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If you own a startup, chances are that you want to scale it into a full-fledged company. That’s surely a great thing to do, but here’s the rub…
Because they created the wrong product.
If your startup must grow, it needs something better…
A better product. A product that people actually need. A product developed based on facilitative, honest feedback of the target users.
And to develop such a product? You will need to find and measure what is called PRODUCT/MARKET FIT.
How do you know when you’ve actually achieved product/market fit? And how do you measure it?
To answer those questions…
…we would first have to understand what product/market fit truly is.
What exactly is product/market fit?
The term “product/market fit” was first coined by Marc Andreessen in 2007, in his article “The Only Thing That Matters.”
Marc defined product/market fit as thus:
This definition makes it clear that product/market fit only happens when:
- There’s a good market for a product. Consider a good market to be one that is either large enough or has enough demand to be profitable — ideally, it should be both.
- The product can satisfactorily meet that market’s need.
This doesn’t necessarily mean your idea going viral on day one, but you working intelligently and closely with your target customers to produce something that they want, something that sparks enough interest and have a good number of people who are willing to pay for it.
Don’t have an idea of what business you want to pursue? Check this out:
Don’t Be A Fool In Love: Guide To Find Your Winning Tech Idea
Why is it important to find product/market fit for your startup?
You may want to wave off the significance of finding product/market fit for your startup. But you shouldn’t.
CB Insights carried out a study based on an analysis of 101 startup post-mortems and found that the number one reason why startups fail is the lack of product/market fit.
You may not like it but what it means is this:
Without product/market fit, your startup may not be able to move forward. No one will be interested in your product, except your mom and your cat. You simply won’t be able to grow your business much easily into something bigger.
Will Caldwell, the Co-founder and CEO of Dizzle even went ahead to say in his article for Entrepreneur.com that:
“Product-market fit is the golden rule for any startup – entrepreneurs need it or their concept will fail.”
If you think that’s just Will’s opinion, well, you’re probably alone on that front. Many thought-leaders agree with this. Take a look at this for instance:
“…most startups fail not because they don’t manage to develop and deliver a product to the market; they fail because they develop and deliver a product that no customers want or need.” – Steve Blank
Here’s a quick rundown of some more reasons why you need to find product/market fit for your SaaS-based business:
- Product/market fit not only let you know if there is a market need for your product, it also positions your business to meet that need effectively. This, in turn, helps you to establish your startup. It’s like building a strong foundation upon which you can build a bigger business.
- Product/market fit also makes it possible to drive sustainable growth in the right direction.
- Product/market fit lets you know your position in an industry.
- After achieving product/market fit, you can more easily make an informed decision about the next steps to take with your startup.
- It lets you know exactly when to scale your startup growth. Try hitting the accelerator too early and you’d wind up wasting resources and even drub your business; too late and a competitor will beat you to the bank.
- Finding your product/market fit creates room for you to focus more on your business’s growth as opposed to spending most of your time and money redeveloping your product over and over in order to find that perfect fit.
- It lets you solve problems more intelligently and in a better way.
- You really get to know what your customers want, the exact problems to solve.
And when you know exactly the problems to solve…you won’t have to waste time, money, and efforts on the wrong stuff.
Peter Reinhardt, the Co-founder and CEO of Segment, spent months with his team working on their startup. In the end, Peter said this in relation to finding product/market fit:
“…20 hours of great interviews probably would’ve saved us an accrued 18 months of building useless stuff.”
How do you know you’re not building useless stuff but have actually achieved product/market fit?
Well, when your SaaS startup has advanced to become satisfactory and attractive to a segment of the market (and there are promising numbers showing that you are able to scalably grow it), then you’ve reached the precise point of product/market fit.
But to really operate on a data-driven level, you would need to know how to measure product/market fit.
When that happens, it’ll be easier for you to be among the top performers who have at least 62% chances of succeeding with their product, as reported by Stage Gate International:
How to Measure Product/Market Fit?
It’s not enough to assume that your product has achieved market fit. You need to operate on a data-driven basis. You need first-hand information of how well your product is needed. You need to know the numbers.
And for this to be possible?
You need to know how to practically measure product/market fit for your startup.
Here are eight actionable steps you can take to do just that:
Step #1: Get to understand customer needs.
No matter how good your product is, the simple truth is that you won’t be able to persuade people to buy from you if you don’t have a clear understanding of what it is your customers really need.
And without an adequate knowledge of what your customers need, you won’t be able to tell if your product fits into the market or not.
So the first step to achieving and measuring product/market fit is to study the market to know what is needed. This is the groundwork, and it is necessary in order for subsequent steps to be performed easily.
There are several different strategies you can apply to understand customers’ needs, including:
- Running a survey
- Social interactions
- Industry reports
- In-depth analysis of your market
- Feasibility study
- And so on.
Once you have this knowledge, achieving product/market fit becomes easy. And you’d be able to more easily persuade potential and existing customers to buy from you.
Basically, this is where you get to identify your customers, understand the problem, and start defining a solution.
Here are few guides you can use to determine customer need for SaaS companies:
A Guide to Measuring and Improving what Matters for SaaS
SaaS CEO’s Guide to Happy Customers
Step #2: Create a minimum viable product for validation.
A minimum viable product (MVP) is a product development strategy in which a new product or website is created with sufficient features to satisfy early users.
The final set of features is only designed and developed after considering feedback and responses from the product’s initial users. Think the beta versions of your favorite applications.
There are several benefits of doing this but to keep it relevant to the topic of discussion here, a minimum viable product will create opportunities for you to receive multiple feedback (more on that later), something that is necessary for easily achieving and measuring product/market fit.
After you’ve studied the market to get a good understanding of what your target users want, move on to create a MVP product to test the waters based on your findings in step #1.
Apart from the helpful feedback you’ll be getting, MVP also lets you see the level of interaction and interest people are likely to develop with your product. You can easily validate the usefulness of what you are creating and use the data to develop something more satisfactory.
Step #3: Assimilate and improve on your product value.
It’s essential for the market you are trying to penetrate to understand the value of what you are looking to sell to them. The quicker your customers are able to connect with your product value, the easier you will know your product has achieved product/market fit, and the easier it will be to actually measure it.
There are two kinds of product values you should push to create:
- Perceived value
- Actual value
For perceived value, you can start by crafting an effective, unique value proposition. Test out different versions of it to see which one performs better (A/B testing is the recommended way to do this).
Here are ten characteristics of a great value proposition:
In as much as you would want to make the copy of your value proposition truly convincing, be careful to provide the actual value of the proposition.
Here’s what I mean:
Some businesses promise gold in their written value proposition but actually deliver nothing close to it. Don’t promise your customers the world if you can’t deliver the word. It is devastating and can sabotage customer relationship and trust. And trust is an important component of an effective product/market fit.
In fact, if you have a look at the world’s most valuable startups, you’ll find that to get to where they are today, they had to put these two together: great product and trust.
Step #4: Use customer survey to unlock the minds of users and develop a better product.
Product/market fit is about being in a good market, knowing what the market needs, and creating a product that convincingly meets that need.
Undoubtedly, the most effective way to know what people want is to ask the people — in this case, YOUR customers.
After you’ve created a minimum viable product, survey your customers to unlock their minds and get to know what they really want.
Your customers are important here because they are just about the only ones who can tell it to you just as it is. So, you’re not supposed to survey just anybody.
Apart from the effectiveness of customer surveying, there are some valid reasons why this works.
However, there are some strategies to follow when looking to use a survey to measure product/market fit.
In particular, we will be looking at Sean Ellis’ product/market fit test. It’s one of the most talked-about approaches for calculating product/market fit today.
The Sean Ellis Product/Market Fit Test
Sean created this test to especially help startup founders find and measure product/market fit.
This survey technique takes a step back from the usual complex metrics. It instead focuses on getting extremely relevant data from customers (read, it’s customer-centric) in the simplest way by serving them a few, highly-apposite questions.
Here’s what it looks like:
Sean created a few questions for this test, but at the core of it is this question:
“How would you feel if you no longer use this (product)?”:
This is followed by three potential answers:
- Very disappointed
- Somewhat disappointed
- Not disappointed
And possibly a fourth, which is for those who no longer use the product. I don’t think the third question is that helpful, though.
Whether you include the third question or not, the kick here is to follow the 40% rule, which says that…
…if at least 40% of your respondents answer “very disappointed”, then that’s a clear indication your SaaS business has found product/market fit.
- Very disappointed: 32%
- Somewhat disappointed: 58%
- Not disappointed: 11%
These results show that Baremetrics still have some work to do to fully achieve product/market fit.
But why use the 40% rule?
Sean said after he had compared nearly 100 startups, he found that those that struggled to reach traction always scored below 40% on this test, while those that managed to gain strong traction always scored over 40%.
It’s a simple strategy, but when doing this, you have to know what’s acceptable.
For one, this shouldn’t be the kind of survey you send out to your first six customers. Buffer said that forty to 50 responses should carry statistical significance, but you should also shoot for the north of those numbers.
Who to survey?
Here is Sean’s recommendation:
Sean even built a tool for this test called survey.io. The tool can be used to easily run the test on your customer base.
Applying this customer-centric survey strategy in your startup will let you measure product/market fit easily and get your hands on the data you need to drive your venture in the right direction.
Check out these guides on customer surveys:
10 Essential Tactics for Creating Valuable Customer Surveys
The Definitive Guide on When to Survey Your Customers (Introducing Custom Scheduling)
Step #5: Track customer engagement to discover behaviors you can use to your advantage.
The manner in which your customers interact with your product can say a lot about the level of product/market fit you have achieved. This is especially true for SaaS startups with products that require good user experience (UX).
How do you measure product/market fit by tracking customer behavior or interaction?
If the time users spend on your website, or the time they spend using your product, is not decent enough, then that could be a sign that something is not right with your product/market fit.
A product with strong market fit is one that users will find fascinating enough to spend time using.
You wouldn’t bother yourself with a product you don’t really need, right?
Thought so, too!
You might also want to look at user interaction on a long term basis.
For instance, if you find that user interaction keeps declining with time, then something is probably wrong with your product/market fit, except your product is seasonal.
Of course, if more people are joining the user-base on a regular (say, daily) basis, that means good product/market fit.
However, when tracking user interaction with your product as a way to measure product/market fit…make sure you track rightly.
Just because a few users are unsubscribing doesn’t mean you have a bad product. Generally, the number of newly added users should be greater than the number of those leaving.
Have a look to these guides to measure customer engagement:
Measure Customer Engagement: Increase Conversion and Lower Churn
The 5 Minute Guide to Contemporary Customer Engagement
Step #6: Track and study early adopters to get an idea of how strong your product/market fit is.
The number of people who jump on your list can reveal a lot about your product’s market fit.
For instance, Danni Friedland and his team launched a startup called Jaco.
Here are some of the results they got:
- They ranked #1 in the Tech section of Product Hunt.
- On launch day, they had 599 upvotes, and an additional 204 new upvotes in the next 58 hours (916 upvotes in total).
- They got 3037 new users directly from Product Hunt in just three days. Want it?
- They also had additional 6098 new users from other sources, likely related to the launch.
- 816 people signed ups.
- They received 119 comments on there.
These results clearly show that the product had product/market fit judging from the number of users that opted for it. And this is actually a good measure of product/market fit.
Step #7: Use Dave McClure’s AARRR model to get all the information you need about how well your product is doing.
Dave McClure has some great models for startup metrics which you can adopt.
One such model is this one called the AARRR model, otherwise known as “the Pirate model” because of the “AARRR” designation.
Dave talks about developing a 1-page business model and identifying three to 5 actionable metrics.
The basic concept of this model is based on five types of measurements of user behavior:
- Acquisition: How do users find you? Where/what channels do they come from?
- Activation: What % have a happy, great first experience?
- Retention: Do they come back and revisit over time?
- Revenue: Can you monetize any of these behaviors, and how?
- Referral: Do they like it enough to tell their friends?
Using this model, and answering those five questions correctly, you would be able to determine how strong a product/market fit you have.
For example, if your answers to the Retention and Referrals questions are YES, then that is pretty much a good thing for your SaaS company.
You do not necessarily need to start with all five metrics, though. If you find that three are more relevant to your business, then you don’t need more than that.
Learn more on Dave McClure’s AARRR model: Startup Metrics for Pirates
Step #8: Keep an eye on viral.
Virality can also be a good way to measure product/market fit.
If your product circulates rapidly and widely from one Internet user to another, then chances are that your startup has good product/market fit.
Virality is an approach designed to get others to share your product for you. Nobody shares products they don’t like.
If you answered yes to any of the questions, there’s a great chance you’ve found product/market fit.
The question you may want to ask
Reading through this, you’ve probably been harboring this question in mind:
Is it necessary that your SaaS startup must find product/market fit?
The answer depends on what you want…
On the downside, getting into a market blindly only dampens your chances of succeeding.
But if you are like me, and want to join the hall of fame of entrepreneurs who conquered their markets through an adequately-done market fit test, then you definitely need to find product/market fit for your business.
Measuring product/market fit cannot be overemphasized either. You need to have an all-round knowledge of the strengths and weaknesses of your offering, which is the idea behind this test.
The knowledge will enable you to know the right actions to take, how, where, and when. Be it to double down on your product development, optimize sales, supercharge your marketing efforts, or to up your customer support.
Whatever action you decide to take in the end, we hope you find this article helpful.