How to Determine Product–Market Fit in Your Industry

Rating — 5·15 min·August 2, 2023
How to Determine Product–Market Fit in Your Industry
How to Determine Product–Market Fit in Your Industry
How can you get closer to your business goals? Learn how to find product–market fit and adjust your app’s functionality to users’ expectations.
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Key takeaways
  • Product–market fit is one of the key things that differentiates successful products from failed ones.
  • For a startup, getting to product–market fit is the only thing that matters.
  • A framework called the product–market fit pyramid explains how to find product–market fit.
  • To ensure you’re on the way to product–market fit, consider measuring four key metrics: customer disappointment, organic growth, retention rate, and customer acquisition cost.

What’s the difference between a successful product and a failed product?

The answer to this question is multi-component: the idea and its implementation, the size and expertise of the team, external investments and market conditions, and multiple other factors can differentiate a successful business from a failed one.

But if you zoom out and get a general picture of the differences, you will notice a single significant factor: successful products find product–market fit, while failed ideas never do.

Of course, you may say that some products achieve product–market fit and still fail afterwards, and you’d be totally right. There’s much to do to keep your head above water after your product achieves product–market fit. But pursuing product–market fit is one of the first steps you can take to ensure you have a chance to succeed.

In this article, you’ll find out what exactly product–market fit is, how to achieve it, and how to make sure you’ve really achieved it.

What is product–market fit?

Product–market fit is a concept that is easy to understand but hard to assess in practice. How can you achieve it? How can you ensure it? How can you measure product–market fit? These things may look challenging; however, the more you know about the concept of product–market fit, the easier it is for you to clarify all related details and implement best practices in your product and business.

Marty Cagan, in his book Inspired, defines a startup as “a product company that has yet to achieve product-market fit.” If you’re a founder of such a business, we invite you to start from the basics of software product development.

The ideal scenario looks like this:

Stage 1. You study the market and brainstorm ideas on how to cater to potential users’ needs in the best possible way during a project discovery phase.

Stage 2. When MVP development starts, you invest time and effort in a high-quality, simple, and user-oriented interface along with server-side development.

Stage 3. As you roll out your product, all startup metrics jump drastically, users beg for your product, and investors pour resources into your idea.

Stage 4. You scale your product and team. At this point, your user base grows exponentially. You go above and beyond your goals and dreams.

This is the ideal scenario, but it has little to no chance of ever happening to the majority of businesses. Between these four fantastic stages of business growth are a bunch of sub-stages, challenges, troubles, poor decisions, and failed attempts. Speaking of product–market fit, we’ll pay most of our attention to those sub-stages, as they can either take your product directly to the product–market fit stage or keep it struggling for months or years.

Products looking for product–market fit are built with never-ending iterations. Continuous product discovery is an integral part of the development process. The number of opportunities in your local market may be nearly unlimited. Thus, the number of solutions you can provide is also huge. But each solution needs to be carefully tested until you discover the most profitable. As you proceed with solution implementation and work on a digital product, you need to constantly iterate to optimize development time and cost, polish every feature, and ensure the quality of your solution.

Improvements and iterations continue until you achieve product–market fit and beyond.

Here’s our working definition of product–market fit:

Product–market fit is a match between product offerings and market expectations achieved by constant improvement of your initial idea, your development plan, and your digital product.

Rachleff’s Corollary of Startup Success says that the only thing that matters is getting to product–market fit.

A product–market fit pyramid: the framework you should use

There are dozens of other definitions of product–market fit.

Dan Olsen, a product management expert and author of The Lean Product Playbook, says that product–market fit occurs when “you have built a product that creates significant customer value.”

If you launch a product in a target market, it doesn’t mean you’ve achieved product–market fit immediately. But if your product meets real needs in a better way than alternative solutions, and if you can prove it with qualitative and quantitative metrics, chances are that you have achieved product–market fit.

Let’s take a look at a product–market fit pyramid introduced by Dan Olsen to help us understand the concept and find ways to achieve and determine product-market fit.

product-market fit pyramid

The framework consists of five interconnected components. The more you know about each of them, the better the chances you have of taking your product towards product–market fit.

Product–market fit pyramid: market

The market section forms the foundation of the pyramid. This is the section to start with, and market research and analysis are usually the primary steps of a project discovery phase.

By studying the target market, you and your team can find out about existing products that may eventually turn into your competitors, uncover unsolved problems that create a gap you can fill with your solution, and reveal customers’ wishes, needs, and demands that you may want to satisfy.

  1. Layer one: target customers

Who would you like to build your product for? How do you imagine your product’s users?

Each case and business is unique, and you may fall into one of these categories:

  • You would like to build a product for your own business needs.

You focus on pains and wishes you and your team are currently experiencing. You and your teammates will be the primary users of your product.

  • You have a spectacular idea for how to launch a business from scratch with a custom software product.

In this case, you have to study, analyze, and understand the needs and wishes of your ideal customer — a particular person you plan to build your product for.

Everything from the potential customer’s age, location, education, and preferences will impact other sections of this pyramid. Thus, understanding your target audience is essential.

If you can clearly see a category of users that may want to try your app, you’ve almost cracked the case.

Still, it’s not enough.

Chances are, users you would like to target are already embracing functionality of a powerful app that has operated in your target market for years.

For example, if you aim to build a product similar to Airbnb, you already have a powerful competitor — the Airbnb platform itself. Besides, there’s (an international giant) and multiple other small, midsize, and huge platforms that help people book vacation or long-term rentals in particular locations.

Thus, you have to study customers’ hidden needs — as Dan Olsen calls them, the underserved needs — to launch a product able to achieve product–market fit.

  1. Layer two: customers’ needs

What do your potential customers really need? And what can’t they get from available solutions?

While answering the first question may seem simple, the second requires a deep dive into the target market.

To identify underserved needs, you can use these methods:

  • Customer research

In a previous section, we mentioned the concept of an ideal customer. But while studying the market, you may need not only to develop an ideal customer persona but also to add significant details to the portrait of your potential future user.

  • Competitor research

If your goal is to build a website like Airbnb, you may overlook dozens of similar solutions that successfully operate in your target market. Sometimes, your main competitor isn’t the company with the highest revenue or the loudest name. It may be a small yet ambitious organization that has already obtained its market share.

Your key competitor may be a product that has recently achieved product–market fit and is now improving and strengthening its position.

How can you identify flaws in similar products or services? Try those products and services yourself and pay special attention to four main factors:

  1. Page load time – Do rivals’ products quickly respond to your queries?
  2. Errors – Can you detect obvious errors in an app’s functionality?
  3. Functionality – Do you find the provided functionality satisfying?
  4. UI/UX design – Are competitors’ apps easy to navigate?

By answering these and similar questions, you can find ways to adjust your offering to customers’ needs.

  • Industry research

Industry conditions may turn into obstacles on your way to success and keep you from achieving product–market fit. Or, on the contrary, they may speed up your growth and support your mission. As you study and analyze current industry trends and conditions, you can leverage them to develop your value proposition.

  • Customer interviews

Another way to identify underserved needs is to ask customers what they really want or what they would like to get from your product.

And it may be a challenging task.

As Henry Ford once said, “If I had asked people what they wanted, they would have said faster horses.”

That’s why you should understand the reasoning behind customers’ wishes and generate assumptions on how to satisfy particular needs.

Once you’ve articulated your detailed market vision and your assumptions are ready, you can move to the next element of the product–market fit pyramid.

Product–market fit pyramid: your product

Your target market determines what you should build. It’s the source of ideas (both well-tested and experimental) and a rules-setting environment. At the same time, it’s your guiding light on the way to your product launch. And as you move to the upper section of the pyramid, you should clearly state your key goal.

The key goal of a product is to satisfy unsatisfied needs.

Another goal you can focus on is to satisfy needs in a better, cheaper, or easier way than your competitors already do.

Thus, the product section starts with a value proposition.

3. Layer three: value proposition

A value proposition represents how exactly your product matches customer needs. It is right above the customer needs section, and by connecting customer profile elements (jobs, pains, and gains) to the components of your value proposition (products and services, gain creators, and pain relievers), you can build a product–market bridge.

value proposition canvas

The number of needs in your target market may be huge. Every potential customer may have tons of wishes and demands. Yet to determine product–market fit, you should focus narrowly.

Consider the following methods:

  • Choose unsatisfied needs solely and work on features to satisfy these needs until you validate your idea and determine product–market fit.
  • Discover a new solution to an existing problem. Remember Henry Ford’s words? Discovering a car was a new solution to a problem that existed since our ancestors were trying to tame mammoths.
  • Use the opportunity solution tree to experiment with your assumptions and define the most profitable.
  • Compare your idea to products available on the market and define how your product will differ.

In trying to heal all pains with your product, you may end up healing none. So focus on one pain at a time and develop a value proposition that makes you stand out.

4. Layer four: feature set

Your value proposition may look fantastic on a chart and sound spectacular in theory. Yet in practice, you can provide value to your users only through your app’s functionality.

Adding a gazillion features to the first version of your product may seem tempting: the more features you have, the more needs you can satisfy, right? But as we’ve mentioned, there’s no point in putting everything on your plate at once: a narrow focus and incremental improvements are the primary ways to achieve your goals. Choosing your feature set and implementation requires a similar approach. Releasing everything, everywhere and all at once is too time-consuming, expensive, and risky.

Instead, we recommend you and your project discovery and development team use these four steps to get closer to the top of your product–market fit pyramid:

  • Generate a long list of features for each value proposition you focus on.
  • Review the list and make sure to cut all features that are not essential for the current release.
  • Prioritize shortlisted features.
  • Implement the prioritized features and start the cycle all over again.

how to choose features for your product

When you’re only starting on your way to product–market fit, returns and investments may not have monetary value. You can consider investment as the amount of time your team needs to implement a certain feature, while returns may be measured as an approximate coefficient of customer value, which equals sale price minus cost of development.

For example, say feature A requires 50 hours of development time and feature B requires 100 hours. In this case, feature B should create twice as much customer value as feature A.

Each feature you choose should help you achieve your key goal.

  1. Layer five: user experience

Focusing on the previous elements of the pyramid, some founders neglect the importance of a seamless user experience. They may believe that a product’s success is directly related to the scope of features and keep adding spices to the feature soup until they run out.

This is why features are not at the top of the pyramid. User experience is.

“No matter how easy to use or beautiful a product is, it can’t deliver a great user experience if the customer doesn’t value the benefits the product provides.”

— Dan Olsen

Good design provides users with emotional benefits that may make more of a difference than the app’s functionality. All layers impact the user experience: you and your team should keep in mind target customers, their underserved needs, your unique value proposition, and your app’s feature set when working on your UX.

How to achieve product–market fit

Following the pyramid framework, we suggest you employ the following guide to achieve product–market fit:

lean product process

As you can see, the road to product-market fit reflects the ideas of a lean startup.

  • You as a startup founder focus on a target group of customers that may be interested in your product;
  • Together with your team, you research and study the underserved needs of your target audience;
  • Then, you brainstorm a unique offering and define value proposition;
  • At the next stage, you develop key functionality that may help satisfy underserved needs;
  • Your design and development team polishes product's UI and UX to attract users, ensure high engagement and impeccable usability of your product;
  • You launch a minimum viable product and ask about users' opinions: are they happy with your product?
  • Based on customers' feedback and your new ideas, you start the process over again, until your reach product–market fit.

And more than that – this iterative process should continue even after you determine product–market fit.

How can you determine product–market fit?

Now, let’s introduce handy and tested signs of product–market fit.

Alex Hormozi, an entrepreneur, investor, and writer, provides us with the three simplest signs of product–market fit:

product-market fit tweet

With an approach like this, determining product–market fit is as easy as pie. However, without real data, it’s more a gut feeling telling you that customers buy your product, use it, and tell other people about it. So in this section, we take a closer look at data-based evidence of product–market fit.

  1. Customer disappointment

If you’d like to find out whether you’re on the right track with your product, just ask your users about it.

Sean Ellis, an entrepreneur and marketer, discovered one of the indicators you can use to determine product–market fit.

Ask your users how they would feel if they could no longer use your product, and offer them to choose one of these options:

  • Very disappointed
  • Somewhat disappointed
  • Not disappointed
  • I don’t use your product anymore

If more than 40% of respondents would feel very disappointed if your product disappeared, then chances are you have already achieved product–market fit.

  1. Organic growth

Let’s learn a lesson from leaders.

Launched in 1997, Netflix struggled to attract users and achieve product–market fit. Through adjusting its business model and continually improving the UX, at some point, the Netflix team noticed a huge increase in organic growth:

“Before we were struggling to get traffic, all of sudden we couldn’t keep up. Our previously prodigious amounts of inventory were suddenly not enough. Engagement soared, churn went dramatically down. Everything started working!”

ー Marc Randolph, first CEO and co-founder of Netflix

Patrick Collison, CEO and co-founder of Stripe, shares some fascinating insights on how his product started achieving product–market fit on the Techzing Tech podcast:

“Over a couple months we had a huge wait list. We weren’t expecting it.”

As you explore success stories of different companies, you may notice a common thing: at some point, the number of organic users started to grow exponentially, surprising entire teams and opening the door to product–market fit.

  1. User retention

User retention metrics describe the number of users that keep using your product over a defined period of time.

To calculate the retention rate, use this formula:

roi formula

There are multiple effective retention strategies, and if you’re retaining more than 40% of customers over 10 to 20 months, this is another sign of product–market fit.

retention curve

  1. Customer acquisition cost

Are you profitable?

While profitability isn’t the one and only evidence of product–market fit (even some profitable companies going to IPO aren’t there yet), profitability may tell you much about your product’s present and future.

Elizabeth Yin, a co-founder of Hustle Fund, advises estimating the customer acquisition cost.

“You have found product–market fit when you can repeatedly acquire customers for a lower cost than what they are worth to you.”

Consider applying the three to one rule: If it costs you $1 to acquire a customer, the lifetime value — an approximate estimate of how much revenue this particular customer will generate — should be at least $3.

Are we there yet?

If the results of your product metrics are controversial, or if it feels like you’re almost there but the numbers prove you’re wrong, take a look at the three main signs that you’re not at the product–market fit stage yet.

  • Slow sales cycle

If you feel like your product is approaching product–market fit but the sales cycle still takes months, you probably need to work more on that fit.

Companies that approach this stage may notice dynamic sales, fast closures, and a constant need for hiring more and more sales and customer success experts.

  • Customers aren’t asking for more
“The only way you know if you’ve built what customers want is they’re using it in an explosive and destructive way.”

— The Real Product Market Fit by Michael Seibel

Customers use things; customers break things; customers report things. Your team is overwhelmed with emerging issues, and even downtime increases.

Sounds familiar?

If not, it doesn’t mean that your product is impeccable. Probably, it just doesn’t handle enough requests to break and show its weaknesses. Probably, your product is not fitting the market.

  • Customers are leaving after the free trial

Is there life after the trial period?

Or do users abandon your product immediately when the trial ends?

As we’ve mentioned, a product that has achieved product–market fit is profitable, meaning after the trial, users are willing to pay for it.

If you’re lucky, you can experience something similar to what happened to GitHub:

“When we launched our private beta (mostly enthusiasts from the Ruby community), we were offering it for free. To our surprise, users started writing to us asking ‘Can we pay for this??’ They liked it so much they wanted to pay for it. That was the first sign this was going to work.”

— Tom Preston-Werner, first CEO and co-founder of GitHub

If it’s not your case, your product is not at its product–market fit stage.

“You can always feel product–market fit when it’s happening.”

– Lenny Rachitsky

The never-ending journey

Product–market fit isn’t a trophy. You can’t achieve it, put it on the shelf, and go rest under the sun of success and profit. Your target market is likely changing faster than you’re iterating your roadmap; adjusting your product to market conditions may require 10 times more iterations than you use to release your business plan for startup.

“It’s possible (& common) to have PM fit for a while and then lose it.”

— Elizabeth Yin

Take Heroku. This cloud platform started with skyrocketing acquisition of Ruby users. But later, the metrics started to drop, and the team had to adjust their offerings and extend functionality to get back to the product–market fit stage.

The journey will take as long as you want your product to live and thrive.

So go back to the basics, focus on target customers and their underserved needs, develop a strong and unique value proposition, build a set of high-priority features, and work on providing a seamless user experience to align your product with the needs of the target market.

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