What is Product-Market fit and why does it matter?
Defining product-market fit
Product-Market fit is the symbolic moment when you have confirmation that the offer meets demand. That the solution you built is showing positive market response in terms of purchase and usage. Marc Andreessen defines Product/market fit as being in a good market with a product that can satisfy that market. Another definition proposed by Seedcamp put it as the point in time when your product has evolved to the point that a market segment finds it attractive so that you can grow your product/company scalably.
How to know when you found your product-market fit?
Dave McClure proposes a very simple yet complete view of KPIs to measure
- Acquisition: How do users find you?
- Activation: Do users have a great first experience?
- Retention: Do users come back?
- Revenue: How do you make money?
- Referral: Do users tell others?
In the beginning, not all indicators have to be a priority. For example, Acquisition and Revenue might not be your top focus until you are sure you can deliver the best experience possible. Therefore, you’ll be more closely looking at Activation and Retention metrics.
Then, while these metrics are promising and positive, you can further focus on Acquisition, Referral, and Revenue.
Finding Product-Market Fit rarely comes as magic. Yes, it does require some intuition but also a great deal of observation, discipline, and execution skills. In this post, you’ll find critical steps to explore your potential Product-Market fit.
Idea Formation – Confirm your problem-solution fit
Define the Problem you are solving, and its Solution
All product ideas aim at solving a problem. So, the first thing is to define properly the Problem(s) you are aiming to solve. And it needs to be a big one. I love this story from Gary Halbert, notorious copywriter who asked a crowd in a seminar:
“If I’m opening up a hamburger stand, what’s the most important factor to have success?”
He got a bunch of different answers:
“It’s a secret sauce”.
“The quality of the burger”.
“No”, he said.
“None of those really matter if you don’t have a starving crowd.”
You should aim at solving a real, painful problem. Like hunger.
Chances to be successful will be much higher then.
When it comes to formulation, less is more. No need to have a 3 pages essay. Articulating your problem in a simple way shows you are able to get to the essence and will help your audience understands what you want to do.
For example, slack help companies and coworkers get rid of (time-consuming, frustrating, asynchronous and decentralized) emails.
Then, as your idea’s purpose is to solve this Problem, define the Solution you have in mind a.k.a value proposition. Again, the shorter, the better.
For Slack, as per their website: Slack is a new way for your entire company to communicate. It replaces email with something faster, better organized, and more secure. Instead of one-off email chains, all your communication is organized into channels that are easy to create, join and search.
Identify your ideal customer and target audience
Not everyone shares the same problems. It depends and what they do, what they aim at, and many more factors. When you define the Problem and its Solution, you most probably had someone or a group of people in mind. You need to identify and get a good understanding of this ideal customer as knowing how to engage and satisfy them will be a key to your success.
You can think about questions such as: Who experience the Problem you aim at solving? For whom is that important that they’ll look for a solution?
You can look at some of the following criteria in B2B: company size, professional profile (role & department), industry, geography, business model, etc
You can look at the following criteria in B2C: geography, demography, geodemography, psychography, and behavior-based.
Some use Persona to document this knowledge.
At this stage you’ve proved there is a problem to solve and have found a solution that addresses your audiences’ pains. You now have a Problem-Solution fit. Now, let’s move further down the path of Product-Market fit to confirm your audience care enough about your solution to buy it.
Define a singular Positioning and build your USP
What is it that makes you different from existing Solutions? How are you solving the Problem differently (and better) than them? The Positioning reflects choices a company makes about the kind of value it will create and how that value will be created differently than rivals — HBS definition.
Very important for your success, your vision, strategy, product and execution shall then reflect this positioning. And your marketing shall display your Unique Selling Proposition, in other words, the factors of considerations that will make your product or services different from the competition.
Design a profitable & scalable business model
Identifying a Solution your Audiences need is a key decisive step. Another key milestone is to measure the potential of your idea. Can it be profitable? And can it scale? At this stage and before investing in building the product, you definitely want to have a better view of your chances of success from a business standpoint.
Are there many of this “ideal customer” or is it just of a few? From this will depend on your TAM, a.k.a. Total Addressable Market. The bigger the TAM, the more potential your project has. I wrote about TAM here.
You’ll can leverage reference tools such as Business model canvas to design your business model. You’ll look at the revenue model as well as the cost model and all the elements of the value chain that impact one or the other (i.e. Distribution channel, production approach, …).
Assumptions-based business modeling and product development
When defining Problem, Solution, Target Audience, USP, Business model, etc, you do make a lot of assumptions. To prove Product-Market fit, the ultimate goal is to confirm potential customers are interested, buy and enjoy your product or service. But to get there, you can validate (or invalidate) assumptions as early as possible. You can use different means for that such as research, surveys etc. The best always being in direct contact with your target audience. For example, for the revenue stream, find your ideal customers, show them your solution and ask them how much they would pay for this (qualitative survey or focus groups can help).
Proofing the product-market fit
Build a Minimum Viable Product
You now have defined what value you want to bring to your customers in a scalable and profitable manner. It’s time for real-life confirmation. Get your Minimum Viable Product out as soon as possible.
By definition, this first version of your Solution will include sufficient features to satisfy early adopters — technopedia definition. For this, you’d had map all the needs and requirements linked to the Problem you are aiming to solve, identify the ones that are really necessary and CORE to your ideal customer…and solve them via your MVP.
Implement continuous feedback & improvement loop
Now, reach a few of these early adopters and get them to use your product. Watch them using it. Listen to their feedback. Try to identify their explicit and well as their implicit needs to further refine your product. That’s the fastest way to get a more robust product ready for take-off and further address the wider Early Majority (conf. Crossing the Chasm by G. A. Moore). That’s what Slack and many other successful start-ups did. See here story of Slack, Dropbox, and Spotify by Rich Quintyn.
When and how to know if your Product is ready for take-off? Well, that’s about the value you bring to the customers. This is when your Solution answer the Problem in an optimized way. In the beginning, you’ll measure progress via qualitative feedback mainly….but while you grow, quantitative metrics will tell: activation, retention, referral, etc.
Persevere or Pivot!
During this journey, you might figure out you are solving Problems you didn’t have in mind initially. Or your Solution is helping Customers you didn’t think about. You can possibly find out that your targetted Customers are not willing to pay for your Product (or the Problem you solve). Many more things can happen down the road. A majority of startups, product managers and innovators drastically change their original plans and that’s part of the game.
The best way to find out if this should be your case is to be alert, always be close to your customer, monitor your key metrics, and listen to qualitative and quantitative feedback. In that case, you can go through the steps above and redefine the Problem, the Solution, the Ideal Customer, the Business Model, rebuild an MVP, launch, measure, learn, etc. The book Lean Startup by Eric Ries explains the model and approach in simple and practical words and actions.