How to Find and Measure Product-Market Fit

Not all products that enter the market are destined to be successful. In fact, about 30,000 consumer products are introduced to the market every year, 95% of which are bound to fail, says Professor Clayton Christensen from Harvard Business School.

With that in mind, finding and measuring product-market fit is critical. In this article, let’s talk about product market-fit, how to find it, and how to measure it.

What is product-market fit?

No matter how brilliant a new product or company may seem to you, you cannot be certain that there is truly a market for it out there. Simply put, product-market fit refers to the level of which a product or service satisfies strong market demand. You might have product-market fit if your product or service fixes a certain problem that didn’t have a solution before, or is a simpler and cheaper solution than the alternatives already available.

One of the biggest mistakes that a lot of entrepreneurs and companies make is focusing on satisfying their target market--but without ensuring that the market is good. If a product is satisfactory and is supported by a competent team, focusing on a great market will likely yield good results. On the other hand, focusing on a poor market--or not analyzing the market at all--will generally fail regardless of the quality of the product or strength of the team.

How to find product-market fit

Finding product-market fit has a lot to do with targeting the right people that actually want to buy your product. Here are five steps that can help you accomplish that:

1. Determine your target customer

As with any other business plan, identifying your target audience is the first step to finding a viable market for your product or service. Determine the scale of the market to figure out how many people (in theory) you can reach and how much money you will be able to make if your product captures their interest.

Afterward, segment that market into separate groups according to: age, location, household wealth, priorities, and other properties and traits. In doing so, you can build your buyer personas, which are the characters that describe the individual or groups of individuals that are most likely to buy your product.

2. Reach out to your buyer

At this point, your buyer personas are still theoretical. You need to confirm your theories by getting to know the real people on which your personas are based. In this step, you can confirm or improve your theories, and identify behaviors, personalities, and characteristics that you may have overlooked.

Use social media polls, online surveys, and website forums to get to know your potential buyers. Whenever possible, try to speak to them in person, be it on the phone or face-to-face.

3. Define your value proposition

The value proposition is a simple statement that summarizes why a customer should buy your product. It should not be a list of standard features and benefits. Instead, it should say why your product is unique and why it is the right solution compared to the alternatives already available on the market.

Defining your value proposition thoroughly helps you identify potential strategies that can help you overcome the competition. With that in mind, it is imperative that you know who your target buyer is and what they are looking for in a product, service, or company.

4. Create your MVP

A minimum viable product (MVP) is a version of your product that is ready for launching, but only contains the most essential features sufficient enough to offer value to customers. Usually, an MVP does not have “nice-to-haves” features, but it satisfies the problem it aims to address effectively.

Creating an MVP can help you:

• Build pre-launch funding
• Gather valuable customer feedback
• Enter the market faster
• Gather data that can help improve your marketing messages
• Confirm your pre-launch research

Before you can achieve these benefits, you have to identify the feature set of your MVP, wherein the features align with your value proposition. Features that are beyond your value proposition can be introduced in later updates or during the full launch.

5. Measure your product-market fit

Now that you’ve identified your target buyer, defined your value proposition, and created your MVP, it’s time to determine if you have successfully achieved product-market fit by analyzing your performance.

One of the most effective metrics to use is total addressable market. Simply determine the absolute maximum number of potential buyers, then calculate the percentage of the market that is already using the product. This shows you the potential opportunities waiting for you.

How to measure product market fit
Establishing a good understanding of product-market fit often requires the use of multiple metrics. Aside from the total addressable market, here are four other metrics that you can use to measure product-market fit:

1. Sean Ellis survey method

The Sean Ellis survey method asks a single question: “How disappointed would you feel if you could no longer use this product?”. Ellis states that this method is effective as it helps entrepreneurs and brands identify their core market. As a result, they are able to establish more accurate buyer personas and use that data to create highly targeted market campaigns.

This method is most applicable for startups that are looking to launch a new product, as opposed to established companies that want to introduce new products to their existing lines.

2. Cohort retention

Unlike the Sean Ellis survey method, the cohort retention method works best for companies with already established products as it makes use of historical data to determine product-market fit. Cohort retention measures the proportion of customers that keep paying for a product after a certain amount of time has passed, which is usually eight weeks.

Cohort retention rate is typically displayed as a line graph, with time on the X axis and proportion of paying customers on the Y axis. If the line levels anywhere above the X axis, it is a sign of a good product-market fit, whereas a line that levels low on the X-axis or declines is not.

3. Net Promoter Score (NPS)

Net Promoter Score (NPS) is one of the most common methods to measure customer satisfaction, but it can also be used to assess product-market fit.

NPS asks a simple question: “How likely is it that you would recommend this product to a friend or colleague?” and instructs customers to answer on a scale of 1-10. Customers who answer six or lower are identified as “detractors”, those who give seven or eight are “passives”, and customers that answer nine or ten are known as “promoters”.

NPS is calculated by subtracting the proportion of detractors from the promoters.

4. Lifetime value to customer acquisition ratio (LTV/CAC)

LTV/CAC is one of the strongest metrics of product-market fit. Here’s how you can calculate it:

1. Calculate your LTV: Gross margin percentage x average monthly payment or churn rate
2. Calculate your CAC: Sales and marketing expenses / new customers acquired
3. Divide LTV by CAC

Simply put, this measures how much money it takes to acquire a new customer vs. the amount of money you make when they buy and use your product. If the money you can make from a new customer is less than the amount you spend on winning a new customer, it is a clear sign of poor product-market fit.

Product-market fit questions

Identifying product-market fit involves a lot of surveys as is apparent by now. Surveys help you get a more accurate picture of your target customer and ultimately help you determine if you have product-market fit or not.

Here are some examples of product-market fit questions that you can include in your survey:

1. How would you feel if you could no longer use this product? (Sean Ellis survey question)

1. Very disappointed
2. Somewhat disappointed
3. Not disappointed
4. Not applicable to me

1.  What would you use as an alternative if this product was not available?

1. I would probably not use an alternative
2. I would use ____

1. What is the primary benefit that you obtain from using this product?
2. How can we improve this product further?
3. Why are you using our product as opposed to available alternatives?
4. What type of person do you think would benefit most from this product?
5. What makes this product a “must-have?”

Conclusion

If you don’t have product-market fit, it’s a clear indicator that you need to revisit your plans lest you want to risk failing before you can even start. Don’t sell yourself short--find your product-market fit before launching, and watch as your business starts off on the right foot.

Already launched your product and having trouble finding leads? Let Leadbird help you find the right decision-makers and land your messages directly in their inboxes.