What is Product-Market Fit? The Ultimate Guide for 2022

Before launching a new product/service, you need to make sure that there is demand for it in the market. No matter how perfect your product/service is, people pay for the things they need or really want. Of course, you would want to know if people need what you are offering, what you worked for, perhaps dozens of weeks, filled with all-nighters. 

Luckily you can have a certain understanding of how your product fits in the current market and if it will catch the buyers’ attention by offering solutions to problems that remain unsolved in the current market. 

This, of course, you can do by focusing on your product-market fit.

So, let’s have a look at what exactly product-market fit is and how you can determine if your products/services are fit for the market. 

What is product-market fit?

Product-market fit means creating a product/service that will provide exactly what the specific market you launch it in demands or effectively fulfill an underserved need in the market.

A simpler definition would be, as the name suggests, your product fits in the market, and is exactly where it is supposed to be, helping your business grow.

Why is measuring product-market fit important?

Building a product without ensuring enough people are willing to pay for it is probably not a good idea. You are likely to waste time and resources building a product/service that people may or may not use if you don’t check your product-market fit.

For example, you might have the best product/service but if it doesn’t offer something different from your competitors who are already established in the market, there is a possibility that you’ll have some disappointing results. 

On the contrary, even if you have a product/service that is average but some features it has offer values no other product/service does, it is likely to have a successful launch and see some great sales.

Besides, a product-market fit also lets you know about several other things such as:

• What features do you need to include in your product/service in order to meet expectations
• Who is likely to buy your product/service and why
• How you can grab prospects’ attention and persuade them to buy the product/service
• What steps you need to take to drive growth and turn your satisfied buyers into advocates

By developing in-depth insights into each of these factors, you will have a better chance to cultivate a loyal customer base, gaining online visibility, and increased conversions as positive word of mouth leads website traffic to you.

A best scenario product-market fit can have your product/service in constant demand. Your sales boosted, your customers leaving awesome reviews online, maybe persuading others to invest. 

Having a product that fits the market perfectly, offering solutions to critical and yet unsolved problems obviously will do wonders for your business.

Now, don’t forget that a product-market fit is not necessarily a one-time event. As the market changes, you might need to adjust your product/service accordingly because if you don’t, your product/service can become outdated in the market very fast.

How do you measure product-market fit?

I have told you about product-market fit and what it can offer for your business. But how do you make sure your product/service is fit for the market you are planning to launch it in? How do you measure it so you get insights about the market, potential customers, and your business?

Measuring it is not an exact science, but there are ways to assess whether or not you are on the right track.

Here is a list of steps you can follow:

Evaluate the relationship with your customers

Your relationship with your customers is directly tied to the success of your business. So, evaluating and having an idea about your relationship with customers is a good idea in order to find out if there is a demand in the market for a product/service you plan to launch.

Some brands may benefit greatly from their relationships with customers if they are trustworthy and reliable in the eyes of their customer base. Customers might believe most things that that brand offers are worth a look.

That is why you should evaluate your relationship with your customers before launching a product to have an idea of how much demand can your brand generate in the market with the help of your customer relationships.

Segment your customers

Customer segmentation is a good idea for your business to implement in order to better target your customers. Every customer is different and a single approach will not work with all of your customers. This is where segmenting your customers becomes an important approach for your company.

Customer segmentation is the process by which you divide your customers based on common characteristics such as demographics or behaviors. so you can offer exactly what different segments of your customers want or need.

This also helps you find out if you are offering the right product/service according to the buyer personas you created from the segments of your customers.

Keep in mind the rule of 40

There are two key factors that determine whether your product/service achieved product-market fit or not: growth and profit.

These two factors come together and create the rule of 40 which is crucial especially for SaaS businesses. The rule suggests your growth rate plus your profit margin should equal or exceed 40%

While any ratio in which these two numbers added up to 40% or more is great, you should keep in mind what stage your product/service or business is in the market. 

For example If you’ve been on the market for a few months and are seeing a profit margin of 35% with a growth rate of 5%, you still may not be in the green. Because, these numbers, for an early-stage product, can indicate your market is relatively small, and your marketing efforts might not be as effective as you’d like. Meanwhile, for a mature business, these numbers can be great news.

Of course, 40% is just a number, and the market you operate and the dynamic business landscape may not agree with this formula all the time. However, as far as benchmarks go, it’s not a bad starting point to see if you and your business are on the right track.

Use surveys and NPS to understand user perception

One of the best ways to measure your product-market fit and understand how customers view your product is by sending them surveys or measuring your NPS.

You can ask your customers questions such as if they think your product is a must-have and if they were currently considering a replacement to determine your place in the market and how essential your product/service is for the customers.

There are several survey types you can use such as the Sean Ellis survey method where you ask your customers how would they feel if they could no longer use your product

And of course, you can use NPS to see whether your clients would recommend your brand or previous products/services to others, allowing you to see if your idea of being market fit aligns with your customers’ experience. This will help you see if you are truly operating in the right market for you and your product/service.

You can do that with the help of a tool like HockeyStack, which enables you to create and conduct all kinds of surveys including NPS, and lets you conduct on-site surveys in minutes.

Common misconceptions about product-market fit

Many misconceptions surround product-market fit. These misconceptions can often confuse managers or teams, leading to future setbacks. To prevent these setbacks, it is important to know these misconceptions and identify them beforehand.

So I listed here some misconceptions about product-market fit.

1. Achieving product-market fit often happens spontaneously

The reality is that assessing market fit for a specific product/service often involves a process of trial and error, in-depth market and customer research, careful planning, and lots of testing.

Achieving product-market fit spontaneously is not a thing that happens to a lot of businesses as it requires substantial time and effort

2. It is evident when you achieve it

This misconception may be partly correct.

There may be some obvious signs that you have product-market fit. For example, the demand for your product/service keeps growing and your business’ revenue increases over time.

But these things may need time to unfold. This is why it’s best to constantly evaluate your customers to ensure that you haven’t been targeting the wrong audience all along. 

You might realize that you are facing a retention problem but didn’t realize it because you were focused on the wrong numbers.

3. Once you have it, you can not lose it

As I mentioned above, as the market changes, you might need to adjust your product/service accordingly. It is only natural for demand in the market to shift and change. And it is up to you to keep up and maintain your product-market fit. 

Invest time and effort on your product, track the market, see what your customer audience needs or wants, and implement changes and updates to better your product to keep it relevant in the market. 

4. Having product-market fit gives you an advantage over your competition

At first glance, this might make a lot of sense. You might think that product-market fit is the key to the success and increased revenue and it will provide you with a competitive edge over your competition.

However, this is not true. Having a product-market fit, although important, is only the beginning of your launch strategies and business growth journey. 

Examples of product-market fit

There are no better ways to understand what a proper product-market fit looks like than seeing how other businesses have succeeded in this area. Here are examples to show you how a small gap in the market can make your product/service essential.

1. Spotify

After Napster closed due to copyright infringement issues, it became apparent there is a demand and an audience for a music streaming service.

Spotify came up with a platform that lets users stream music. They saw that the former audience Napster had, and many more people, would not mind paying a small fee to access the music they want, legally, without headaches. They were right and now Spotify has over 270 million users.

They still constantly add features like personalized music suggestions and playlists that make people more and more dependent on Spotify as their primary music provider. 

As you can see, they kept track of the market and adjusted their product accordingly.

2. Uber

Uber’s founders recognized that the taxi system was expensive and outdated, and people weren’t too keen on using it most of the time. 

Uber first caught attention by offering free rides between tech events in San Francisco, then, once they gained some popularity, they started offering 50% discounts to first-time users and several other discounts and sales.

They both solved a problem and created a need simultaneously. People weren’t looking for an alternative to the taxi system. However, once they found out they could use Uber instead and benefit from discounts occasionally, with the added ease of calling an Uber, of course, they began relying on Uber as a simpler and more convenient way of transportation.

Today, Uber has about 93 million riders and the company recorded 4.98 billion rides in 2020 alone.

As I’ve told you in this article, finding product-market fit is critical for businesses. To do that, you need to analyze the market, and your customer base, and find out what are the critical problems that people would be willing to pay for a solution. And as I’ve mentioned above, you need to remember a product-market fit is not a one-time event and markets tend to shift quickly.

But all that aside, if you keep track of your data and survey results, keep adjusting your product/service according to the market, and be careful not to mistake misconceptions about product-market fit for the truth, you will do fine.