Product market fit is a term that describes when a company develops an offering that is proven, through sales and other metrics, to meet the needs of a specific customer base.
Product market fit is a must for long-term business success, and it is a significant milestone for startups. It provides a level of validation for the company’s offering — and for the company as a whole — and sets the stage for future growth.
Companies struggling to find product market fit should take a market-in approach to identify customer problems and develop a differentiated solution.
Andy Rachleff, co-founder of venture capital firm Benchmark Capital and investment firm Wealthfront, coined the term “product market fit” based on a concept developed by Don Valentine, founder of Sequoia Capital.
Valentine wanted to find and invest in companies with such a high demand for their products that they could fail in every other area but still succeed as a business, Rachleff said.
How to Find Product Market Fit
Lack of product market fit is one of the biggest reasons — if not the biggest reason — why startups fail.
When startup newsletter Failory interviewed 80 discontinued startups, 34% said they failed because their product did not have a market. Incubator and accelerator StartupDevKit estimated in 2018 that 42% of startups fail because they do not find product market fit.
Clearly, the issue of how to find product market fit should be a priority for all founders and entrepreneurs. The market-in approach makes it easier because it relies on research and data to guide your product development processes and go-to-market strategy.
To get started, ask yourself these four questions:
- How big is your market?
- Who will be your customers?
- Who are you replacing?
- Is anyone else disrupting this market?
So many new companies are founded by technologists who have an idea and run with it. Some may happen to find product market fit with this approach. But your chances increase when you rely on research data to help understand your market and how you can stand out from the crowd.
How do you know when you have product market fit? Some founders say they just know. There’s a buzz around their product, and it’s reflected in their sales.
If you’re looking for a more concrete answer, sales is a good place to start. But there are several other success metrics that can serve as strong indicators.
Sales yield: How much revenue are you generating, and how much are you paying sales staff to generate it? Once the former outweighs the latter, it’s a good sign.
Retention and churn: Sales alone don’t matter if your customers don’t stick around. Net retention rate not only measures how well you hold on to existing customers but also how successful you are at growing your business with them. If you’re a SaaS or other subscription-based business, you should also pay attention to renewal rate and its counterpart, churn rate.
Net promoter score: If you truly have found product market fit, people won’t just buy your offering. They’ll evangelize it. Net promoter score measures how likely customers are to recommend your company, product or service.
For more information on how to find product market fit and the tools you need to take a market-in approach, sign up for Fuel, our business growth platform.