Product-market fit is the eureka moment for any business. It happens when a startup has successfully identified its target customers and provided them with the perfect product to solve a specific problem.
The term was popularised by American entrepreneur Marc Andreessen, who describes product-market fit as “being in a good market with a product that can satisfy that market”.
When you achieve product-market fit, it causes a snowball effect. Rather than persuading people to buy your product, customers advertise for you through word of mouth. Sales become repeatable and scalable, which leads to rapid growth.
This blog post will help you identify product-market fit and understand how to work towards it.
Focus on pain points, rather than nice-to-haves
For Entrepreneurial Spark co-founder Lucy-Rose Walker, startups need a product that answers a specific pain point for their target customer at a price customers are willing to pay.
Trying to be everything to everyone is rarely a successful route, but having that clear focus is particularly important if you want to achieve product-market fit.
“It’s about the number of people who feel it’s something that they would enthusiastically want to use or have. They can really see it answering a specific pain point they have, not just thinking, ‘Oh that would be nice to have’,” Lucy-Rose explained.
It’s important not to get too caught up in the hype of trends either. A sudden spike in sales doesn’t necessarily mean you’ve achieved that fit – it’s best to continue testing until you’re sure the growth is sustainable.
One startup that springs to Lucy-Rose’s mind is Ooni, a company that makes portable pizza ovens. After popping up on Instagram, she’s watched them take a measured approach to testing and growth.
“They started off asking if pizza ovens were something people would like to use in their garden. Then, was it something that people would use more than once? Was it just a fad?
“We watched them grow and do that testing quite slowly. Then it seemed to be the thing that everybody wanted and was actually being used on a regular basis, rather than being just the next cool thing to have. And now they’ve taken off and sell throughout Europe,” she said.
Try new markets and keep tweaking your approach
New Kings Coffee founder Jason Nichols tried several markets before finding product-market fit. He recommends testing different channels for your products and tweaking your offering to fit each channel.
The luxury coffee bags brand first launched on Amazon, which enabled the business to easily get feedback through reviews and grow in confidence. New Kings Coffee then expanded into markets such as hotels, offices, retail, hospitality and food service.
“What I’ve learned is that it’s not necessarily that this channel isn’t suitable for your product or for your idea. It might be that there are components of what you’re doing that are just not geared properly towards that channel,” Jason said.
It could be the price isn’t quite right for that channel or your messaging is off-point. Little things like tweaking the packaging or the size of your product can help.
“It won’t always be the case that the market isn’t right for your product. It’s just that you might need to tweak certain things along the way,” Jason added.
Ryan Panchoo of Borough 22 Donuts tried product testing on the harshest critics he knew – his kids. After realising his family members couldn’t enjoy sweet treats as easily as everyone else due to various allergies – he decided to launch a different kind of donut.
All his products are gluten free, vegan, oven baked and they even do a nut free and cook at home range. Check out how he managed to navigate this market in his video:
Five signs that your business has product-market fit
1. You consistently achieve a high NPS score
Measuring emotions is subjective. However, there are a couple of ways to determine how customers feel about your product.
One metric is called the 40% rule. If at least 40% of surveyed customers would be “very disappointed” if they could no longer access your product, it demonstrates that you’ve built something integral.
Similarly, measuring the Net Promoter Score (NPS) is a great way to capture customer sentiment. Ask customers: How likely is it that you would recommend this product to a friend or colleague? Scoring is based on a one to 10 scale:
- Promoters (nine to 10) are loyal customers who will make repeat purchases and recommend your business to others
- Passives (seven to eight) are satisfied with your product but could be tempted elsewhere
- Detractors (zero to six) are unhappy customers who could damage your brand through negative word of mouth
A positive NPS is a good score, with anything from 50+ considered impressive. While a consistently high NPS score is indicative of product-market fit, it’s still a good idea to research the scores of competitors to see how strong your position is.
2. More customers, less effort
When you’re providing customers with the perfect product to solve a specific problem, they talk about it. Word of mouth recommendations and referrals are gold dust to businesses.
If you’re spending a lot less to acquire new customers, it’s a good sign that you’re close to achieving product-market fit.
3. You need more staff
Growing your team might not seem like an obvious metric to determine product-market fit. However, if you’ve had to hire more staff to keep up with customer demand, it’s clear that sales are up, demand is outpacing capacity and your business is growing.
4. Increasing revenue – and profitability
If cash is rolling in and your revenues are up, it’s a good sign that your business has achieved product-market fit. People love what you do and they’re recommending your product to others.
The caveat here is that you need to make sure you’re still managing the rest of your costs effectively. Revenue is one metric, but check that the rest of your business is sustainable. Are you paying yourself and on top of your other costs?
5. Investors are interested
Trying to convince investors to part with their hard-earned cash is a daunting task. However, by demonstrating product-market fit, you might find the tables turn.
Rather than trying to convince investors that you have a winning product, people start approaching you.
“What investors are looking for from startups are real proof points that there is momentum behind your business,” said Luke Lang, co-founder of Crowdcube.
“Have you got customers? Have you got revenue already? Are people downloading your app, using your product or advocating your service? These things are really good indicators to us that you’ve got a good product-market fit. And that’s exactly what investors will be looking for.”
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