Are you wondering if your product will succeed on the market? Many business owners are asking themselves the same question. Trying to build growth in the wrong market or with a product that your customers don't need can be difficult or even impossible to achieve. That's why before you start "growing" it's a good idea to check if your product or service has a good product-market fit.
Finding product-market fit can highly benefit your company. It can contribute to growth potential, increased sales, and overall performance. Let’s find out more about key metrics and the process of product-market fit.
Why is product-market fit important?
The importance of product-market fit is easy to explain. You can have the best product possible, but if it doesn’t fit the current market, then it’s destined to fail. Why should customers use a product they don’t really need nor want?
At the same time, your product might have many features that need improvement, but if it provides a value proposition for the customer or solves a specific problem, then it is very likely that the product will succeed on the market and achieve product-market fit. That’s why it is important to measure product-market fit. The product doesn’t have to be perfect to perform well on the market.
What is product-market fit?
Product-market fit occurs when a product or service matches the needs of its target markets and, at the same time, maintains growth and profitability. It is a continuous process rather than a one-time activity. The product can change over time, as can the customers and market conditions, so you have to adjust your product to the current circumstances to maintain its product-market fit status.
According to Marc Andreessen, a startup coach, and investor, “Product-market fit means being in a good market with a product that can satisfy that market.” In other words, when you address the customers’ needs properly and create a product based on these needs, product-market fit can be achieved. Moreover, identifying and maintaining your product-market fit can distinguish you from competitors, making your product high-value in the target market.
However, despite the simplicity of the concept, it isn’t easy to achieve. The biggest challenge is to understand who your existing and potential customers are so that you can address their needs. A product team must put in a significant amount of work and conduct a lot of market research in order to get there. In the next section, we’ll look closer at the process of product-market fit.
How to find product-market fit?
Let’s focus on how to achieve product-market fit. In the well-known book, “The Lean Startup,” Eric Ries states that most startups fail because they don’t address customers’ needs and make a product that is simply useless and unwanted. That’s why it is recommended to scale your product-market fit properly first to avoid wasting money and resources for nothing.
In the iterative process called The Lean Product Process, Eric Ries sums up how to achieve product-market fit in six steps:
- Target customers
- Identify underserved customer needs (our specialists from the UX/UI Design team can help you research customer needs properly).
- Create a value proposition
- Determine the key characteristics of the minimum viable product (MVP)
- Create an MVP
- Run tests and gather feedback
With our expertise in MVP development services, we can bring your product to another level.
Continuing with the book “The Lean Startup”, we want to present the product-market fit pyramid, which is divided into five components. It can help you visualize what the process looks like.
Of course, the process can have more than six steps. As it is an iterative process, you can go back or repeat any step according to your needs. It is recommended to check your metrics after each iteration. So, let’s look at how you can measure product-market fit.
How to measure product-market fit?
Let’s examine six metrics that will help you measure your product-market fit. The more metrics you use, the better because you’ll have a more in-depth look at your product.
PMF Survey
Product-market fit survey
One of the most popular methods to measure product-market fit is a survey. There are dedicated PMF tools 
to facilitate your work. By using some PMF templates and conducting a survey, you can easily check if your product reaches your target market needs. We’ll provide an example of a PMF survey down below.
The 40% Test
The 40% Test was developed by Sean Ellis, the author of “Growth Hacking”. It asks your current customers if they were disappointed if your product left the market.
It usually sounds like this:
How would you feel if you could no longer use [name of your product]?
Followed by answers:
- Very disappointed
- Somewhat disappointed
- Not disappointed
- I'm no longer using it
If at least 40% of your customers would be disappointed, it’s a good sign that you might have found your product-market fit. However, keep in mind that you have to have 40% of answers “very disappointed” not “somewhat disappointed” to take it into account. You can pose this question in the user/customer feedback survey.
NPS (Net Promoter Score)
Another metric is Net Promoter Score (NPS). This is a popular and widely used metric for testing how much people like your product (customer loyalty). It is calculated based on the question:
How likely would you be to recommend our product to others?
The question is usually rated on a scale from 0 to 10. The ones who choose 9 or 10 are called “promoters”, from 7 to 8 are called “passives,” and the ones who choose from 0 to 6 are called “detractors”. Based on this, you can calculate the NPS as follows:
Percentage of Promoters - Percentage of Detractors = NPS
NPS varies depending on the industry. According to the American Customer Satisfaction Index , the median NPS for technology companies is +40, whereas, in legal and financial services, it is +50. So, make sure you evaluate your performance based on the proper information for your business.
This quantitative method checks the potential for organic growth driven by word of mouth. However, it has a drawback. It doesn’t tell you “why”. You don’t really know why your customer chose a specific answer. Still, overall it does give valuable general information about your product-market fit.
Churn rate
Churn rate measures how many customers you are losing monthly/yearly. A high churn rate indicates that customers are unsatisfied with your product. There might be many reasons, such as a feature or customer service that they’re not happy with, causing them to not use your product longer or cancel their subscription. A high churn rate shows that your product isn’t achieving product-market fit.
Below, you’ll find how to calculate the churn rate:
When calculating churn rate, it is important to understand what part of your user base is leaving your product. Are they long-term users who have found a better product or new users who don't find your product appealing on first use.
Growth rate
If you see growth in areas such as sales or an increased number of customers over time, you might say that you are closer to your product-market fit. However, you have to be mindful of what is causing the growth because it’s not always valuable to your company. For example, if it is only a result of marketing investment, then, in this case, a high growth rate is not a good indicator of product-market fit.
High churn and growth rates may indicate that your product is an intermediate step for users to another product.
Customer Retention Rate
This metric is a percentage of existing customers who continue to use your product after signing up for a specific period of time. A high score indicates that customers are happy with the product. Loyal customers are great ambassadors that contribute to your product’s success.
So, how to calculate CRR? We’ll explain this in four simple steps:
- First, choose a specific period of time you want to measure.
- Then, calculate the number of customers that you have at the beginning of the chosen period of time (S).
- Next, calculate the number of customers at the end of the chosen period of time (E).
- Finally, calculate the total number of new customers in the chosen time period (N).
Once you have this data, you can proceed to calculate the CRR by using this formula:
Customer lifetime value (CLV)
The next indicator of product-market fit is customer lifetime value. It measures the average revenue that a customer can bring by remaining your client. There are two ways to calculate customer lifetime value. The first one is to multiply the average revenue that a customer creates in a specific period of time (for example, monthly) by the average contract length. It looks like this:
CLV = average (monthly) revenue per user (ARPU) x average contract length (ACL)
The second one is based on ARPU and churn rate (we explained what churn rate is earlier):
CLV = average revenue per user / Churn rate
To determine the CLV using the first formula, you have to know what ARPU is. It is the average revenue of all your current customers. You can measure it by dividing the monthly recurring revenue by the total number of customers.
Conclusion
As you can see, measuring and finding product-market fit isn’t the easiest task. However, with specific metrics and a plan in mind, you can address the needs of the target customer and fill a gap in the market by serving up a tailored value proposition.
Bear in mind that product-market fit isn’t your only indicator of success. Success is a combination of many other factors, including customer service and continuous software development.
