any product, they look for value-added.

At Startup House we believe that there is no point in creating a product that nobody wants. We think the proposed solution or service has to answer specific, underserved needs and focus on what's important for users. 

Our experience proves that the more you know about your customers and their needs, the closer you are to finding product-market fit.

Therefore "finding product-market fit" is one of the key elements of our MVP development process. We provide our clients with workshops and user testing, prepare go-to-market strategies and connect them with target customers. This is how and why we gain the crucial feedback that enables us to make the changes and improvements that will ultimately lead to the best possible product.

Do you have an idea for an application or other digital product? Contact us and we'll help you find this ever-essential product-market fit.