According to the 2024 Global Overview Report (January 2024), out of a population of approximately 8.08 billion people globally, 5.61 billion are unique phone subscribers, 5.35 billion actively use the internet and 5.04 billion have social media identities. For digital product leaders and marketers, how do you ensure your product is reaching your target customers in such a wide market? How can your product engage and gain traction through advocacy?
Aligning your digital product with the specific needs of your target market is critical to adoption and, ultimately, growth. This alignment, known as ‘product-market fit’ (or PMF), is the identification of a good market (based on its size and identified demand) and the formation of the product to fit that market’s needs, resulting in delighted customers. Product-market fit will help you realise value through customer satisfaction and loyalty, ultimately resulting in business growth. PMF means advocacy, where product growth is driven by customer word-of-mouth, reviews and referrals. In a market where 88% of customers trust personal recommendations more than any other channel, PMF is crucial for any digital product marketing strategy.
What exactly is PMF?
In ‘Introduction to Tech Ventures’, Harvard Business School Senior Lecturer Jeffery Bussgang stated that PMF is creating a compelling product that properly satisfies the target market, such that the market embraces the product".
Marc Andreessen of Andreesen Horowitz (a16z) emphasises PMF as the “only thing that matters” and that market understanding is critical in managing successful products. Similarly, if an enterprise hasn’t discovered PMF, there are clear indicators:
“You can always feel when product-market fit is not happening. The 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.” Marc Andreessen
It can be challenging to apply the theory of PMF in practice and achieve real value. There are many mistakes that should be avoided and there are no shortcuts to achieving good product-market fit. So to help you avoid the pitfalls and realise the benefits, here is your practical guide to product-market fit.
The Starting Point
Andressen breaks down the three fundamental building blocks of a successful digital business:
The team
The product
The market
While many may initially look at the team or the product as being the most important, Andy puts it into a different perspective:
Ultimately, this means that while a company can iterate and develop products and teams, the single greatest point of success or failure starts with achieving alignment with the market.
What are the benefits of great product-market fit?
CB Insights conducted 473 business failure post mortems and found that 42% of failures were due to ‘no market need’. If no one wants a company’s product, the company cannot make revenue, cannot reinvest to improve and ultimately cannot grow. However, a company can survive and thrive if it can establish and maintain a good product-market fit. Target customers sustain growth and profitability by consistently purchasing, using, and advocating the product to others.
Other than the avoidance of failure or reduction of risk as a benefit, PMF can also be a key enabler of:
Accelerated growth: aligning your product to market demand and ensuring that demand is constant will allow for rapid growth where demand continues to exist.
Customer advocacy and satisfaction: rather than relying on the initial market conditions to remain constant, customer advocacy for your product can establish ongoing demand.
Lower cost to acquire new customers: PMF will establish a model where customer influence can drive a more organic rate of adoption, in turn fuelling a self-sustaining model. Rather than investing in advertisements and websites, influencer partnerships (or AI generated content).
Company growth: You can either build on a successful model or do it the hard way, learning through failure and remediation. PMF lays the groundwork for success and allows for simpler iterations.
Benchmark of Product-Market Fit – The 40% Test
A key benchmark of PMF is the ‘Sean Ellis test’ or the 40% test. With this method, a survey of customers can determine whether they would be unhappy if they could no longer use the product. If 40% or more customers state that they would be very disappointed, given that the product solves an important problem, you can consider that PMF has been achieved. If less than 40% of customers indicate they would be unhappy, this suggests the product is not meeting the needs of the target market.
This may not be the end of the world, but it should be an immediate trigger to re-engage with the target market to determine what is missing. Customer surveys, such as the 40% test, are critical tools for product managers and leaders to continually adapt and iterate products in order to retain or achieve better market fit.
Case studies: successful Product-Market Fit
Slack, a great case study in use of the Sean Ellis test, heard from 51% of their customers that they would be ‘very disappointed’ if they could no longer use Sack at all. This exceeded the 40% rule and showed how Slack had nailed the required feature set to become loved by their customer base. The survey outcomes also enabled deeper analysis into what the differences were between those that loved the product and those that were more indifferent, driving further improvement and growth.
Another case study that exemplifies a good approach to achieving product-market fit is Loom, a video messaging tool that helps you get your message across through instantly shareable videos. Loom was born out of customer research related to an earlier product called Opentest which was facing failure due to lagging growth. Customer interest in one feature from the research led to the adaptation of the first iteration of Loom, a simple Chrome plug-in. Loom developed further by focusing on adoption over monetisation and, using techniques such as referral campaigns, drove a more organic and lower-cost adoption model.
The pandemic and the major change in workforce behaviour in 2020 had a major impact on Loom’s growth. Adoption went viral, and Loom’s product leaders adapted rapidly, repricing their Pro version and developing free product tiers for education and non-profit.
Loom stands out as a PMF success story given the focus on customer research driving rapid ideation and iteration of product feature and function. In finding what meant most to their target customers, Loom was able to align their product to meet their needs. Loom now reports that more than 25 million people across 400,000 companies are using the product.
How to Achieve Product-Market Fit
The path to achieving product-market fit is ultimately about combining many of the models and guidelines we have covered in this article. Ultimately, the process is all about understanding the target market, researching customers (what problem will your product solve), building your customer base through ongoing iterations and, ideally, long-term growth.
Define your business model: Using tools such as the Lean Canvas will help establish a dynamic model and business plan for your product. You can iteratively review and adapt many of the steps within the business model.
Know your customer: building products people love starts with knowing who those people are. Customer research, surveys and focus groups enable data-driven UX design, which should be a repeatable process continually revisited through the product lifecycle.
Understanding customer needs and behaviours – what unique problem will you solve for them: based on customer research, establishing customer personas and journey maps will help to gain further insights into problems and pain points, including across product channels and linked services.
Know the market: companies must spend time reading and understanding market conditions. Economic and geopolitical trends, potential competition and supply-chain dynamics are all variables that can impact a product's success.
Establish the unique value proposition: the value proposition establishes the benefit of the product, the customer’s problem that will be solved and what makes it the best buy over the competition. Value propositions should be continually tested and validated through ongoing customer research and surveys, such as the 40% test.
Product creation, MVP development and customer base building: all the customer and market research done to date will help you prioritise the initial feature set for your product. A Minimum Viable Product (or MVP) is an early version of the product that has enough features and capabilities to deliver value (as defined in the value proposition). Most importantly, an MVP attracts early adopters and grows your customer base.
Analysis, user testing & feedback loops: analysing what is working (continue or exploit) and what is not (stop or change) and validating through user testing and customer surveys will help to refine the product and value proposition. Other improvements, such as channel effectiveness, customer conversion (e.g. converting website visits and adding to shopping carts to sales) and reducing leakage points, are also key to ongoing success.
Iteration and refinement: ensuring that product-market fit is not a one-off and continuing to improve existing, or add new features to grow the customer base or drive loyalty.
Key Metrics to Track Product-Market Fit
Customer adoption and subsequent growth are two of the key indicators that PMF is being achieved. However, sustainability is key to ensuring that growth is not at the cost of other things, most importantly the business itself. A company must be able to scale as it grows to ensure it is not overwhelmed and could potentially collapse at a future point. Short-term success is great but not at the expense of the company long-term. Andy Rachleff also says that growth must be organic and exponential to be sustainable and to achieve “escape velocity”, which is where a company can start achieving scale.
The rule of 40 (or the 40% rule), a value metric initially defined by Brad Feld in 2015, was designed (predominantly based on SaaS companies) to determine the threshold to drive growth sustainably. The rule focuses on the line where revenue growth and profit margins align, ensuring that rapid growth doesn’t require a company to consume available cash reserves and ultimately become unsustainable.
Alternatives that might be more useful or complimentary alongside the 40% test include metrics that focus on generating more revenue from existing customers. Metrics that can help a company establish a view on long-term customer value include:
Customer lifetime value (CLV): is the total revenue or profit generated by a customer over the entire course of their relationship with your business.
Net Promoter Score (NPS): measures the likelihood a customer will recommend (or recommend against) a company or product as a way of determining customer loyalty and advocacy.Churn Rate: is the percentage of customers who stop using a product or service during a given period.
Customer Satisfaction Score (CSAT): measures the level of customer satisfaction with a product or service.
Integrating These Metrics:
Churn Rate and CLV: By monitoring churn rate alongside CLV, businesses can identify whether they're retaining high-value customers or losing them.
CSAT and NPS: Using CSAT together with NPS can provide a comprehensive view of customer satisfaction and loyalty, highlighting areas for improvement.
Tracking Over Time: Regularly tracking these metrics allows businesses to see trends and make data-driven decisions to enhance product-market fit.
The Importance of Adaptation
The insights you will gain from continuously surveying customers and listening to feedback are priceless. Maintaining Product-market requires constant adaptation to remain relevant. Markets change and shift and are often buffeted by external forces, and the competitive landscape can change dynamically, diverting existing customers and prospects to alternative products. To continuously deliver value, companies must remain agile and responsive to evolving needs, promptly incorporating user feedback into iterative feature development.
Several key strategies are available to support adaptation:
Collecting customer feedback for continuous product improvement.
Continual revaluation of product-market fit, including challenging assumptions and hypotheses.
Flexible and adaptive pricing models (throttling up or down with demand or at times of peak opportunity, per the Loom case study).
Resource augmentation – using ecosystem partners and providers to lend expertise to overcome any limitations.
Agile development processes.
The importance of an agile development process for rapid adjustments
Agile product management and development processes are critical as enabling product-market fit. Tools such as the Lean Canvas and concepts such as Minimum Viable Products are core to the agile methodology and will enable highly responsive and iterative development.
The six phases of the Agile are:
Concept: sometimes referred to as ideation or planning, this phase identifies the features and functions essential to product success. Market and customer research are critical to validate assumptions during this phase.
Inception or initiation: where the product team develops a common understanding of what is required and commences initial tasks (sprint zero).
Iteration or development: the creation and implementation of prioritised product features from the backlog.
Testing: a continuous assurance process, often combined as part of the iteration process. Testing should include technical processes (assuring development) and validation with customers.
Release or transition: refers to the activities involved in preparing for and managing the launch of a new product or feature. Again, this should be both technical tasks and enabling tasks such as marketing and customer development.
Review: a continuous process for gathering and analysing customer feedback in order to improve the product or features.
Final Word
Starting a new product or feature can be a daunting prospect, depending on your target market and customer. As companies like Loom have shown, it is often just about focusing on a single feature that customers will love and building it up from there. For other, more established products it may be more about improving customer satisfaction and retention where product feedback is initially unfavourable. Whatever the case may be, product-market fit provides you with an anchor point to which you can align all your activity. Adapt, iterate and always, always, always, listen to your customer.
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