Think of product-market fit as the moment when “your customers become your salespeople.” Josh Porter, of Rocket Insights, calls it the magical moment when three things happen:
- Existing users recognize your product’s value.
- They tell others about their great experience with the product.
- Your company replicates the great experience for the new users.
What is Product-Market Fit?
Product-market fit occurs when a company’s value proposition, customers, and distribution channels align. It’s the perfect balance of all three pieces. If two of the three are aligned, you’ll probably enjoy some short-term success, but you’ll struggle to sustain it.
Daniel Ek, CEO of Spotify, recognized that many of the necessary pieces for product-market fit were already in place when music-sharing platform Napster collapsed in 2001 following allegations of copyright infringement.
The content already existed, mobile devices stood poised to distribute the music, and Napster had amassed a sizeable market of users. Ek banked on the possibility that this market of users would pay a small fee for legal access to the music, and he was right.
As of May 2019, Spotify boasted 217 million monthly active users.
Indicators of Product-Market Fit
Forbes Magazine characterizes product-market fit as a hair-on-fire problem that an identifiable group of people have. It’s a scenario in which a product satisfies customer needs in a way that alternative products do not.
Stated another way, if more than 40% of your customers would be very disappointed to see your product disappear from the market, there’s a good chance you’ve created a must-have item.
If your customers buy your product faster than you can manufacture it, you’ve likely achieved product-market fit. Other signs include a significant amount of press coverage or the need to hire more people quickly.
Marc Andreessen, who coined the term “product-market fit’ in 2007, believes companies who have achieved this ideal state can feel it, because money is piling up and investment bankers are staking out the company.
On the other hand, companies who haven’t achieved product-market fit can feel it as well, because word of mouth isn’t spreading, deals aren’t closing, and press reviews are flat.
Product-Market Fit Goals for Startups
Startups should prioritize product-market fit above all other goals, because those that find it will dramatically increase their odds of success. Conversely, many startups fail because they waste money on products that no one wants to buy.
To avoid this fate, make sure you understand the pain points your product solves as well as the challenges your customers are seeking to solve. You can do this by focusing on six primary areas:
1. Determine your target customer
Work to identify the target customer who represents the users that will most likely benefit from your product. Use market segments to define your ideal customer. Develop “archetypes” for those customers so your team will clearly understand who it is building toward.
TechStars’ Entrepreneur in Residence Sean Higgins defines this process in four steps:
- Analyzing your product or service
- Familiarizing yourself with your competition
- Choosing segment criteria
- Performing research
The research phase itself is carefully crafted around defining your buyer persona, identifying which part of that persona you’ll target, conducting market research with prepared research questions, and summarizing your findings into digestible takeaways to share with your individual contributors, executives, and board.
2. Gather intelligence
Talk to your customers to determine their pain points and how much they would consider paying for a solution to those challenges. Seek insights from your sales and marketing teams to identify recurring customer complaints.
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.
3. Focus on a single vertical
Startups have notoriously small budgets, which means that trying to sell your products to everyone will likely result in disaster. Begin with a narrow focus and dive deep into that industry. Establish yourself as the industry expert in a single domain with a goal to stimulate a viral spread.
For example, Spotify saw that people were ready to pay a small fee for unlimited access to music, legally. They didn’t go into the market trying to take on existing music streaming services like the discovery centered Pandora or the more traditional, pay-per-album structure of iTunes.
They created a platform for people who wanted to listen to any album, any time by only paying one fee. They identified a gap in the market and targeted the people in that gap.
4. Specify your value proposition
Determine which customer needs you can best address with your product or service. Figure out how you can outperform your competitors and surprise your customers. Don’t lose sight of your product roadmap when determining which challenges you’ll address. Not every problem will fit into yours.
For example, Spotify’s value proposition positions the streaming service as offering access over ownership, providing data-driven personalization, and the opportunity for content unbundling.
5. Measure your product-market fit
You must measure your performance in order to manage your success. Identify key data points that will help you track performance. Start by identifying your total addressable market (TAM) otherwise known as the total number of people who can benefit from your product/service (i.e., If everyone who could use your product/service started using it).
TAM is calculated by multiplying your average revenue per user (ARPU) by the total potential customers in the market. Once you have your TAM, determine what percent what percentage of your TAM are currently customers.
6. Avoid complacency
If you manage to achieve product-market fit, don’t assume you’ll always have it. Your customers’ needs will change over time, and you must constantly re-evaluate market conditions in order to continue meeting those needs.
This could look like sending out a simple survey that asks customers, “How would you feel if you could no longer use ?”
Product-Market Fit Examples
Wonder: Are You a Painkiller or a Vitamin?
Your customer relationships will drive your quest for product-market fit, from the search to find it to the battle to maintain it.
Guy Cohen, chief revenue officer at Wonder, points to his company’s drive to be a painkiller rather than a vitamin. “Vitamins are nice-to-haves, but people can’t live without painkillers.”
In its development, the company recognized that it had endless verticals to pursue, but it also understood the need for laser focus. The company developed a list of 15 verticals it believed it could help and then cold-called countless companies within those verticals to ask a barrage of questions.
Wonder chose its first vertical by determining which one felt the most pain and would therefore be willing to pay for a solution.
Uber: The Free Ride
Uber captured product-market fit by initially offering free rides between regional tech events in San Francisco. Uber’s co-founders recognized that the taxi system was prohibitively expensive and outdated, and few people used it. Once the Uber app gained steam, Uber offered 50% discounts to first-time users.
Experts point to Uber’s ability to solve a problem and create a need at the same time. Consumers weren’t demanding better taxi service, but once a more convenient, simpler option emerged, users began to rely on the concept. The network effect kicked in and users began sharing their experiences on social media, providing social proof for the startup.
To date, Uber has about 75 million riders, and the company recorded 5 billion rides in 2017 alone.
In most cases, product-market fit doesn’t happen on the first try. You’ll likely test and adjust your product or service a number of times before you find the perfect combination of value proposition, customer base, and distribution.
Continually experiment based upon the feedback from your audience. Tweak your concept if your data indicates it and be prepared to pivot if necessary.
When you achieve product-market fit, your job will become much easier, because your customers and other interested parties will become a major part of your marketing effort. They’ll share their own stories with others so you can focus on the work of creating the same great experience for everyone who interacts with your company.