Product Market fit

What is Product-Market Fit?

Product Market Fit is a magnetic force that attracts and binds customers to products. The better the fit, the higher the market share, the more loyal customers tend to be, and the more difficult it is for a competitor to lure customers away.

High fit means low customer acquisition cost, high loyalty, and high lifetime customer value.

Low fit means high customer churn, high customer acquisition costs, and low loyalty. It really is like a magnet: in one polarity it attracts customers, and in the other, it repels them.

Product-Market Fit Goals for Products

Startups should prioritize product-market fit above all other goals, because those that find it will dramatically increase their odds of success. Conversely, many startups fail because they waste money on products that no one wants to buy.

To avoid this fate, make sure you understand the pain points your product solves as well as the challenges your customers are seeking to solve. You can do this by focusing on six primary areas:

1. Determine your target customer

Work to identify the target customer who represents the users that will most likely benefit from your product. Use market segments to define your ideal customer. Develop “archetypes” for those customers so your team will clearly understand who it is building toward.

TechStars’ Entrepreneur in Residence Sean Higgins defines this process in four steps:Analyzing your product or serviceFamiliarizing yourself with your competitionChoosing segment criteriaPerforming researchThe research phase itself is carefully crafted around defining your buyer persona, identifying which part of that persona you’ll target, conducting market research with prepared research questions, and summarizing your findings into digestible takeaways to share with your individual contributors, executives, and board.

2. Gather intelligence

Talk to your customers to determine their pain points and how much they would consider paying for a solution to those challenges. Seek insights from your sales and marketing teams to identify recurring customer complaints.

Collect a large enough data sample to provide meaningful feedback. Consider, too, that face-to-face conversations will often generate feedback that online surveys will not.

3. Focus on a single vertical

Startups have notoriously small budgets, which means that trying to sell your products to everyone will likely result in disaster. Begin with a narrow focus and dive deep into that industry. Establish yourself as the industry expert in a single domain with a goal to stimulate a viral spread.

For example, Spotify saw that people were ready to pay a small fee for unlimited access to music, legally. They didn’t go into the market trying to take on existing music streaming services like the discovery centered on Pandora or the more traditional, pay-per-album structure of iTunes.

They created a platform for people who wanted to listen to any album, any time by only paying one fee. They identified a gap in the market and targeted the people in that gap.

4. Specify your value proposition

Determine which customer needs you can best address with your product or service. Figure out how you can outperform your competitors and surprise your customers. Don’t lose sight of your product roadmap when determining which challenges you’ll address. Not every problem will fit into yours.

For example, Spotify’s value proposition positions the streaming service as offering access over ownership, providing data-driven personalization, and the opportunity for content unbundling.

5. Measure your product-market fit

You must measure your performance in order to manage your success. Identify key data points that will help you track performance. Start by identifying your total addressable market (TAM) otherwise known as the total number of people who can benefit from your product/service (i.e., If everyone who could use your product/service started using it).

TAM is calculated by multiplying your average revenue per user (ARPU) by the total potential customers in the market. Once you have your TAM, determine what percent what percentage of your TAM are currently customers.

6. Avoid complacency

If you manage to achieve product-market fit, don’t assume you’ll always have it. Your customers’ needs will change over time, and you must constantly re-evaluate market conditions in order to continue meeting those needs.