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What Is Product Market Fit and How to Find It

Aug 29, 2023
7 min read

Did you know that 42% of startups fail every year simply because they are building solutions with no market demand? It’s not a new problem, but it’s one that founders and organizations still find themselves in year after year.

How do they end up in this predicament?

Most of the time, it’s because they didn’t evaluate product market fit before they launched their new offering. Instead, they spent so much time designing the “perfect” product that they forgot to figure out whether anyone would actually want or need it.

Without utilizing the product market fit framework, selling your product is like trying to fit a puzzle piece into a space where it doesn't belong.

On the other hand, companies that do achieve strong product market fit earn higher sales and revenue, better retention, greater customer satisfaction, and more growth over time.

The sections that follow will cover what you need to know to get it right when it comes to product market fit — we’ll define it, cover a real-world example that shows why it’s so critical, and determine how to measure it effectively for your business.

Quick Takes On Product Market Fit

  • Product market fit measures how well a product meets customer needs and demand.
  • Even large and established companies must measure product market fit to keep up with market trends and changes.
  • Feedback surveys and customer data are two proven, effective ways to measure product market fit.

What is Product Market Fit?

Product market fit measures how well a product meets the needs of its target customer and market segments. Products with high product market fit align strongly with what customers are specifically looking for — it helps them solve problems, address pain points, and accomplish goals. Products with low market fit fail to deliver value in these ways.

Insights about how well your product is being received on the market, whether it’s being used for its intended purpose, and how it’s aligning with changing trends are all essential to operating a responsive and agile company that maintains high demand and profitability over time.

Let’s look at a real-world example to see why finding product market fit is so important to every kind of business — startups, large enterprises, and every business in between.

The Power of Product Market Fit: A Real-World Example

Now a media streaming giant, Netflix was once purely a DVD rental startup in the late 90s, trying to compete with market giant Blockbuster Video. At the time, Blockbuster owned the market on movie rentals and boasted a store within ten minutes of every U.S. neighborhood.

Fast forward a few years, where consumers quickly adopted the convenient DVD-by-mail business model that Netflix offered. Blockbuster failed to provide a competing service. Netflix adapted to customer preferences for streaming online. Blockbuster stuck to its traditional store rental model.

By 2010, Netflix had taken over the industry and Blockbuster was filing for bankruptcy.

Nothing had changed about Blockbuster’s business quality — they offered the same service that customers had once loved and demanded in droves. But when the market changed and customer preferences evolved, Blockbuster failed to respond. As a result, their product market fit took a nosedive.

Netflix, on the other hand, reinvented its business many times in its early years to align with the way consumers wanted to access and watch movies. Their current success speaks for itself.

How Do You Find Product Market Fit?

Unlike many other business metrics, there isn’t one single equation used to calculate product market fit. Instead, measuring and monitoring product market fit requires a combination of research, observation, and analysis during every stage of your go-to-market process. Below are five key steps you can take to understand (and improve) product market fit before, during, and after launch.

Know your target audience (and their pain points)

The product market fit framework is built on a product’s ability to do two things: reach the right customer, and resolve their pain points.

First, to identify your target customer, use buyer persona frameworks to define the people and organizations best fit for your solution. Buyer personas include goals, motivations, demographic traits, and other relevant personal and professional attributes.

The key to creating strong buyer personas is to make them actionable. You want to focus on what drives someone to seek your solution and what they aim to accomplish by using it — and this is where pain points come in.

Pain points can be an actual problem, a task or initiative that needs to be completed, or another kind of need that requires fulfillment. The important thing to keep in mind is that pain points are not solution-specific, meaning customers care about solving them, but they aren’t attached to one particular product or solution to do it.

In other words: It’s up to you to demonstrate why your product is the best option.

Define your value proposition

Your value proposition gives a compelling description of the benefits your product provides. A well-defined value proposition is key to letting potential customers know your product’s purpose and why they should consider it over a competitor. It also helps you clarify your product market fit in customer-focused terms.

Keep your value proposition concise and to-the-point — in just a sentence or two, your customer should be able to understand if your product is relevant to them and see the value in choosing it.

Calculate total addressable market

One of the more quantifiable ways to measure product market fit is with the total addressable market (TAM) metric, which provides the total revenue opportunity for your product. Once you know TAM, you can measure the percentage of it you’re capturing and take further steps to evaluate how product market fit is playing a role.

You can take three approaches to calculating total addressable market:

Top-down approach— Starts with a macro view of the market and narrows it down by factors like geography, target customer, and business model alignment.

Bottom-up approach— Uses first-party data and financial actuals to determine the number of potential customers.

Value theory approach— Estimates how much a customer would be willing to pay based on perceived value.

After you calculate TAM, look at your own customer data and revenue numbers to determine how much of it you’ve captured so far.

Collect customer feedback

To maintain or improve your product market fit and increase the percentage of total addressable market you hold, you’ll need to conduct product validation — the process of confirming that your product meets customer needs. The best way to do this is with customer feedback.

Customer feedback is most commonly collected through surveys. Surveys are effective because they deliver measurable data, collect both quantitative and qualitative feedback, and are easy to share with customers through digital channels such as email, text, and social media.

To design surveys specifically for finding and evaluating product market fit and validation, aim to capture identifying customer information as well as satisfaction levels. You can evaluate these categories separately and together to understand which customer segments indicate the highest or lowest product market fit and why.

For example: If you have three primary customer segments and one reports significantly lower levels of satisfaction, you can take quick action to get to the root cause of the issue and assess if product market fit plays a role.

Be sure to ask questions that deliver both quantitative and qualitative insights. The former can be found using rating scales (i.e. rate on a scale of 1-5) while the latter can be found with open ended questions.

Here are some suggestions for questions to include in your surveys:

  • How much do you like our products?
  • How often do you use our products?
  • Have you recommended our products to someone else?
  • How would you feel if you could no longer use our product?
  • How does our product compare to competitors?
  • What are your favorite things about the product?
  • How do you suggest we can improve?

Analyze customer data

Thanks to technology advancements, companies also now have easy access to customer data from internal and external sources to help evaluate product market fit and validate their offerings. Helpful data points to measure for this purpose include:

Online review ratings - Reviews are indicative of customer satisfaction levels. Evaluate reviews from your own site as well as third-party sites (like Google or G2).

Customer retention rates - Customers that stick with your company are finding value in what you offer, which suggests high product market fit.

Customer churn - Conversely, high customer churn indicates your customers are likely not finding value in your offerings.

Free trial conversions - If you offer a free trial, this metric can help you assess your product’s first impression and whether potential customers can see its value right away. You can also gauge which customer segments are a better fit.

These are some good examples, but the list isn’t exhaustive—any customer behavior data you collect can help you assess whether your offerings meet the needs of your customers, if there are opportunities to improve, and whether you need to make adjustments for certain customer segments.

Make Product Market Fit a Priority

One of the most important takeaways for every brand thinking about product market fit is that it’s never static. As we learned from Blockbuster, failing to assess how the market is changing and how it impacts your product’s market fit can quickly set your company back (and send customers to your competitors).

Continuously tracking your marketing, sales, and customer data is the surest way to maintain an accurate picture of your product on the market, and an Intelligent Revenue platform like Xactly’s can help you do it.

Xactly’s Revenue Intelligence platform provides access to real-time market insights that inform your revenue strategy—a key factor when assessing product market fit for your organization.

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Xactly News Team

The Xactly News Team reports on the latest product, events and market trends taking place within Xactly and throughout the revenue intelligence industry.