Road to Product-Market Fit

Developing a product that is popular in the market, fits consumer needs, and skyrockets the company's sales is often the greatest challenge of product development. Businesses invest a lot of capital in researching their idea’s value in the market and foresee how it will be received once launched. The primary step of product development is market research and gathering insights on how the said product can add value to the customer’s daily life and why it is a crucial addition to the range of products available to the consumers.

Speaking of value-adding products that are popular with customers, a commonly applied concept in today’s business world is Product-Market Fit. The theory talks about releasing products that have a profoundly positive impact on the target market, which results in customers promoting the product to fellow buyers themselves. In other words, the Product-Market Fit can also be defined as the degree to which a product satisfies large market demand. 

The theory has become a crucial step in product development, as well as in building a successful business venture- especially at the initial stages when the company is gathering investors and getting potential clients interested in its products. 

Let’s delve a little deeper into the theory of Product-Market Fit and understand how it can affect the product sales of a business. 

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What is Product-Market Fit?

While the term “Product-Market Fit” was introduced by Andy Rachleff, the CEO of Wealthfront, it was brought to acceptance by Sean Ellis, the CEO of GrowthHackers. However, the term was expounded and defined in detail by Marc Andreessen, an American investor and businessman- founder of Andreessen Horowitz, a popular venture capital firm headquartered in Menlo Park, California.

He interpreted and defined the theory of Product-Market Fit as: 

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“Being in a good market with a product that can satisfy that market.”

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Andreessen’s definition of the product-market fit can be explained through a simple example: 

You launch a highly beneficial application to your target market and receive about 200 customers in the first month of the launch. Out of those, 100 customers return for more in the second month, along with another batch of 200 new customers. This brings the total sales in 2 months to 500, thus creating a steady customer base of 500 for your application. 

These 500 clients understand the product's utility, think the application is worth its monetary value, and are satisfied with its performance and thus want to keep using it.

Most of these customers will remain loyal to the product and will be most likely recommend your application to other users. 

In this case, the application satisfied your target market, thus bringing in 500 loyal users who can now sell this product in their social circles through recommendations, sharing experiences, and positive reviews with fellow buyers through various means- thus concluding the concept of Product-Market Fit. 

Product-Market Fit is an essential concept often associated with an enterprise's marketing and product development department. On the contrary, implementing this theory is a shared responsibility across departments like Sales, Business Development, Finance, and others.

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How does Product-Market Fit work?

The idea of Product-Market Fit is based on consumer psychology that shows how one consumer’s decision to invest in a product can positively affect fellow buyers. In short, the product is made to solve its customers’ problems. 

Not only does the buyer give valuable insights about the product, but they also share their personal experience and candid reviews with potential customers, thus advocating in favor of the product, which helps increase sales by significant numbers. 

Additionally, people resonate with the product better when they know that their peer has used it. The sense of reassurance develops customer confidence and faith in the brand and the product. This often increases the sales of other products offered by the company. 

In addition to developing a product that addresses its target users’ needs, keep in mind that the product-market fit should be taken into account before its Minimum Value Product is launched in the market. 

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Product-Market Fit Pyramid

A brilliant way to understand the theory of Product-Market Fit is the Product-Market Fit Pyramid,  a practical model that brings forward the five critical components of this theory. 

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The 5 components of the Product-Market Fit Pyramid are:

1. Target Customer

2. Undeserved needs

3. Value Proposition

4. Feature Set 

5. User experience

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In the pyramid, each component is represented by a layer. The significance and priority given to these components in the Product-Market Fit theory are defined by how high up on the pyramid the layer is situated on the pyramid. Additionally, all layers are interconnected and thus are directly related to the prior and forthcoming components. 

For instance, the lowest and primary level is “Target Customer” in the pyramid. This means that finding and understanding the target market is of utmost significance to achieving Product-Market Fit. The subsequent layer is called “Undeserved Needs,” which accounts for comprehending the needs and requirements of the target market. Here we can see that the first and second layers are directly related. 

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How does Product-Market Fit benefit businesses?

Since the theory of Product-Market Fit is a relatively new concept, its benefits are unknown to many. However, the consequences of implementing the concept in startups as well as big businesses have proven to save companies a lot of capital and resources. The concept gives you an insight into the consumers’ minds along with a competitive edge over other brands. 

It is always a huge risk to create a product without knowing how the customers will receive it. Whether the target market is willing to pay for the commodity helps businesses make decisions in favor of or against the development and launch of the product, saving themselves from incurring severe losses and wasting resources. 

Implementing Product-Market Fit is also vital prior to the launch of a product because it promises conversions and escalates sales. Since the concept demands market research and understanding of consumer needs before the stage of product development, the end product turns out to be what the consumers want. Thus, they don’t mind paying for it, which drives consistent conversions. 

In addition to the growing sales, the Product-Market Fit also highlights the following points about the product that helps in enhancing user experience: 

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• Features that need to be added to the product to meet customer expectations and ensure satisfaction
• A target market that cares about the product
• What makes your customers care about your product?
• What changes can/additions to the product make your customers loyal and make them advocate the product to fellow buyers?

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How to determine a Product-Market Fit?

Product-Market Fit cannot be measured using a singular unit or metrics, and the measurement of this concept's results is a mixture of qualitative and quantitative growth. Qualitative product-market fit can be achieved through word of mouth, customer loyalty, media publicity, the brand, product popularity on social media platforms, and positive customer feedback. 

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Quantitative Product-Market Fit can be measured by: 

• NP Score: The Net Promoter Score refers to the number of people who are willing to recommend your product to other buyers. These people are basically satisfied customers who want to share their experience with other customers, which will convince them to invest in your product. 

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• Churn Rate: Churn Rate refers to the percentage of customers that stop buying your products over a period of time. 

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• 40% Rule: The 40% rule helps to determine the impact your product has on the market or the impact it will make on the market after it is no longer available for purchase. The Rule highlights whether or not a minimum of 40% of consumers out of a cross-section of users will be disappointed to lose access to the product. 

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Conclusion

Finding the Product-Market Fit of your upcoming product is very beneficial in foreseeing the popularity and profits the product will bring to the table. The knowledge of what your target market needs only secures a high standard in the competitive markets but also challenges big businesses to match the quality of product development and research. 

Besides, investing time in finding the right Product-Market Fit helps you find consumers who value the product and are willing to pay and advocate for it in front of potential buyers. Lastly, a Product-Market Fit strives to satisfy your target consumers and turn them into loyal, returning clients. 

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Do you want to increase your profitability and enrich your market with value-adding products?

At CognitiveClouds, we help our clients analyze their target markets and create the right Product-Market Fit before developing high-quality SaaS applications. Reach out to our experienced team of senior engineers here to discuss how we can help you with your next product launch!

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