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What is Product-Market Fit & Why Does It Matter?

by Greg Cargopoulos

What is Product-Market Fit & Why Does It Matter?

Nearly half (42%) of startups fail due to a lack of product-market fit, according to startup incubator and accelerator StartupDevKit. Often, these failures occur when founders mistakenly believe they've found product-market fit and start hiring people and increasing burn, limiting their runway to pivot before running out of capital.

Let's take a closer look at product-market fit, how to measure it, and strategies to help your startup succeed.

Nearly half of startups fail due to a lack of product-market fit, so it's critical to find and track product-market fit.

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What is Product-Market Fit?

Product-market fit is the degree to which a product satisfies strong market demand. When you have product-market fit, customers are buying products as quickly as you can make them, or in the software world, usage is growing as fast as you can add servers. You've hit a problem so painful for customers that they're eager to buy a solution.

How product-market fit looks within the venture capital timeline. Source: StartupCommons

A lack of a product-market fit becomes apparent when customers aren't quite getting enough value out of the product, you're not getting a lot of word-of-mouth referrals, and you have a long sales cycle. You may have come across a problem that customers want to solve, but either the solution is inadequate or it's not a painful enough problem.

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How to Reach Product-Market Fit

Many founders make the mistake of prioritizing their solution over the market or problem. If there is no market or the problem isn't dire, you'll have a hard time attracting customers and achieving product-market fit. As a result, the first step in the process is always validating that there's a problem-solution fit before you even start developing a product.

Michael Seibel notes that founders should seek out customers who "have their hair on fire." In other words, they have a problem so great that they prioritize solving it above everything else. More importantly, they're willing to try half-baked ideas and imperfect solutions to solve the problem, an ideal growth foundation for startups.

Once you've identified a problem-solution fit, the next step is building a minimum viable product (MVP). Marc Andreessen famously said, "the market pulls product out of the startup." The MVP is almost never the right solution to the problem, but it enables the market to "pull the product out" by talking to customers and iterating over time.

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How to Measure Product-Market Fit

Startup founders looking for a problem-solution fit (e.g., pre-MVP) should follow the advice of Rob Fitzpatrick. In his book, The Mom Test, he discusses how to ask questions and have conversations that lead to honest answers. In short, the goal should be to learn more about a customer's problems rather than proposing solutions.

Once you have an MVP, you can measure product-market fit by looking at quantitative metrics. Ideally, you're charging customers for early access, enabling you to accurately measure real interest and conversion rates. But, even if you only collect an email address, you can roughly estimate how a potential solution resonates with would-be customers.

Some early-stage metrics to track include:

  • Bounce Rate - How many visitors look at more than one page on your site (e.g., they're interested in learning more)?

  • Time on Site - How long do visitors spend on the landing page?

  • Pages per Visit - How many pages does each visitor look at?

  • Returning Visitors - What percentage of your visitors come back?

These are early signs of product-market fit—or at least problem-solution fit. While a high percentage of returning visitors is a positive sign, it doesn't mean that paying customers will stick around after subscribing to your service. As the MVP matures, startups should start looking at other metrics to better understand product-market fit.

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Iterate & Improve Product-Market Fit

Product-market fit doesn't end when your MVP gains traction among a small subset of customers. Until you're struggling to keep up with demand, you still need to measure and improve over time by looking at metrics like the net promoter score (NPS) and other engagement statistics while learning and iterating on the product.

Some core metrics to watch include:

  • Churn Rate - How many customers are sticking around after a free trial or the first months of their subscription?

  • NPS / Referrals - How many customers are willing to recommend your product—and how many actually make recommendations?

  • Customer Lifetime Value - What is the average profit that you make from a customer’s entire lifetime?

  • Conversion Rate - How many leads are converting into customers and how long is your sales cycle?

How do you know when you have reached product-market fit?

As mentioned earlier, it often means there’s a struggle to keep up with demand and hire support staff quickly enough. If you're well-staffed, you might also look for high conversion rates, rising customer lifetime values, a high percentage of referrals, and low churn rates.

Some experts recommend measuring product-market fit with the 40% rule. At least 40% of customers should be "very disappointed" if they no longer have access to your product or service. In other words, you've developed a highly-effective solution that addresses a very painful problem, and customers would be in trouble without it.

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The Bottom Line

Startups should focus almost all of their resources on achieving a product-market fit before investing in anything else. At the same time, they should keep their burn rate at a minimum until that point to maximize their odds of success. As Michael Siebel says, "stay lean, keep burn low, and resemble a Navy SEAL team instead of an Army battalion."

Intent can help you with design sprints, user interviews, and other processes to validate early-stage ideas and transform them into effective MVPs. 

Contact us today to discuss your project!


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