Product-Market Fit is a term coined by Venture Capital Great, Marc Andreessen, in his post “The Only Thing That Matters.” In short, a powerful statement, coming from a very strong player in the game. So today, we’re going to explore why it’s the only thing that matters, how to assess product-market fit, and how to achieve it.
What is Product-Market Fit?
Good question—it really is; product-market fit is a famously elusive term to define.
So while there are different ways of phrasing it, we’ll use Andreessen’s original definition. In short, product-market fit is:
“Being in a good market with a product that can satisfy the market.”
We’ll go over metrics that can indicate product-market fit, but signs you’ve reached it are:
- “Your customers become your salespeople.”
- Your value proposition delivers
- You’re sharing your product in the correct channels such that your incoming customers are sustaining your business
- Your value hypothesis (the combo of your business model and key assumptions regarding customer motivation) is being validated by demand and by your market
Why Product-Market Fit Matters
In his post originating “product-market fit,” Andreessen listed a few signs you have (or haven’t) reached it. Above all, it beautifully outlines the role of it in a business’ journey.
w/o Product-Market Fit
“ – 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.”
w/ Product-Market Fit
– Production and headcount are barely keeping up with demand
– Servers are barely keeping up with users.
– Your company’s bank account is accumulating money
– Press contacts are reaching out to you.
How to Measure Product-Market Fit
Firstly, the most important to achieving product-market fit is knowing where you stand.
However, there are many, many metrics we can go into here. In short, we’ll go over the main three:
Net Promoter Score (NPS)
So, the NPS was first developed by Bain & Company in 2003, the NPS is considered a top-tier CX metric.
Moreover, it can be applied to anything—product, features, stores, web pages, customer service. And so, by improving it, you can improve customer loyalty and, in that, expand your brand.
The NPS is based on this survey question: “On a scale [of 1-10], how likely are you to recommend this [product/service/experience] to a friend or colleague?”
Then, answers are segmented into three “personas”:
- Detractors rate from 0 to 6
- Passives rate from 7 to 8
- Promoters rate from 9 to 10
NPS = % of Promoters – % of Detractors
And, from that calculation, you can then inform improvements with open-ended responses. You can also relate your experience data (X-data) to operation data (O-data — renewals, cancellations) to understand when (and even why) a customer is likely to stick with you or leave.
Additionally, you can segment your X- and O-data by behavior, demographics, psychographics, or market. As a result, you’ll better understand who’s responding and how to your product or iterations.
The Sean Ellis Survey Method
Sean Ellis is a well-known entrepreneur, angel investor, and startup advisor. As the CEO of GrowthHackers, he publicized the method of assessing product-market fit with the multiple-choice question:
“If you [customer] were no longer able to use a product, how would you feel?”
Possible Answers: “Not Disappointed,” “Somewhat Disappointed,” and “Very Disappointed.”
As a result, your “Very Disappointed” crowd is your target market—and you can learn a lot from them. So, investigate the differences between your “Very Disappointed” and “Somewhat Disappointed” users with open-ended questions.
From there, you can also apply the “Rule of 40”. In a benchmarking study of 100 companies, Ellis found that those with a “Very Disappointed” rate under 40% most often struggled to find growth.
Likewise, Hitah Shah, an investor and founder, then suggests segmenting your users based on their responses and following up with questions such as:
- What are alternative solutions you’d consider?
- What are the main benefits of this solution?
- Have you referred others to this product?
- Which type of user would most benefit from this product?
- How can we improve this solution?
- What motivated you to sign up?
- Which motivators propelled you to use this solution?
- What makes our product a “must-have”?
Then, segment these responses by demographics, psychographics, behavioral characteristics.
Cohort Retention and Repeat Usage
And while using the Cohort Retention Data can be wildly informative, it’s better for companies with more established customer bases. As a result, they already have data about their established customer base which they can analyze.
The gist is this: companies should measure the share of customers still paying for their product after a set period (often around two months.)
We’ve actually written about tracking retention before, but it’s important to mention in relation to product-market fit as well.
This is because, as founder Danielle Cohen-Shohet explains, when a product is successful, it organically adds paying customers through referrals and virality. Therefore, the company can then shift away from focusing on product improvement to growth distribution and marketing channels.
So, how do we explain what a good retention trend looks like? Imagine measuring the retention rate after 14 days, for instance, with the y-axis tracking activity usage and the x-axis representing time elapsed.
Moreover, if the cohort retention rate continues to decline across time, there’s a problem with retention.
However, if cohort retention stabilizes across time (with an initial drop-off)—this means the users like what you’re offering and are sticking with it. Success!
So, what’s a good retention rate stabilization point? Unfortunately, we’ll have to invoke a wildly unpopular answer: it depends. The answer is it depends on the industry.
However, there are some industry standards that indicate success. For example, according to a MixPanel study, most apps and software have a 6-20% eight-week retention rate. Moreover, if you’re at a 25% eight-week retention rate in media or finance products, you’re considered “elite.” However, in SaaS and e-commerce, that number is around 35%.
How to Achieve Product-Market Fit
If there were some set steps to write about to achieve product-market fit, I’d be a gazillionaire. Unfortunately, there are not. However—there are some pointers we can give you to help you on your journey there.
Consider Every Aspect of the Product and Organization
According to Andreessen, there should be no stone left unturned in the quest for product-market fit. So whether it’s rewriting your product, changing up your headcount, or raising a dilutive VC round—it’s all on the table.
Use Your Whole Organization
Moreover, every member of your team has a place and role in achieving product-market fit. So, this includes the teams building the product, the sale teams, the financial strategy team, and especially marketing.
Finally, marketing teams should be used to isolate your target market, figure out their needs, and, therefore, inform product development.
Know Your Target Customer
So, when it comes to product-market fit (so literally, fitting into a market), stick with a reliable method to find and validate your target market.
Similarly, it might look like this:
- Analyze your solution’s benefits, and which type of customers have the painpoints you’re addressing
- Run extensive competitive analysis
- Choose segment criteria to research
- Develop buyer personas
- Perform thorough market research, keeping in mind which parts of the personas you’ll target and investigate
- Refine your ideal customer and target market
- Finally, Summarize findings into key takeaways for your team, executives, and board
Let’s go back to the “market research” point of the last section.
Approach market research with the curiosity and lack of preconceptions of a newborn puppy. Basically, your aim here is not to prove your assumptions but to validate or invalidate them.
So, ask your customers about their painpoints and willingness to pay for a solution. Additionally, gain insights from your sales and marketing teams to find information about recurring complaints and problems.
Lastly, use a myriad of prepared feedback methods—so interviews, surveys, and questionnaires—to get a large, robust sample of meaningful data.
Focus on One Vertical
Certainly, it’s important not to try and sell to everyone. Instead, isolate your target market before expending resources on sales to find the niche in which you can establish yourself and gain a reputation as a market leader.
By doing so, you’re increasing your chances of finding virality.
Specify Your Value Proposition
By staying consistent with a specific value proposition, you’ll be able to reach and identify which customers (and customer needs) your solution best addresses. Additionally, you’ll also be able to run cohesive competitor analysis and find gaps to fill that your competitors do not.
It’s just important to keep your product roadmap in mind when you decide which challenges to tackle—because you won’t be able to address every problem with your solution.
Track Your Product-Market Fit
As we mentioned, the first step to achieving product-market fit is to know where you stand. So, consistently analyze the metrics we spoke about and delve more deeply into this topic than what we could fit in this blog post.
There’s a lot to learn, and it’s crucial to stay on top of your product-market fit indicators to achieve it and keep it. Which is an excellent segue to:
Don’t Get Complacent
If you’ve achieved product-market fit, congratulations! You are the success story we’re all proud to tell our friends. However, remember—just because you have product-market fit doesn’t mean you can’t lose it.
It’s essential to stay up to date on market trends, retention rates, and all of the other metrics we spoke about to keep your coveted spot on top.
There will be new competitors and new trends that may sway your users away, or perhaps releases and product updates that won’t be so popular.
So, stay up to date, and keep an eye on your many graphs.
Find a *Good* Market
In Andreessen’s original definition, he uses the term “good market.”
How shall we define a “good” market? Andrew Chen, a general partner at Andreessen-Horowitz, describes it like this:
– A large number of potential users
– High growth in # of potential users
– Ease of user acquisition
Why choose a good market? Well, aside from the fact it’s called “good,” it’ll help you figure out competitive, user-centric attributes. That way, you’ll be able to incorporate competitive differentiation while maintaining (and cost-effectively defaulting to) industry standards.
Well, this was a lot. We know. So, it could be beneficial to consult product strategy experts who’ll help you put the theory to the rubber.
Coincidentally, hi, we’re Goji Labs—a product and software development consultancy with experience in designing, “rescuing,” and deploying hundreds of products.
Looking to develop a new app or revamp an existing one?
Reach us at GojiLabs.com.
– Goji Labs