How to determine and measure product—market fit: a step-by-step guide
Radhika Madhavan
Director of Marketing
Table of Contents
- 7 stages of product–market fit lifecycle
- Types of product prototypes
- Stages of product development
- Measuring the product—market fit
- Indicators that you have the right product—market fit
- Beyond product—market fit
- In short,
American entrepreneur Marc Andreessen first coined the term product—market fit describing it as “being in a good market with a product that can satisfy that market.”
While that may not be the most accurate definition of the term, product-market fit largely refers to a product that inspires and creates value for your customers, and growth for your business.
SMEs believe product-market fit is largely about having a great product and a great market, and a little bit of serendipity. When your product has evolved to the stage where it is being consumed by the market, you can confidently state that you have achieved product-market fit.
In this article, you will learn:
- Stages of product—market fit lifecycle
- Different types of product prototypes
- Measuring the product—market fit
- Indicators that you have the right product—market fit
- Beyond analysis products and markets
7 stages of product–market fit lifecycle
There is a process behind the success of every product. Whether you are an early-stage startup with a great new idea, or an already successful company with a legacy of good products, achieving product-market fit is necessary in both these situations. And the path to achieving product-market fit is a journey that involves multiple stages.
Let’s take a look at the seven stages of a product-market fit cycle:
1. Your big vision
This is the very beginning stage of your product where you have a hypothesis of the product and some rudimentary aspects carved out. For most companies, a product simply starts out as wanting to solve a pressing consumer pain point. Understanding the problem the customer is facing and the solution for said problem is the first step to building a product hypothesis.
2. Identify your customers
Having a great product means nothing if you cannot identify a great market for your product. The key to a successful product-market fit is dependent on identifying the right set of customers, i.e., customers that want to buy and use your product. This not only includes identifying your target customer but also identifying the size of the market, type of market, and a clear definition of the product use case.
One of the best ways to go about this is by conducting research and developing buyer personas. This will give your product team a clear understanding of who and what they’re developing the product for.
3. Strategize your positioning by building an MVP
A Minimum Viable Product (MVP) helps you understand how consumers are engaging with your product and what the market reaction is. Because an MVP gives organizations an insight into how customers perceive the product, it will help determine how they can strategize their position on the same.
4. Test your MVP
Testing the MVP helps companies identify the kind of consumer base that would readily want to buy and use the product. The approach to testing out an MVP must provide verifiable insights on whether the product will be able to effectively engage the market after its launch.
While there are several different ways to test the MVP, the most common ones include customer interviews, crowdsourcing campaigns, and ad campaigns.
5. Analyze the results
Perhaps one of the most important stages in the product-market fit cycle, analyzing the results is fundamental to understand whether your product is living up to the expectations of the market. Oftentimes, companies make the mistake of attempting to sell their product to a consumer base that may not truly benefit from the product.
It is important to analyze the results both quantitatively and qualitatively to understand what the final product will be like, as well as to manage time and resource expenditure objectively.
6. Pivot in the direction of your findings
Based on the insights gathered from the analysis, product teams can align their development and marketing strategies to improve features, adaptability and usability, and other important aspects of the product. This can be noted as the final stage in the product-market fit lifecycle since you have all the necessary information and tools required to launch the product into the market successfully.
7. Redefine your vision (product hypothesis 2.0)
It is important to note that not all markets are created equal. What’s more interesting is that a product that once raked in high sales in a given market, may not perform the same the second or third time around. Because markets are so volatile and competition is ever-evolving, it becomes imperative for companies to redefine their product vision and objectives from time to time.
Types of product prototypes
A product prototype is essentially an initial version of your proposed product that can be used as an early model for testing. A prototype can also represent an initial product experience for targeted users.
Testing a product prototype helps determine key concerns such as user needs, information architecture, usability, visual accessibility, thereby helping product managers evaluate which aspects of the product work, and which ones need refining.
Depending on the business objective, there are two types of prototyping:
Low-fidelity prototyping
Low-fidelity prototyping is a quick process that helps translate high-level concepts into tangible observations. They are usually paper-based, involving hand-drawn mockups, and are primarily done to evaluate the functionality of the product rather than its visual appeal.
High-fidelity prototyping
High-fidelity prototypes are computer-based, realistic representations of the actual product. They aim to provide users with the actual user experience before the product is launched into the market, so as to gather feedback and insights about the product.
Stages of product development
Regardless of the needed fidelity, products are largely developed in five stages as discussed below:
1. Proof Of Concept (POC)
A proof of concept is a process or an exercise that is carried out to determine if an idea or a concept is feasible or workable. In the product development phase, the POC is primarily created to test two factors: feasibility of technologies, and user desirability.
2. Minimum Viable Product
As discussed earlier, a minimum viable product (MVP) is a version of the proposed product containing the key features that early users can test and provide feedback for future product development.
3. Alpha release
An alpha release is a product release in which only key features of the product are available to the target customers for use. This release is carried out once the product has passed the initial quality assurance check. The alpha release is an ideal opportunity for the product team to determine which features of the product appeal most to users, and also those aspects of the product that need enhancement.
4. Beta release
The beta release is carried out when the product development is nearly complete but there is a possibility that there may be certain bugs, or performance issues. A beta release is usually done for users who can test the product and report any issues.
5. Product launch
In the final stage of the process the product is ready to be released into the target market. This is carried out when the product has been thoroughly tested and evaluated for product-market fit. A product launch is a planned and coordinated strategy to make the product available for purchase in the market.
Measuring the product—market fit
To be able to understand whether or not your product is ready for the market, it is important to measure the product-market fit. Below we discuss a few ways how:
The famous management leader Peter Drucker said “What gets measured, gets managed.” This means that you can only manage what you are measuring. To determine if your customers will even use your product, it is important to carry out certain actions that will help evaluate the product-market fit.
SWOT Analysis
SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. A product SWOT analysis assesses the product’s strengths and weaknesses in comparison to the competition. It also helps companies understand where they currently stand as opposed to where they want to be in the next five to ten years.
For a new product, a SWOT analysis helps determine the unfulfilled needs of customers and identify the latent demand in the industry. Consequently, the analysis should provide an insight into how the product will evolve in the future.
Net Promoter Score
The Net Promoter Score is considered to be a gold standard to measure overall customer satisfaction. The NPS is calculated with the help of a questionnaire-based market research survey that typically asks survey respondents the likelihood that they would recommend or promote a product or a company to their friends, family, or colleagues.
The NPS score gives you a measure of your customers’ willingness and readiness to promote your product, thereby helping you gauge the market and determine the customer’s need.
Customer Lifetime Value
Customer lifetime value calibrates the total worth a customer provides to any business over the course of their relationship. Put simply, it refers to the average profits generated by the product company from each customer during their total product usage lifetime. Having a good customer lifetime value score not only means the company is making high profits, but also depicts that customers are happy with the product. This automatically validates your product-market fit success.
Bounce rates/ sign-up drop rates
Bounce rate is a percentage value that indicates whether a visitor stays with your product or leaves. For instance, if your product has more than 55% bounce rate, it means that 55% of customers are not willing to stay with your product.
This directly relates to product-market fit because it demonstrates a customer’s desire to use the product. It also helps to determine issues with the product such as low performance, poor user experience, and so on. While having a high bounce rate doesn’t always mean that your product is not ready for the market, it is indicative of issues that may be hampering the product-market fitness of the product.
There are many other ways to measure product-market fit in the business world. However, American entrepreneur Marc Andreessen believes that as a product owner you always know whether or not product market fit is happening. He believes customers are able to decide pretty quickly if the product adds value, and if so, the word spreads quickly, sales go up, product gets good press coverage, and product usage increases.
Indicators that you have the right product—market fit
Most companies feel a certain market pull if the product performs exceptionally well in the market. It could be in the form on an inflection in organic growth, or customers willing to pay for the product in advance, or customers using the product even when it is not completely functional and so on. While the market “pull” comes in many different forms, product -market fit becomes clear and prominent with time through a series of recurring milestones. Typically, there are three primary ways that companies can claim that they have found their product-market fit:
1. Sudden and significant pull from the market
The product is immediately successful within a span of a few months after market launch. Some of the best examples of such products are Netflix, Uber, and Dropbox.
2. Gradual but accelerating pull from the market
The product takes a few years to find PMF, however, once there is a market pull they see a steady increase in usage and sales. Companies like Substack, Gusto, and Instacart are examples of products that experienced a gradual but accelerating pull from their respective markets.
3. The “milestone” stage
When we think of hitting a milestone, companies like Airbnb and Canva come to mind. Such companies find their product-market fit through a streak of consistent milestones.
One of the surefire ways of achieving product-market fit is to build a product that makes the customer fall in love with it, because it solves a real problem they were facing. One of the best examples for such a product would be Uber.
Since launching in 2010, Uber has spread to 250 cities across the globe, overcoming geographical, cultural, and demographical challenges that most products fail to bring to success. From first knowledge, we know Uber solved one of the most common problems faced by commuters—the ability to hail a cab on their own time, and of their own volition. In addition to this, the application is extremely user-friendly, secure, and provides good support. Its current market cap as of March 2022 stands at [$71.49 billion], with an estimated 45% growth in 2022.
This is simply due to the fact that Uber as a product managed to single-handedly disrupt the industry.
Beyond product—market fit
Oftentimes companies take a one-size-fits-all approach when trying to solve for product issues after market launch. This is untrue because different kinds of products will require different strategies and solutions. In this section we explore what four categories of issues that may arise after achieving product-market fit:
Feature work
Once PMF is achieved, it is important to continue creating value for the customers. Feature work refers to creating more value by extending the product’s functionality, as well as its market.
Growth work
A product is a living organism. Accelerating adoption and usage of the product helps to create value in the market. For instance, a company can decide to launch their product in a new geography. This decision will need to consider key demographics depending on the geography such as industry, location, age, sex, consumer behavior, existing competition, and market growth.
Scaling work
Once a product achieves PMF, it doesn’t stop just there. By expanding product growth, companies must also consider scalability and the challenges that come with it. Scalability issues would comprise designing the product to be able to accommodate more number of users, allow multiple users to use the product at once, and so on.
Product—market fit expansion
This would involve incremental growth of the product in terms of entering a new market, developing a related new product, or both.
In short,
It is important to understand that the road to achieving product-market fit is never ending. It is an ongoing journey that demands change across the various phases of growth. More importantly, the growth is non-linear, because there are several factors that come into play.
Finding and achieving product—market fit takes significant time and hard work. Every stage in the journey will demand a nuanced approach. We hope this article enabled you to understand what product-market fit is, how it can be measured, and finally how to achieve it.
Innovative products are integral to a company’s success. At High Peak, we will help you establish a product development plan that ensures the success you desire.
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