What is Product-Market Fit?

What is Product-Market Fit?

Product-market fit is associated with a company’s product’s ability to satisfy the market’s needs. The balance or relationship between the market’s demand and the product’s capabilities and serviceability to fulfill those demands. It is the level of compatibility between product and market.

The concept was popularized and expanded by investor and entrepreneur Marc Andreessen. For a good product-market fit the company must find and tap into a market that suits best for the product, and deliver a product that suits best for the market.

According to Andreessen, “Product/market fit means being in a good market with a product that can satisfy that market.” 

By market demand, it means the amount of units that will be consumed, the product’s capacity, ability to solve user’s problems or fulfill their needs. Basically, it is the analysis of how well does your product fit into a certain market or market segment.

In case of a good product-market fit the target consumers are so pleased by the product that they aid the marketing efforts of the company by promoting the product at their level by spreading a good word for the product, encouraging other people to purchase the product, sharing their experience with the product.

All of this deeply impacts the purchasing decisions of other potential customers. They tend to buy the product which they have seen work well or have been told how beneficial it is for another person. 

It is the beginning of growing a successful business as it requires researching the market, focusing on customer success, early-stage practices to establish the brand in the market, and gathering feedback. 

Importance of product-market fit

Suppose you want to run software which requires certain specifications to be present in the system it is being run on otherwise it won’t work efficiently and may have negative effects on the entire computer as well.

Now the sensible approach would be to first figure out whether your computer fulfills the requirements of the software, will it support the software or not.

Basically, you need to see if the software and computer are fit for each other. If this step is skipped, all next steps can turn out to be fatal for your computer, project, and time and resources. 

In the same way, product-market fit is this initial step where you assess whether the product fits well into the market before rushing into production.

There’s no point in putting capital into a product that’s not gonna be received well in the market or which does not have the potential to attract the customer.

The product-market fit helps the company to get the idea of the product’s capacity to sustain and generate profit in a market segment. 

How is it beneficial for the business?

Let’s look into the practical benefits of product-market fit. 

The study of the product-market fit addresses a lot of fundamental questions such as 

• What is it that your product must have in order to please the user. What features or service elements. 
• Among the markets which segments or demographics are expected to pay attention to the product, are the potential customers and why so.
• What should be done to attract prospective customers. And,
• How to turn the buyers into promoters of the product. 

When you work out these questions you’ll get detailed insights on factors that will lead your brand to succeed in the competitive market. 

The product-market fit is considered to be a foundation-building step of a successful business venture because it gets you to focus on developing a stable and faithful customer base, finding out the strengths and weaknesses, and boosting up the marketing efforts and brand image through word of mouth. 

It also gives you the idea of how much effort and capital has to be invested and at what time to fulfill the market’s consumption appetite. 

Metrics used to analyze product-market fit

40% rule 

The users are surveyed and if at least 40 percent of surveyed users reveal that they would be disappointed if the product is no longer available to them. This metric basically validates the presence of your product. It is a measure of how many of the consumers consider it as a must-have. This is quite helpful for the startups to know where they stand in the market. 

Net promoter score (NPS) 

It is a research metric based on a survey where the users are asked whether they will suggest the brand to other people like friends, relatives, or colleagues. 

Lifetime value to customer acquisition ratio (LTV/CAC) 

This ratio studies the relationship between the cost incurred in acquiring a customer and the profit made from the customer. 

Cohort retention 

This metric is beneficial for established businesses, it is the measure of the proportion of customers that are continuing with a product after a certain time period has passed. 

Product-market fit is achieved by all the departments of the company like a shared goal or responsibility. Sales, business development, finance, product development, designers all impact the product-market fit in a combined way.