You might’ve come across product-market fit under the alias of ‘product/market fit' or even just simply ‘PMF’ but forward slash, acronym, or hyphen, it all means the same thing.
In this article, we delve into the depths of its definition and beyond. We provide you with all the key tools and granular insight you need to become a product-market fit pro.
Grab yourself a drink ☕️ and make sure you’re sitting comfortably because we’ve got a fair bit of ground to cover, including:
- What product-market fit actually is
- Why you need a strong PMF strategy
- How to achieve product-market fit
- Measuring the success of your PMF
What is product-market fit?
Like, what does it actually mean? 🤔
Unfortunately, there isn’t one succinct definition of product-market fit that would slot neatly into the pages of a pocket dictionary.
However, in the name of starting somewhere, we’ll give it a damn good try...
So, in a nutshell, product-market fit is the intrinsic combination of two major things:
- The demand for your product (the gap in the market you have identified)
- How your product satisfies this appetite and plugs that gap (features, pricing, etc)
It’s all about honing in on your target demographic (the demand within the market) and then providing that niche audience with a must-have solution to a problem they collectively experience (your product).
It’s all about gauging an appetite for what you have to offer.
Before we continue to break these two vital elements down further though, let’s first put product-market fit into some context.
The history of product-market fit
The concept of product-market fit is believed to originate with Andy Rachleff - Benchmark Capital co-founder and CEO and co-founder of Wealthfront. In the mid-nineties, Rachleff coined product-market fit as an umbrella term under which the following aspects of start-up venturing and business development could huddle:
- The What: What your product is - what you’re offering.
- The Who: Your target audience - whose problem you’re trying to solve.
- The How: Your plan of action - the strategy that will bring your product to the right market.
This holy trinity of product marketing forms what Rachleff describes as the ‘value hypothesis’ of a product.
“A value hypothesis is an attempt to articulate the key assumption that underlies why a customer is likely to use your product. Identifying a compelling value hypothesis is what I call finding product/market fit. A value hypothesis identifies the features you need to build, the audience that’s likely to care, and the business model required to entice a customer to buy your product. Companies often go through many iterations before they find product/market fit, if they ever do.” - Andy Rachleff.
To be precise.
Why is product-market fit important?
Entrepreneur, Marc Andreessen describes PMF as being: “The only thing that matters”, because without an available space in the market for something to fit into, even the most impressive, well-designed, generously funded product will be a flop.
The strategic benefits of product-market fit
Product-market fit is an invaluable art to master because it sits at the intersection between you, your product(s), and your customer. Getting to grips with it will not only help you better understand your customer needs and how to meet them, it’ll also help boost that bottom line.
Nailing product-market fit means:
Sales, sales, and more sales
You’ve launched an awesome product into a great market that’s hungry for it so you start to see this reflecting in your revenue.
Customer churn is under control
Your customers stick around cause they like what they see (and they want to see more) so you start to see a downturn in attrition.
Positive customer feedback
Customers start shouting about how epic your product is and sharing their positive experiences. Et voila - the magic of word-of-mouth marketing.
Doesn’t it feel great when your customers start selling for you?
Who is responsible for product-market fit?
Product marketers and product managers are usually considered responsible for product-market fit. But achieving product-market relies on all departments sharing the responsibility to help achieve this.
How to tell if/when you’ve found product-market fit
Product-market fit never strikes as an obvious A-HA! moment (unfortunately). It’s more about the process and going through the motions.
Sometimes, it’s easier to access your PMF by looking out for indicators that suggest you haven’t cracked it yet. With these red flags still waving, you can be pretty confident in assuming you’ve still got work to do.
5 indicators you haven't found product-market fit yet
These indicators may mean you haven't got your product-market fit quite right...
1. Customers aren’t getting real value out of your product
2. You’re getting no feedback or even worse - negative feedback
3. Customers are falling out of the sales funnel
4. Leads aren’t turning into sales
5. Customer churn is on the rise
Signs your PMF strategy is working
Here are some positive signs that you've nailed your product-marketing fit:
1. Customers are snapping up your product like hot cakes
2. Revenue is on the rise as a result of the product
3. You’re not relying on marketing to see growth
4. Customer feedback is on fire - reviews and recommendations are rolling in
5. You’re no longer having to question whether or not you’ve found PMF
When you know, you know.
How to achieve product-market fit
As we said, finding PMF is a non-linear process. It’s about exploration and discovery, and your findings will steer your strategy along the way.
That said, there is a loose framework around which you can start to build your process on the plight for strong product-market fit:
- Fine-tune your value hypothesis - what, why, who, how?
- Revisit your personas - who are your audience? What do they want?
- Align your team - everybody has a part to play in PMF, from product developers and PMMs to sales, marketing, and the C-suite.
- Conduct customer feedback research to evaluate and respond.
- Measure the strength of your PMF and react accordingly - pivot or plow on.
Examples of product-market fits
Spotify took advantage of the failure of Napster to fill the spot in the market by asking users for a small fee to stream music without the copyright issues.
And as of 2022, Spotify has amassed 182 million paid subscribers so their product-market fit was spot on!
HelloFresh saw that people wanted to eat healthier meals but kept hitting various pain points (where to buy food, what to cook, etc). So they filled this gap in the market with a weekly subscription box that sends the ingredients you need to your door, along with the cooking instructions.
Now HelloFresh has over 8.5 million customers worldwide.
Net Promoter Score
Net Promoter Scores (NPS) are an invaluable - and recommended - way to measure the success of your product-market fit when it comes to management tools. It’s the modern alternative to more traditional customer satisfaction research.
Through an NPS tool, you can ask your customers to rate how likely they are to use or recommend a product on a scale of 1-10. Your NPS is then calculated based on 3 different types of responses:
- Promotors - Those scoring 9-10 and likely to spread positive feedback and promote growth.
- Passives - Those scoring 7-8 and are therefore satisfied but still receptive to the lure of your competition.
- Detractors - Those scoring 0-6 and are presumably unhappy and therefore able to negatively impact you in some way.
This customer-led insight will give you a good sense of how strong your PMF is.
Customer advisory boards and feedback loops are also effective ways to tap into this kind of information.
Total addressable market
Total addressable market (TAM) is another method of measuring product-market fit which shows the total number of people who can benefit from your product. This is calculated by multiplying your average revenue per user (ARPU) by the total number of potential customers in the market.
After you achieve product-market fit
Aicha Zaa, Product Marketing Manager at Productsup, shares her advice on what to do after achieving product-market fit.
“Creating a good product that serves a substantial market is difficult, and only the first of many steps to becoming a successful startup.
“Reaching product-market fit is a significant milestone in the life of every startup.
“The next and last step is the scale (or growth) stage. During this period, teams start to think about processes and optimization.
“When many enterprise startups get to product-market fit, they feel they’re ready to take off.
“We have product-market fit! Let’s grow! Hire sales! Invest in marketing! Spend!”
“The unfortunate, frequent reality then kicks in...
“Instead of sales taking off, sales just bump along. The number of new customers grows sporadically, painfully disproportionate to the rapid increase in sales and marketing.
“Many enterprise startups get to product-market fit but don’t achieve growth and acceleration. Why? Because there’s a 'missing link' between product-market fit and accelerated growth for the enterprise startup journey.
“The missing link is go-to-market fit, or GTM fit.”
Steps to finding go-to-market fit
Aicha Zaa shares her top tips for fining your go-to-market fit.
Understand the customer journey
“Start by identifying the urgent pain for the Ideal Customer Profile that drives customers to buy now. The GTM fit begins with understanding the entire customer journey (CJ) and starts with the urgent pain for the Ideal Customer Profile and ends when your company becomes strategic to the customer.
“This is especially critical for SaaS startups, since signing the contract is only the beginning of the relationship with the customer, and so much of the business is based on renewals and upsells.
“The customer journey is the backbone of your entire go-to-market. Everything else is built on top of it.
“Fully comprehending the customer journey entails:
- Understanding the customer mindset
- Starting with the urgent pain
- Working out the full customer journey
- Ending by becoming strategic to the customer”
Watch on-demand: Be the voice of your customer >
Build the go-to-market playbook
“Once you’ve found the urgent pain for your Ideal Customer Profile (ICP) and understand the customer journey, how do you repeatedly find and win ICPs that have the urgent pain?
“This is where the go-to-market playbook comes in.
“The GTM playbook is a step-by-step, repeatable recipe to find and win deals over and over again. It becomes the blueprint for your marketing and sales teams. It becomes the bible for every new sales or marketing person to ramp. It becomes a powerful tool to align the rest of the team behind a go-to-market plan.
“The GTM playbook is the backbone for repeatable sales, and is the core of GTM Fit and unlocking growth.
“It’s that important.”
What does a GTM playbook look like?
“As we've established, the GTM playbook is a recipe to find and win customers over and over again. It has three main components:
- Customer journey stages: From urgent pain, to initial engagement, to win, to hero.
- GTM actions (for each stage): What’s done/said? Who’s involved? Exit criteria?
- GTM deliverables (for each stage): What does the rest of the company do/build to support that stage of the playbook?”
Operationalize the Playbook
“Unfortunately, the Go-to-Market Playbook doesn’t execute by itself. The GTM playbook needs an owner: the CEO.
“Why the CEO? The GTM Playbook cuts across marketing, sales, product, and customer success. It’s the most cross-functional project there is in a startup. The CEO is the only person with the visibility to see across the company — and the authority to get the whole company behind it.”
Report download: PMM Perceptions Among the C-Suite >
“Moving through the stages of the GTM playbook is like a relay race — passing the baton from one leader/team to the next. Identify which department or function takes the baton for each stage of the playbook.
“Like a relay race, the handoffs are where races are won or lost: the baton is either smoothly handed to the next stage, or it’s fumbled.”
End-to-end metrics: growth & efficiency
“Here’s how you’ll know you’ve achieved go-to-market fit: you’ll just feel it. It feels like pure momentum — like you are surfing on a wave.
“You can also see it in the numbers. The two key metrics are net new ARR (which measures the growth) and the magic number (which measures the efficiency of the growth).
“Analytically, the magic number measures your go-to-market fit. Your magic number (new ARR divided by your marketing and sales spend) answers the question: how much do you grow for every dollar spent on sales and marketing (S&M)?
“If every dollar of S&M spend brings in more than one dollar of revenue, you’ve achieved GTM fit.
“But keep in mind that the magic number is a lagging indicator, and it may take you a few quarters to see a positive result.
“The end-to-end SaaS metrics give you the big picture about your go-to-market, and they’re main criteria when investors evaluate your GTM:
Net New ARR - How much ARR has increased/decreased from the period? It is the sum of all new ARR (such as lands, expands and upsells) minus the sum of all lost ARR (such as churn or contraction). In other words, how much are you growing?
“Magic Number - For every dollar spent on sales and marketing, how much new revenue did you generate? In other words, how efficient is your lead and land system? If this number is greater than 1, things are going well.
“The end-to-end SaaS GTM metrics are lagging indicators. They are the outcome of the GTM process — not tools to improve it. That’s why it’s important to remember: to tune up the playbook into a well-oiled machine, you need to look under the hood.”
Some final food for thought…
The important thing to remember about product-market fit is that you can lose it and it shouldn’t be taken for granted. Fail to listen to customer feedback, keep an eye on the competition and adapt in response, and your PMF can go down the toilet.
If you do feel your PMF has slipped or that your value hypothesis has changed, it’s time to keep pivoting until you consolidate it again. Reconfigure teams, change names, redefine the product - do whatever it takes to strike gold.
You should only start to scale-up once you’re product-market fit is rock solid.
It’s still a relatively new concept so the various definitions and processes floating around are pretty vast. You know us lot at here at PMA though, we’ll work our socks off to make sure you stay in the loop.
Want to learn more?
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