Did you know that 42% of startups fail due to misreading market demands?
Before creating a product, businesses must ensure their assumptions align with actual user and market needs!
Once the product is live, you cannot bridge the gap between your offering and the market's needs with more product features.
And Brian Norgard, former CPO @Tinder, affirms it: "A lack of Product Market Fit is never solved with more features."
Hop on because today we're delving into what Product Market Fit (PMF) is and how it can guide you to success!
What is Product Market Fit?
A product reaches market fit when its solution solves a problem for a group of people who actively choose it.
This concept of problem/solution fit was introduced in the book "The Four Steps to the Epiphany" by Steve Blank.
In the book, he highlights the Customer Development Model, which validates user needs and assumptions early in Product Development.
Steve Blank didn't coin the PMF term, which is attributed to Andy Rachleff and Marc Andreessen.
However, his work laid the foundation for aligning a product with the market it aims to serve. Think of it like this:
- Your product offers a specific solution.
- Your target market has a clear, urgent need.
- Your value proposition informs why your solution is better, faster and more effective than the competition.
Keep in mind that the PMF isn't set in stone, as markets and user needs constantly change. Businesses must adjust their product to continue meeting market needs.
Why Care for Product Market Fit?
Achieving Product-Market Fit means you've built something people actually need.
This signals to investors that you're worth backing, transitioning from survival mode to scale mode.
Do you need PMF before starting Product Development? Not fully, but you absolutely need validation before scaling.
Here, you can build a product prototype or a Minimum Viable Product to test core concept with potential users.
Skipping PMF risks building solutions that no one wants and becoming part of the 42% that fail!
How Do You Measure Product Market Fit?
PMF Quantitative Metrics
1. Net Promoter Score (NPS)
You may have seen products or platforms asking: "How likely are you to recommend this product to a friend or colleague?"
That's NPS! The Net Promoter Score measures customer loyalty by assessing users' likelihood of recommending you.
Responses range from 0 to 10, where 9-10 are promoters, 7-8 are passives, and 0-6 are detractors. To calculate the NPS score, use this formula:
NPS = % of Promoters - % of Detractors.
Imagine that, out of a total of 626 users, 72 chose 0–6, 126 chose 7–8, and 401 chose 9–10.
First, determine the % of promoters: Promoters/Total Users * 100: (401/626) * 100 = 64.05%
Then, determine the % of detractors: Detractors/Total Users * 100 = % of Detractors: (72/626) * 100 = 11.50%
After that, you're ready to calculate the NPS: 64.05% - 11.50% = 52.55%
A score above 50% is considered excellent, while a score above 70% indicates exceptional PMF and customer satisfaction.
This metric measures whether customer engagement vouches for your product, which can directly correlate with your growth strategy.
2. Customer Retention Rate (CRR)
The CRR measures the percentage of customers who continue using your product over a specific time.
High retention suggests a strong user engagement, a clear PMF indicator. The formula to calculate CRR is:
CRR = (Customers at End of a Period - New Customers) / Customers at Start of a Period) × 100.
Let's suppose a startup started the period with 1,190 users and ended it with 1,124, but acquired 45 new users. Their CRR would be (1124 - 45) / 1190 * 100 = 90.67%
Strong PMF shows retention rates above 90% monthly for SaaS products, though this varies by industry.
3. Customer Acquisition Cost (CAC)
CAC measures the cost of acquiring each new customer. To calculate CAC, use this formula:
CAC calculation: (Total Expenses) / Number of Customers gained.
Imagine your total expenses were $12,352 and you acquired 35 users within that period. That would equal: 12352 / 54 = 228.74
In this example, acquiring each customer costs the business $228.74
4. Customer Lifetime Value
CLV, or often LTV, estimates the total revenue a customer generates throughout their relationship with your product. Use this formula to measure it:
CLV calculation: (Average Purchase Value * Purchase Frequency * Customer Lifespan).
You may identify an average purchase of $25, made 12 times per year, with a lifespan of 2 years. The CLV is: 25 * 12 * 2 = 600.
The CLV would be $600, meaning a customer "is worth" about $600 in revenue throughout their relationship with the business.
A good CLV:CAC ratio in PMF should be at least 3:1, meaning a customer generates three times the cost of acquiring them.
In this case, the ratio is almost 7:1, a strong indicator of healthy customer profitability!
5. Churn Rate
The churn rate measures the percentage of customers who stopped using your product in a given period.
Contrary to customer retention, this rate provides insight into product stickiness, with the formula:
Churn Rate: (Customers Lost During Period / Customers at Start of Period) * 100.
If you had 98 users and only four stopped using it, the churn rate would be 4/98 * 100 = 4.08%.
Low churn rates, typically under 5% per month for SaaS, indicate a strong PMF.
6. Market Share
Market share represents your portion of the total addressable market, showing how well you're capturing available demand. To calculate it, use this formula:
Market Share = (Your Revenue / Total Market Revenue) * 100
Let's say your industry had a market revenue of $13 million, and your startup's revenue was $144,590. Your market share would be: 144590 / 13000000 * 100 = 1.11%
Growing market share, especially when achieved organically, indicates that customers are choosing you over competitors. It also indicates a strong PMF within your target segment.
PMF Qualitative Indicators
1. Word of Mouth
When customers recommend your product, it can indicate that you're effectively meeting market needs.
Startups can track word-of-mouth growth on social media platforms, customer referrals, and in user-generated content.
2. Media and Analyst Attention
Increased inbound interest from journalists, industry analysts, and thought leaders is often also a signal of a strong PMF.
When media shifts from you pitching your story to reporters reaching out, it shows market recognition, relevance and impact.
What is a Product Market Fit Framework?
A Product Market Fit framework ensures your product roadmap aligns with the target market's wants and needs.
It provides a step-by-step guide for teams to follow as they work to achieve and maintain this synchronization.
Rather than relying on vague hopes for market acceptance, a PMF framework lays out clear steps to confirm demand.
PMF Frameworks
Sean Ellis Test
Also known as the 40% Rule, this test centers on the question: "How would you feel if you could no longer use [product]?" with four response options:
- Very disappointed
- Somewhat disappointed
- Not disappointed
- I no longer use this product.
Ellis developed this framework by comparing around 100 startups.
He observed that achieving PMF often correlates with having at least 40% "very disappointed" answers.
The question emphasizes disappointment, a negative emotion, instead of satisfaction to gauge necessity. If more than 40% of users can't live without you, you've hit PMF.
Jobs to Be Done (JTBD) Framework
JTBD answers the question: "What job does the user 'hire' your product to do?"
A "job" here is the fundamental goal a customer wants to achieve. In this context, for example, people don't buy cameras: they "hire" them to "capture shareable memories."
Jobs here have four main components:
- Statements. These are the "jobs" customers aim to achieve, and defining them ensures teams are focused on what users really need.
- Struggles. These are the hurdles that prevent users from completing the job. Businesses must understand these issues, as they can be used to build solutions that genuinely overcome these obstacles.
- Context. It refers to the circumstances under which the job is performed that influence how the solution should be built.
- Outcomes. These outcomes are what users want to achieve and define success from the user's viewpoint.
The "Jobs To Be Done" approach enables you to deliver a solution integrated into users' lives. This is better than forcing users to adapt to the product.
The Product Market Fit Pyramid
Built by Dan Olsen, the PMF pyramid has five interdependent layers, yet each layer must be strong before adding the next one.
In this step-by-step approach, insights from the top layers often require revisiting those from the bottom ones.
The layers of the Product Market Fit pyramid are:
- Target Customer. Conduct thorough market research and customer interviews to create detailed profiles that represent your product's ideal fit.
- Underserved Needs. Identify currently unaddressed customer needs through thorough customer research, interviews and observational studies.
- Value Proposition. Articulate how your solution addresses underserved needs better than others with a solution specific enough to be testable.
- Feature Set. Balance completeness and simplicity to ensure features meet the promised value and directly support your value proposition. You can use journey mapping, MVP development, and prototype testing. I
- User Experience. Ensure users feel good when they're interacting with your product and make the value proposition immediately apparent and accessible.
Conclusion
Creating a product that people truly want or need is a challenging task.
However, when you achieve an extreme Product-Market Fit, the first stepping stone is set. PMF is not the end of the journey, but the beginning of your scaling process.
At Capicua, we navigate this exact journey, from validating demand and refining value to building solutions that actually work.
Ready to build a product that lasts? Reach out, and let's find your fit together!
