15/12/2021

How can we determine product-market fit?

Ana Vilar García

Product-market fit is a magical moment for a company. After finding it, things will most likely flow the way you want them, and you will start sowing what you reaped. But determining when there is product/market fit is not always obvious. So today we are sharing our views on how to determine product-market fit and we share some of the tips we use at Corporate Lab.

What is product market fit?

Product market fit refers to the actual fact of identifying your target user or client and providing them with a product that offers value to them

This is probably one of the first goals for every company, since it justifies the need for your company and its product or service and it provides long-term success. 

This magical moment is not always so easy to find, especially when your product or service is completely new to the market, and you need to create an urge in your audience first.

How to find product-market fit: 3 steps for any kind of company

Regardless of your sector, type of company or even if you're an online or offline business, every company shares some common assets you need to comply with in order to be successful. These are 3 simple steps you need to follow in order to find product-market fit. 

1. Determining a target market and user personas

Your target market is the business context that fits your service, while your user or buyer personas are the people that most likely can benefit from your service and potentially buy it.

Here you will need a research phase, in which you will execute your market research and summarize your learnings. In order to do so, you can create a survey with relevant questions for your company and spread it among various people, the more the merrier. Since your audience is not determined yet, try to share among as many different profiles as possible, even if your intuition tells you otherwise.

The data gathered will set up your own market research. But even when you find your product-market fit, it is important to keep on carrying this kind of research periodically, so you can be aware of changes in the market and your audience. If you're short on time, you can also buy an existing market research.

2. Specifying value propositions

After determining what your target market and user personas are, you should be able to develop an accurate communication strategy. This should include a clear and well-defined communications and design guide that will help you address your users in a direct and effective way. 

Sometimes, communicating the value proposition is challenging. This might be the case for startups that work with brand new products or services that don’t look like any other service already in the market. If this is the case, this can have a positive effect on your company, since that unique factor is rare to find. Nevertheless, you will have to work on a marketing strategy that educates your market and creates an urge for a product they have never seen before. 

In any case, your product or service should always solve a determined need. 

3. Finding the right channels

You have determined a user persona and defined the way you address them. Now it’s time to find the right channels to do so. Knowing what their habits are or what kind of media they consume can give you the keys to the right channels.  Keep in mind you can combine several distribution channels.

3 signs you haven’t achieved product-market fit yet (and how to measure them)

If you have carried out all the previous steps and you’re not sure if you have achieved that product-market fit, here you have some signs that can help you figure it out.

1. Unclear buyer persona

It is possible that you have carried out market research and have defined a target market and audience, but numbers don’t match this research. This can be a sign of delivering a product that serves multiple audiences, or none.

📏 How to measure it. Being an early asset, you can define many different key performance indicators (KPIs) in this phase. Common indicators include organic traffic or signups conversion rates. Carrying out A/B tests regarding communication, visual identity or distribution channels can be a way of finding out what is the right buyer persona for your business.

2. Poor usage of the product

This sign is particularly relevant when your service has a free trial or doesn’t cost much to your users. If your free users are not using your product, this is a sign of a poor value proposition, and you probably need to iterate it and rethink its purpose. 

📏 How to measure it. Monthly active users represent the number of unique customers who interact with your product within a month. In this case, you need to define what kind of interaction is relevant to your product.

3. Slow or inexistent sales

Even if your buyer persona and value proposition is clear, the sales cycle may present friction. If you think that your users are not willing to pay for your product, or if you detect users cancelling right before their free trial expires, this is a sign of a poor product market fit. 

📏 How to measure it. Revenue metrics. These vary highly depending on the product and business model. Examples of relevant conversion rates are visitor-to-lead or lead-to-customer numbers. If there isn’t money in the company's money box, it's time to rethink your business model, the product itself or the target market and audience.

3 signs you have achieved product-market fit 

You think you reached product-market fit? These are some hints that reveal that you made it.

1. Exponential organic growth

If your company is growing, this is a good sign. But if your company is growing exponentially and organically, this is a great sign and it probably means that you have achieved product-market fit. While linear growth represents an increase at the same rate, exponential growth represents a major increase over time. 

2. Effortless user acquisition and retention

Experts agree customer acquisition costs should have a 1:3 ratio. This means the acquisition cost should be 3 times less than the lifetime value. If you have no friction when it comes to attracting new customers and making them stay, you have found product/market fit.

3. Revenue growth

If you don’t encounter friction in purchase conversion rates, this is a sign of product/market fit. You can also see this sign if there are no difficulties when users renew the subscriptions or switch from free to paid plans.

Is this your case? Congrats! Now you can continue optimizing your product, add complementary features, expand your company to other markets or make strategic investments.

Conclusion

Achieving product-market fit is synonymous with business success, but this is not an immediate or obvious task. Finding this moment can take longer than you expected, especially when your product or service is completely new to the market. 

Trying different minimum viable products (MVPs), testing new ideas and iterating your product are some essential steps you need to take if you’re not there yet. Be patient, but take into account finding your product-market fit may take less than 2 years, in general terms. 

Corporate Lab is a venture studio specialized in creating new tech startups for large corporations. We're experts in launching fast MVPs and finding a product-market fit, fast. If you think your company needs to be ahead of the business curve and build new businesses, contact our team.


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