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How to achieve product-market fit

Learn more about achieving product-market fit, its benefits, and how to start working on it immediately.

How To
March 16, 2022
How to achieve product-market fit
Learn more about achieving product-market fit, its benefits, and how to start working on it immediately.

Imagine going to work only to find that your inbox is flooded with customers telling you how happy they are with your software. People are in such a hurry to download your app, you need to scale your servers to meet the demand before the infrastructure crashes. Your phone rings: it’s a tech journalist trying to book an interview with you about your company's growth.

This is the dream for every business owner and entrepreneur.

But the reality is often in stark contrast to the scenario above. You’re dealing with a number of customer complaints and returns. It’s unclear why demand is down this quarter and people simply aren’t using your app. And the media is definitely not calling you about your latest product launch.

So, what makes some companies thrive, while others barely survive? The answer is product-market fit. 

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You can scale your data operations, save 30% on costs and make more money. But only if you use Keboola.

What is Product-Market Fit?

 “Product-market fit means being in a good market with a product that can satisfy that market.”

That’s how Marc Andreessen, the lucrative venture capitalist who coined the term ‘product-market fit’ (PMF), defined it in his now notorious blog post The only thing that matters.

Breaking down the definition above, we can see that product-market fit boils down to three main components:

  1. A good market. A good market means that your target market is big enough to allow you to grow and expand your operations several-fold. For example, if you were to sell or rent movies and series, like Netflix, you would be addressing a large market of potential customers. But if you were to focus solely on renting out DVDs of documentaries about graffiti culture in the 80s, you would operate in a niche market and have lower chances of expansion. In market research, this is called TAM: Total Addressable Market. You need to pick a TAM which has the potential to be great or you risk shooting yourself in the foot from the beginning. Even if you have a great team, a fantastic product, and the most streamlined operations in the industry, it will be impossible to grow your business if there is no demand to fill.
  2. A good product. Mind you, Andreessen said a good product, not a perfect one. This means that the product does what it promises, and it does it well. 
  3. Satisfaction. Satisfaction refers to how your (potential) customers respond to your product. The product satisfies your customers’ needs in a way that your competitors’ offerings do not. For example, Uber didn’t reinvent the taxi, but it understood that customers needed a more accessible ride, with less hassle when it came to ordering and paying for the trip. They satisfied the customers’ specific needs for a faster, hassle-free journey in a way that existing taxi services did not.

But what does this mean for a company in concrete terms? Andreessen vividly characterized how PMF impacts businesses:

“You can always feel when product/market fit is not happening. The 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.

And you can always feel product/market fit when it is happening. The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You're hiring sales and customer support staff as fast as you can. Reporters are calling because they've heard about your hot new thing and they want to talk to you about it. You start getting entrepreneur of the year awards from Harvard Business School. Investment bankers are staking out your house.”

PMF is not just beneficial for your PR points and checking accounts, it also has tangible consequences for your business’s bottom line.

Why is Product-Market Fit Important?

Achieving product-market fit has several perks:

  1. Lower customer acquisition costs. Companies that achieve PMF have lower acquisition costs. Free media coverage and word-of-mouth both act as non-paid and organic channels that drive new customers at no additional cost.
  2. Higher customer retention. Happy customers are loyal customers. Satisfying the needs of your target audience means that they won’t be turning to your competition to scratch that itch. This translates to lower costs when it comes to customer retention campaigns, as well as lower churn rates, which would otherwise eat into your revenue.
  3. Faster growth. Fast growth is an indicator of PMF. It also means more early adopters, who will pave the way towards the next seed round. 
  4. Scaling done right. Scaling before you achieve product-market fit is business suicide. A pre-PMF company leaks money: customer acquisition costs are higher and grow exponentially once you stray away from the early-adopters zone (potential customers do not understand the value proposition of your product yet and cost more to acquire), you lose customers due to churn, and both of these problems scale along with your company. Unlike premature scaling, scaling post-PMF means that your company experiences fewer growth cramps and is better able to sustain itself when operations change by an order of magnitude.

Is there a way of knowing when a company achieves product-market fit?

How to Measure Product-Market Fit

We’ve already mentioned a couple of indicators that a company has achieved product-market fit: PR coverage, organic growth via word-of-mouth, high demand that outperforms supply, and awards from the Harvard Business School.

Unfortunately, all of these indicators are lagging metrics. That is, once the investment bankers stake you out, you have already achieved PMF.

What we need are leading metrics, aka, indicators that tell us whether we have reached PMF before we cross that line.

Several quantitative metrics have been suggested:

  1. High Net Promoter Score (NPS). NPS is a measure of customer satisfaction and loyalty. Because PMF is defined as a measure of how well your product satisfies the needs of the market, it is often suggested as an indicator of PMF.
  2. Low bounce rate and more time on site. When your online content is engaging, website visitors spend more time on your site and have a lower bounce rate, as measured by digital analytic tools such as Google Analytics.

The problem with the metrics above is that they are not easily transferable across companies and industries. Website performance metrics only matter to companies who use digital channels as their growth machine. NPS, on the other hand, varies massively across industries. 

As a result, neither can be used as a yardstick to determine whether or not you have reached PMF.

Sean Ellis was the first to introduce a qualitative metric that is transferable across different business operations. He is responsible for the early growth and scaling of household names such as Dropbox, LogMeIn, and Eventbrite. In his quest to understand PMF, he benchmarked hundreds of startups with his customer development survey, in which he asked users:

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

  1. Very disappointed
  2. Somewhat disappointed
  3. Not disappointed at all (it really isn’t that useful)

He then measured what percentage of all users answered “Very disappointed”, as these are the people who see the value of the product and the company. In other words, they’re the customers with whom you have achieved product-market fit. 

And the benchmark? Turns out that the magic number is 40%. When 40% of your target audience say that they would be very disappointed if they could no longer use your product, that means you have reached PMF.

The survey is now an accepted measurement for PMF. Slack, for example, used it on a sample of 731 users, and found that they had hit the honey pot: 51% of their users claimed that they would be extremely disappointed if they could no longer use the platform. 

But beware. 

Companies often fall into two traps when measuring product-market fit:

  1. Listening to everyone. Everyone's a critic, but you don’t need to consider everyone’s opinion. In particular, companies that have a multi-tiered revenue structure (e.g. subscription, SaaS, app companies, etc.) should focus on measuring the PMF of paying users, not all (freemium) users.
  2. Thinking PMF is a goal, not a process. PMF is not a state that you achieve and then bask in its glory - it’s a process. Measuring PMF can tell you if you are heading in the right direction and how close you are to accomplishing it. But beware of becoming complacent once you have achieved it. Companies who have reached PMF can also lose it (erm, Blockbuster anyone?).

Measuring is not enough. We also need to know how to improve this metric.

How to Achieve Product-Market Fit

When developing a product, companies often choose the Lean Product Process. This process iterates over six steps to develop a product that satisfies a big market need:

1. Determine your target customer. This is your buyer persona. Segment the market and/or your target audience to understand who your target customer is.

2. Identify underserved customer needs. Interview your target customer, check out the negative reviews that they’ve left for your competition, run UX questionnaires, and distribute product-market fit surveys. Do all of this with one goal in mind: to understand which current need is being neglected and underserved by products that are currently on the market.

3. Define your value proposition. Your value proposition is the solution to your customers’ needs; it’s the benefits that your product will bring. Let’s look at a couple of examples:

Unbounce – A/B Testing Without Tech Headaches

Slack – Be More Productive at Work with Less Effort

Lyft – Rides in Minutes

Mailchimp – Send Better Email

4. Specify your minimum viable product (MVP) feature set. Expand your value proposition (which is abstract) to a set of features which transform that proposition into something tangible. These features need to be minimal: no extras, just the smallest number to achieve the value proposition. But keep the product viable: the set of features must address the customer need. In other words, you need to specify your Minimum Viable Product. Think of it as a proof of concept. What is the minimum set of features which would prove that you can fulfil your customers’ requirements?

5. Create your MVP prototype. A prototype is a less detailed representation of your product that you can build without actually building your product. If you're working on an app, you could just prepare the mockup screens which would be a part of it. If your product is a manufactured good, you could create a handmade version of it (and not set up the entire manufacturing process).

6. Test the MVP with real customers. Get the product into the hands of your target customers. Listen to their feedback as they use it. Check that there is a clear understanding of what the product does and what problems it solves. If there is no “Aha!” moment, go back to Step 2 and iterate.

Once we loop through the stages, we measure PMF and repeat the process until we are satisfied with the results.

So, how does this apply to companies that are not startups and are already on the market?

  1. Already established companies use the lean product process for launching new products.
  2. Companies iterate through the process as if their existing product is launching for the first time. Oftentimes, this helps you to uncover assumptions about your operations which you were previously unaware of. For example, your target audience might belong to a different segment than the one you had envisioned.

Manage and orchestrate your data in one place. Cut costs and build data products in days instead of weeks.

Improve your Product-Market Fit Today

Whether you choose to measure product-market fit with the Sean Ellis questionnaire, NPS, bounce rate, or UX interviews, you will have to collect data.

Once the data has been collected, you will also have to clean it. The entire process of data cleaning and transformations represents approximately 80% of any data project. It is long-winded and laborious, but removing outliers and wrong answers, categorizing responses into appropriate groups, standardizing scores, and carrying out all of the other work that goes into data cleaning are necessary steps for analyzing data.

Sadly, this process is even longer when testing for PMF, because you have to repeat it several times for every batch of MVP tests that you do. So how can you speed everything up?

Rely on tools like Keboola.

Keboola is an all-in-one data operations platform, which helps startups to speed up and automate their work. In just a couple of clicks, you can:

  1. Collect all of your incoming raw data. For example, automate your collection via Zapier, or forward the responses from your Google Form survey into Google Sheets, then collect data from there.
  2. Transform the raw data into the desired form automatically. Set up the cleaning rules. Exclude everyone who has not answered a particular question, or automatically recode answers into numbers so that you can run a % analysis.
  3. Store your data. Once you have cleaned and analyzed your data, store it in whichever form you like the most - whether that be databases, Google Sheets, or even Dropbox. 
  4. Automate the entire process to speed up PMF analysis. Once you’ve developed the pipeline from collection to storage, you can simply rerun it with a click (or even schedule it). Forget about manual work every time you want to determine PMF: let Keboola do the heavy-lifting.

Contact our sales team to schedule a free consultation on how to achieve a product-market fit.

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