It’s no secret that the overwhelming majority of businesses fail. While there are a number of reasons any given company will eventually close up shop, most do so because their owners fail to take at least one aspect of product-market fit into consideration.
While the general meaning of this term is rather self-explanatory, it’s definitely worth taking a deeper dive into the nuances of what we mean when we use the phrase “product-market fit.”
Defining & Breaking Down Product-Market Fit
Entrepreneur Marc Andreessen defines product-market fit, in the simplest of terms, as:
“Being in a good market with a product that can satisfy that market.”
Paul Graham gets to the point even quicker:
“Make what people want.”
Notice, though, that these statements approach PMF from two different perspectives. On the one hand, Andreessen focuses on finding a market in which your product is in demand. Graham’s focus, on the other hand, is on making a product that the market demands.
The point is that reaching product-market fit requires developing an innovative, useful product and making sure the market for said product is large enough to sustain your business.
Let’s break that down a bit more using Clement Vouillon’s model of PMF (pictured below).
Developing Your Product
Creating the product your company will offer is, of course, an incredibly important step in the process of building your business.
Before you even begin developing your product, you’ll create your product’s value proposition. This is a document that explains the benefits of the product you’ll be creating, as well as how it is different (read: better) than similar products already on the market.
Note: Creating your product’s value proposition inherently requires you to consider the audience you’ll be marketing to – but we’ll get more into that in a bit.
Once you’ve developed your product’s value proposition, you’ll be ready to create the actual product. At this point, it’s important to think of your product not as a single item, but rather as a set of features that work together to create said item. Again, we’ll get more into this later; for now, just think of the product as a work in progress.
Okay, so you’ve created a product, as well as documentation that proves it will be useful in some way or another. Now, you need to consider who it will be useful for.
Identifying Your Market
To identify the market you’ll be targeting with your newly-developed product, you’ll want to consider two things:
- Who your target customers are
- What they need
One important thing to note here, as we alluded to above, is that you shouldn’t wait until after you’ve created your product (or even your value proposition) to define your target audience. Rather, both should be done in conjunction with one another, as the inflexible aspects of one will determine the flexible aspects of the other.
In other words, while brainstorming the features of your product, you might realize the product would be useful to an entire demographic you hadn’t thought about before. Or, on the other hand, while assessing your target audience, you might realize one of the features of your product is either redundant or not even necessary.
By thinking about your product and your audience simultaneously, you’ll avoid instances in which you accidentally pigeonhole your product or spend money, time, and energy on initiatives that bring no value to the table.
Once you know what product you’re going to create, and who you’re going to create it for, you’ll be ready to consider distribution. As the illustration above suggests, when thinking about distribution, you’ll want to consider your approach to both sales and marketing.
First, think about how you’ll actually sell and deliver your products. Will you accept payments online and deliver to your customer’s doorstep? Will you have a brick-and-mortar storefront? Will you partner with other distributors, such as retail companies, to help deliver your product? The answers to these questions (and more) will be determined heavily by what your product actually is, and who you’re delivering it to.
You’ll also need to think about how you plan on marketing your product. How will you promote it? What channels will you use? What channels will you avoid? What methods of promotion will be most effective? Again, when determining the answers to these questions, you’ll want to consider the best ways through which to reach your target audience.
To be clear, even if you know exactly who your audience is, and you’ve created a product that you know they need, if you don’t make your product and brand accessible via the channels they utilize, you have little chance of reaching product-market fit.
If you’ve been following our blog for a while, you might recognize that everything we discussed above draws a heavy parallel to aspects of the marketing mix – specifically, the “P’s” of marketing. This, of course, is no accident; to be successful in any line of business, you absolutely need to consider every single aspect of it – both independently and concurrently.
Product-Market Fit: A “Big Bang” Or An “Evolution”?
While we said earlier the term “product-market fit” is – at least on the surface – rather self-explanatory, the word “fit” has been the cause of many a debate ever since the term was coined years ago.
The word “fit” in this sense tends to conjure up an image of the last piece of a puzzle falling into place. As we’ve said throughout this article, if any part of the equation (product, market, or distribution) is missing from your game plan, you’re almost certainly going to fall short of your goal. So, at least in this sense, the word “fit” is rather appropriate.
Some entrepreneurs, such as Peter Reinhardt, have likened PMF to “a landmine going off,” in that once your company finally reaches this level, business will immediately start booming. Reinhardt has often discussed how reaching PMF was the catalyst that lead to his company, Segment, absolutely taking off in terms of sales and revenue.
In fact, it was one rather minor tweak in features that led to Segment reaching PMF. Keep this in mind for later when we discuss developing a minimum viable product.
However, the term “fit” can also be a bit misleading, as well. When you finally fit the last piece of a puzzle into place, you’re done; there’s nothing more you can do to make the puzzle better, or more complete.
Needless to say, this definitely isn’t the case when it comes to your business. Ben Horowitz, who actually partners with the aforementioned Marc Andreessen, raises a few points regarding some of the common misconceptions and myths about PMF:
Though it’s not necessarily unheard of for a company to experience a “big bang” type moment that defines its pre-PMF and post-PMF timeline, this is more the exception than the rule. In truth, the vast majority of companies will reach PMF gradually, through a series of peaks and valleys, as well as major and minor tweaks to their operations.
On that same token, companies won’t always experience the “a-ha!” moment that tells them they’ve reached PMF. (Note: We’ll talk about KPIs regarding product-market fit in a moment.) The point here is that, while it’s relatively easy to look at last month’s numbers and realize it was your best month yet, there’s no pat-yourself-on-the-back moment that says you’re “officially” at PMF.
One last thing Horowitz warns against – and this is, perhaps, the most important thing he has to say on the matter – is that, even if you’ve undoubtedly reached PMF, there’s never a time in which you should simply rest on your laurels.
For one thing, it won’t be long until your competitors discover what you’re doing that they aren’t that makes your company so successful. Once they figure it out, they’ll not only be equipped to match your company – they’ll be ready to take over your industry altogether.
On top of that, the demands of the modern consumer are constantly changing, and markets are constantly in flux. While your company may have reached PMF as the market currently stands, even the smallest changes – such as a shift in the cost of advertising or a change in preferred delivery methods – could throw your entire operation for a loop.
The lesson here is to always be looking for ways you can improve your business’s operations. Even if you have reached what you initially consider to be PMF, there’s almost certainly more you can do to make things run even more smoothly.
Product-Market Fit KPIs
While there are no “set in stone” KPIs that absolutely determine whether you’ve reached PMF, there are certainly a few metrics you can assess over time that will at least let you know you’re on the right track. Entrepreneur Sharad Verma looks at:
- Meeting Win Rate: The more leads you can get past the “just looking” stage, the better. A monthly increase in meeting win rate will tell you you’re marketing to the right people, through the right medium.
- Sales Cycle Length: How long does it take your leads to become paying customers? If your customers don’t need much prodding throughout the sales funnel, you can be sure you’re doing something right.
- Product Engagement: Determine how often your average user actually uses your product, as well as how many of your product’s features they use. This will give you a general idea of how much value your customers are getting out of your product (or, rather, how much value you’re providing your customers).
- Churn and Renewal Rate: This is pretty self-explanatory; if your customers are willing to renew their subscription to your service or buy your newest product model, it’s a clear sign they like what you have to offer. If they don’t…well…
- Net Promoter Score: How likely are your customers to refer your brand to their peers? A high NPS almost certainly tells you you’re reaching the right customers with your offering.
To make sense of these metrics in terms of PMF, you’ll want to compare them to your company’s past monthly/quarterly/yearly performance, as well as that of your industry as a whole. Again, while not an exact determination that you’ve reached PMF, analyzing these metrics will give you a decent idea of which direction your company is headed.
Developing a Minimum Viable Product to Determine Product-Market Fit
A bit earlier, we talked about how Segment hit its PMF by making what was, at the time, considered to be a relatively small change. If you didn’t check out the article, the team basically posted a landing page offering their audience access to a side project they had been working on.
It wasn’t some major upheaval or complete overhaul that helped Segment out of its slump; it was a seemingly minor addition that Reinhardt himself thought would falter.
So, what does all this have to do with minimum viable product?
Well, while it’s impossible to know for sure, it stands to reason that if Segment’s audience had been introduced to its little side project much earlier, perhaps the company could have avoided the slump it had been in altogether.
A minimum viable product is that which includes the “bare bones” features of what will become your company’s true product. The reason for creating an MVP are two-fold:
- It introduces your product, brand, and industry expertise to your target audience
- It allows you to gain valuable insight into what your customers are looking for (in turn allowing you to tweak your product accordingly)
An MVP doesn’t – in fact, it shouldn’t – be anything that requires too much time and money to create. It just needs to showcase your company’s value to your audience. Scale My Business provides a number of examples of minimum viable products, from landing pages and explainer videos to “Wizard of Oz” and concierge services.
Consultant Dan Olsen, in his Playbook for Achieving Product-Market Fit, describes what he calls the “Lean Product Process”:
- Determine your target customer
- Identify underserved customer needs
- Define your value proposition
- Specify your Minimum Viable Product (MVP) feature set
- Create your MVP prototype
- Test your MVP with customers
For the purposes of this section, we’re going to focus on the fourth, fifth, and sixth steps of this process.
Specifying Your MVP’s Feature Set
A feature set is a document that lists a product’s specifications and features, and includes a blueprint and timeline for development of said product.
Your MVP’s feature set serves a number of purposes:
- It requires you and your team to come to a consensus about what you’ll be creating
- It also requires you and your team to come to a consensus regarding what your audience needs (or what your audience will be expecting) from the product
- It explains to investors what your product is, who it’s for, and the value it will bring these individuals
For the most part, you’ll have figured all of this out while completing steps 1-3. Once you get to this step, you’ve simply committed to putting your ideas in writing.
Create MVP Prototype
Once your plan for creating an MVP is in writing, development can begin. Two things to keep in mind when creating your MVP:
- While an MVP is, by definition, rather minimal, you still want to ensure your users get the absolute most they can out of engaging with it. While an MVP shouldn’t be feature-heavy, it should definitely provide an incredible user experience.
- That being said, start with as minimal of an MVP as possible (again while maximizing UX). You can continue to add features in future iterations of your MVP before releasing your full product.
Once you have your MVP ready for your target audience, there’s one more thing you need to do before making it available.
Prepare for the Release of Your MVP
Before you allow your audience to check out your MVP, you need to have a clear idea of what you want to gain by doing so.
It should be clear by now that your main goal for developing and providing an MVP to your audience is to gauge their response to it, allowing you to make appropriate improvements before releasing your full product.
To actually collect this information, you’ll need to have created a means of communicating with your users.
Consider creating a Likert Scale survey that asks your users questions regarding their experience with your MVP, and provides them the opportunity to explain their answers in more detail. You can then use this information to improve your MVP by adding, removing, or changing certain features before releasing its next iteration.
Taking a step back, it’s also beneficial to gauge your audience’s attitude regarding the product you’re offering in the first place. While this step might be more applicable during steps 1 and 2 of the Lean Product Process, it’s never too late to fine-tune your target audience.
Once you’ve properly prepared to receive feedback on your MVP, there’s nothing left to do but let your audience get their hands on it.
After you’ve released your MVP and given your audience time to use it and provide feedback, it will be time to head back to the drawing board. Depending on your users’ initial responses, you may have to go back to one of the six steps of the Lean Product Process.
If, for example, many of your audience members reported they have no use for your product, you may well need to find a more appropriate target audience. If that’s the case, you’ll need to go through each step once again.
If, on the other hand, your audience reports they do have a need for such a product, but they simply don’t enjoy using your product, you’d go back to steps 4 or 5 to tweak your product’s features and improve its UX.
Hopefully, with each iteration, you’ll begin to receive more and more positive feedback (and less and less negative responses). Additionally, the positive feedback you receive will become higher in quality, and the negative responses will become more constructive rather than disheartening.
As you make these improvements, you’ll inherently inch closer and closer to product-market fit before you even release your full product.
At that point, you’ll be ready to invest all the time, money, and energy it takes to actually develop the full product you’ve had in mind from the get-go. As an added bonus, you can be almost certain that your return on investment will immediately be worth all the effort you put into creating your MVP.
Most companies don’t reach product-market fit by accident. But, on the other side of that same coin, it’s not something that just “happens” to the lucky few billionaire entrepreneurs in the world.
While many businesses have struggled for years to “hit their stride” and reach PMF, it’s possible to reach this mark before you even release your full product. Any business can reach PMF as long as its owner understands the importance of determining who their audience is, what their audience wants, and how they can give it to them.