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What is product-market fit (PMF)?
Product-market fit describes the product’s ability to satisfy a customer need in a particular market, and drive value for both the user and the business.
What makes up the product market fit?
First, the product needs to solve customer problems and help them achieve their objectives.
Second, it needs to be easily scalable so that you can deliver it to your customer base in a cost-effective way.
Finally, there needs to be enough demand for the product to make it profitable.
Product-market fit vs product-customer fit
Although product market fit and product customer fit are related (and hence confused), they approach product management from different perspectives.
Product-market fit is about finding a good market for your product and developing the product to satisfy specific needs.
Product-customer fit focuses on attracting the right customers to the product. As a result, this is the objective for products that already have product market fit.
Do you need to achieve product-market fit before building a product?
Achieving product-market fit before building the product is not possible. These two processes should happen at the same time.
Product development is an iterative process based on market research and customer feedback. You can’t achieve product-market fit without that input.
Market research can help you formulate the initial idea and prototypes or mock-ups can help you validate it. However, you need to get the MVP out and get real-life data on its performance to find the product-market fit.
What is a product market fit framework?
The product market fit framework is a strategy that allows you to maintain the fit once you achieve it.
Having such a framework in place ensures that the future development of the product is based on sound market, customer and market research that enabled the team to achieve the PMF in the first place.
How do you measure product market fit?
Let’s look at a few metrics that will help you decide if you’ve reached product-market fit.
The 40% rule: product-market fit (PMF) survey
The PMF survey, also known as the Sean Ellis test, is quite a subversive way of measuring how close you are to the PMF.
In the survey, you ask your customers not how satisfied they are with the product but how disappointed they would be if they couldn’t use it anymore.
The benchmark is 40%. If so many users choose the ‘very disappointed’ answer, it means you’ve made it!
Track your LTV:CAC ratio
The ratio of Customer Lifetime Value (LTV) to Customer Acquisition Cost (CAC) is another way to track the PMF.
This one is a bit more complicated to calculate. Generally speaking, the higher the ratio the better. However, to talk about product market fit, it needs to be at least 3.
Look at your retention rate
A healthy retention rate is a solid indication of a good product-market fit.
If your customers are staying with you and keep paying their subscriptions, you are in the right place.
The formula is simple but getting the right data is not.
You need to distinguish between new customers and returning ones and look at their behavior at the right time. For that reason, you may need to rely on cohort analysis rather than segmentation to single out the right groups.
Net Promoter Score NPS
Net Promoter Score (NPS) is a metric of the general user sentiment and as such it could be an indication of product-market fit.
You can use early NPS results as a baseline. As you keep iterating to solve user pain points, their satisfaction should grow, and with that the NPS.
What are the phases of the product-market fit framework
To achieve product-market fit, the team needs to go through the following stages:
- Business Model Canvas
- Market fit validation
- Customer interviews to obtain customer feedback
- Product development: Minimum viable product
- Potential customer acquisition
- Product usage analytics
Business model canvas
A business model canvas will give you the necessary structure and ensure that you consider all the relevant aspects before you commit to further steps.
The key questions to answer are:
- Who is your target customer?
- What is the problem that they have? How important is the problem for them?
- How are you going to solve it?
- Are there similar solutions out there? How is your solution better than the existing ones? Is it good enough for target customers to consider switching?
- Would the potential customers be happy to pay for the solution? Would you be able to make a profit from it?
- How are you going to acquire your customers?
- How will you measure your progress/success?
Market fit validation
At this stage, you want to make sure there is a genuine need for your product on the market and that you will be able to monetize it.
To do that, you need to run some experiments.
If you are a start-up with no products on the market, you can do it with a simple website that explains what the product does and its benefits. Next, use some paid ads to attract traffic to the page and monitor how many of them sign up to receive more information.
Keep experimenting with different ways of presenting your idea until the conversion rate reaches 10%.
If you already have a product on the market and are developing it further, you could use in-app messages to reach your customers.
This is what Buffer did when they were expanding its Twitter functionality. They used fake door testing not only to test how much interest there would be in the idea but also how much their customers would be ready to pay for it.
Get customer feedback through customer interviews
Whether you are getting lots of conversions or not, you need to conduct some customer interviews to collect feedback about how they feel about the product.
If you get lots of sign-ups, approach potential customers and ask them how they found the product, why they signed up, and if they are already paying for a similar product.
If there aren’t enough sign-ups, interview some of the users who signed up and try to identify ways to make your product more appealing to a wider customer base.
Product development: Minimum viable product
Interviews with customers can also help you decide what features should go into your minimum viable product.
The MVP serves two purposes.
First, it allows your users to experience the core value of your product. If the MVP gets a good reception, it will be easier to sell it to a wider user population.
Second, it helps you to further validate your ideas and obtain data on how to develop the product.
Attract potential customers
Affordable customer acquisition is the key to achieving product-market fit. That’s where many promising products have failed, so work on this aspect of your model while developing your MVP.
Where can you start?
Your attention should be on two areas. First, you need a successful product launch.
Product Hunt is a free platform where start-ups can launch their products.
It is popular among innovators and early adopters who make excellent beta testers and will help you grow your product. If your product is good enough, they will also promote it in their networks by word of mouth.
Launching your product on Product Hunt should be a part of a more comprehensive launch plan. It may be enough to test the waters and develop your MVP but to make your product profitable you need to attract a wider range of customers.
Paid advertising or SEO content marketing may work for one product or user segment but may be completely ineffective for others. That’s why your team needs a framework like Weinberg’s Bullseye Framework to identify the best channels.
Product usage analytics
Once you launch your product, you need to monitor how it performs.
There are great analytics tools available for product managers, like Amplitude or Heap, to track and analyze product performance.
What data should you be looking at?
Some of the key metrics include:
- Retention
- Stickiness – helps to assess user engagement by looking at the ratio of Daily Active User (DAUs) to Monthly Active Users (MAUs)
- Growth Rate – expressed either as Monthly Recurring Revenue (MRR) or Active Users.
You can use a tool like Userpilot and track how specific user segments engage with your app using feature tagging and events tracking analytics.
Achieve product-market fit by repeating the steps
Having launched your product and collected initial performance data, you have a solid base for further iterations that will bring you closer to the product-market fit.
However, that’s not the end.
Segment users and collect feedback
Data analysis will hopefully help you identify trends in product usage. However, to reach the product-market fit, you need qualitative data about customers’ experience with the product.
That’s why you need to reach out to them again through in-app surveys or interviews. Use them to identify friction points and how to improve their user experience.
Make sure to segment your users first, and approach each group only with relevant questions.
Prioritize ideas
Customer interviews are likely to produce lots of new ideas. You can’t develop all of them at once though. In fact, you should never try to satisfy all of your customer requests. Instead, focus on those that will deliver the most value.
If so, how do you prioritize ideas? There are a few prioritization frameworks that you can apply:
- The RICE framework
- The MoSCoW method
- MoAR-Metrics over Available Resources
- The Kano model
The Kano model is very useful for the initial prioritization of the features and development of the product roadmap.
It encourages product managers and product owners to divide the ideas into three categories:
- The basics are essential for the product to work.
- Satisfiers increase the value of the product. The more of them, the better.
- Delighters surprise the users and exceed their expectations.
Analyze and repeat
After developing new functionality and implementing improvements, you need to see if you’ve achieved the desired effect.
So you conduct more PMF surveys and look at your key metrics like LTV: CAC and retention rate again. Collect more qualitative data, generate new ideas for improvement, and keep iterating.
Achieving product-market fit as you scale: Challenges
Achieving and maintaining product-market fit as you scale comes with new challenges.
Value proposition and product differentiation
Even if you manage to achieve the product-market fit, it doesn’t mean it will last forever.
The chances are that the more successful your product is, the more competitors will appear and try to steal your lunch.
Your customers’ needs change as well and what works for them now, may not work in the not-too-distant future.
To stay relevant and keep your value proposition attractive, you need to keep reviewing your differentiation and positioning strategy.
This is also necessary when you are entering new markets with very different customer expectations and needs.
This is what Joanna Drabent, the CEO of Prowly, discovered when they launched the product in the US. To achieve the PMF in the target market, Prowly needed to add new features that American customers had been expecting in similar products.
Trying to please everyone – Feature fallacy trap
Teams fall into the feature fallacy trap when they keep adding new features to the product without considering how they benefit the customer or how they fit into the overall product vision.
Product managers often find themselves under the pressure to include new features in the roadmap, for example, to ensure feature parity with competitors.
There’s nothing wrong with that if the ideas are backed by robust user and market data insights. However, developing features that don’t generate value or that customers won’t pay for, is a waste of resources.
What’s more, you may end up diluting your value proposition and developing a product that is not great at solving any of the problems it aspires to.
Feature prioritization and backlog grooming
To avoid falling into the build trap, effective feature prioritization and backlog grooming are essential.
Focusing on Jobs to be Done by your customers can help you prioritize the solutions that address the most urgent user needs.
Feature-Driven Development is a framework that allows you to apply Agile development processes at scale. Thanks to it, you don’t have to give up on the quick release times and customer feedback loops even in large organizations.
No matter what the size of your team is, public roadmaps are a great way to collect user ideas and involve them in the development process.
With a simple project management tool like Trello, you can create a place for your users to contribute ideas and vote them up or down.
Conclusion
The product-market fit framework helps teams develop products that solve the right problems for the right customer in the right markets.
If you would like to learn how Userpilot can help you collect user feedback, validate ideas and track product usage to improve the product-market fit of your product, book a demo!
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