Product-Market Fit: The Key to Differentiating Yourself From the Competition

Learn how to achieve product-market fit so you can meet the needs of your audience and set your company up for long-term success.

If you’re in the startup world, you probably worship at the altar of product-market fit. It’s the #1 obsession for many startup entrepreneurs who want to position their product for success.

“In my view, product/market fit is the most important thing to get right as a startup,” says Scott Cook, founder of Intuit. “There's a variety of ways to do it, but without solving some pain point that the customer gets so excited about they tell their friends, it's really hard in the modern age to get any liftoff.”

Product-market fit will make or break a release, just as much as the quality of the product itself. (You can design the best boat the world has ever seen, but your business will still fail if you try and sell it in the desert.) But by emphasizing user needs from the beginning of the development process, you can ensure your product will find loyal users instead of being a great idea with nowhere to go.

What Is Product-Market Fit?

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Product-market fit describes a situation where your company is:

  • In a good market (a sector with potential for scalability)
  • Offers a product that’s satisfying your target audience (the users of your product)
  • Solves a big enough problem (a significant need in the market that’s going unnoticed and where you can fill in the gap)

Investor Marc Andreesen came up with the term in 2012 in his blog series called PMarca’s Guide to Startups. He goes as far as to call product-market fit “the only thing that matters” in product development.

“You can always feel product/market fit when it's happening,” says Andreesen. “The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account.”

According to Andreesen, you can also always feel when product-market fit isn’t happening. “The customers aren’t quite getting value out of the product, word of mouth isn’t spreading, usage isn’t growing that fast, press reviews are kind of ‘blah,’ the sales cycle takes too long, and lots of deals never close,” he continues.

Sadly, you can't change the market to want your product, but you can change your product to meet your market's needs. It’s all a question of testing until you deliver the product experience that meets user expectations and retains them.

Also, don’t forget premature scaling is the reason why over 74% of startups fail. Product-market fit prevents you from burning out all of your resources and money on unnecessary features that could put your product development budget and company in jeopardy.

Another advantage of product-market fit is it sets you up for growth. If you’re solving a big enough problem that affects a lot of people, you’ll have a big pool of potential users to target and attract to your platform.

Examples of Product-Market Fit from Top Brands

So what does product-market fit look like in the real world? Here’s how some of the biggest success stories in tech built their brands around product-market fit:

Spotify

In the 2000s, illegal music downloading was threatening the very existence of the music industry. The flood of pirated music seemed unstoppable because why would listeners pay for something they could get for free? Enter Spotify.

Daniel Ek, the founder of Spotify, wanted to test if online listeners were willing to pay a small fee for unlimited, legal streaming. That way, users could listen to all the music they want on one convenient app, avoid copyright infringement, and the music labels could turn a profit.

“You can never legislate away from piracy,” said Ek. “Laws can definitely help, but it doesn't take away the problem. The only way to solve the problem was to create a service that was better than piracy and at the same time compensates the music industry – that gave us Spotify.”

The hypothesis turned out to be true. As of January 2021, the value of Spotify was around $67 billion, making it the number one music streaming service in the world.

Uber

Uber’s founders knew the taxi system in the Bay Area was out of date and wanted to build a solution that was not only more practical but also affordable. To determine their product-market fit, they tested a beta version of their app in 2008 by offering free rides at tech conferences.

After seeing a bit of success, they decided to offer 50% discounts for new users to their app. As more and more people started to use the discounts and become long-term riders, the app took off and sparked a wave of rideshare copycats.

Dropbox

When Dropbox first launched in 2008, their team had a hard time finding users because they weren't reaching out to the right target audience. That’s when they decided to share a demo video on the website Digg, even though at the time Dropbox was still a beta product with limited features.

The result? They were able to generate 70,000 new signups in one day to their beta waitlist. To drive even more signups, they decided to organize a referral campaign, where they would reward users with extra storage space if they spread the word to their friends about their product.

Here’s what Dropbox CEO Drew Houston had to say about what it feels like to achieve product-market fit for the first time:

“For me there was a visceral sense of your thing taking on a life of its own and lurching forward, like getting pressed into the back of your seat by a fast car or a plane taking off,” says Houston. “The most standout moment for me was our demo video hitting the top of Digg (and then Reddit).”

How to Achieve Product-Market Fit In 5 Steps

Here’s how you can achieve product-market fit to see if your upcoming product or feature has the potential to win big, according to Dan Olsen’s The Lean Product Playbook:

1. Identify Your Target User

Achieving product-market fit starts by understanding which users will benefit from your solution. So, first, create buyer personas of your ideal user and the main challenges they’re trying to solve.

This process consists of a lot of research. Talk to your marketers and sales reps and dig into your internal data to discover who your users are and what matters to them.

2. Identify Underserved User Needs

This stage aims to identify any need that’s going unnoticed, so you can find ways to fill in the gap.

There are many ways to uncover these needs and blind spots in the product experience. For example, you could look at your product reviews and feature requests, conduct customer interviews to ask users what’s missing, or run customer surveys. If you’re launching a new product, do a competitor analysis to find what’s missing from the market.

3. Define Your Product’s Value Proposition

During this stage, you’re defining how your product is solving the challenges your audience is experiencing, along with your unique value proposition. Here are good examples of value propositions from top brands:

  • Apple iPhone: The Experience IS the Product
  • Digit: Save Money Without Thinking About It
  • CrazyEgg: Website Behavior Tracking at an Unbeatable Price

Not sure of your product’s value proposition? Here are the steps to follow so you can define it:

  • Connect back to your customer’s pain point: Your value proposition must speak to the customer's pain points and how your product solves them.
  • Identify what makes your product stand out: What’s the unique value you’re bringing to the table that the competition doesn’t? For example, that could be a unique set of features others don’t have.
  • Use HBS’ essential questions: HBS has an excellent resource on the three questions to ask yourself when writing your value proposition. These questions should make it easier for you to create a value proposition that resonates with customers.

4. Specify and Create Your Minimum Viable Product (MVP) Feature Set

Specify the functionality you’ll use to make that value proposition come to light and turn it into something concrete. It doesn’t need to be anything too fancy: just something tangible enough for your user base to experiment with.

For example, in 2007, Brian Chesky and Joe Gebbia, the founders of Airbnb, had the idea of offering their loft as cheap accommodation for a nearby design conference. To do this, they figured building a simple website and uploading pictures of their apartment was going to be enough. It was a stripped-down version of what would ultimately become Airbnb but was still enough to capture people’s imaginations.

A good MVP needs to be small in scale, cheap, but not too glitchy so the beta user can still get the most out of it. The ideal time it should take to build your minimum viable product is around a month and a half; however, depending on the complexity of your solution, the process can take up to three or four months.

A key thing to remember as you’re building your MVP is not to add as many features as possible since the goal is not to build a complete product. Instead, only focus on the essential features that make a significant impact and solve the challenges of your target users.

5. Test Your Target Audience’s Response to Your MVP

During this stage, you’re showing your target audience your product and collecting their feedback. Olsen recommends you get feedback from five to eight users.

Based on the feedback you receive, you can determine if your audience has a genuine interest in your product. Going back to our Airbnb example, here’s what their MVP prototype looked like:

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Top 3 Strategies to Measure Product-Market Fit

Product-market fit can be confusing since you're not measuring an effect: you're looking for signs (often hidden) that what you're building is valuable to some market. You can use the following methods to shine a light on how your product will land with users:

1. Run a PMF Survey

This approach comes from Sean Ellis, a VP of marketing who’s behind the growth of top companies such as Dropbox and Eventbrite. The goal of the PMF survey is to ask your MVP beta user a set of questions on their product experience in order to measure product-market fit.

The survey starts by asking the question, “How would you feel if you could no longer use the product?” From there, customers can choose between:

  • Very disappointed
  • Somewhat disappointed
  • Not disappointed at all

You can learn more about the survey on PMFsurvey.com, which includes various resources on getting the most out of your PMF survey, along with a survey example.

2. Determine PMF Based on DAU and MAU

Andrew Chen, a general partner at Andreessen Horowitz, has a different method of determining your product-market fit, which consists of comparing your Daily Active Users (DAU) and Monthly Active Users (MAU).

“DAU/MAU is a popular metric for user engagement,” says Chen. “It’s the ratio of your daily active users over your monthly active users, expressed as a percentage. Usually apps over 20% are said to be good, and 50%+ is world class.”

It’s a straightforward way of understanding your app engagement, which is a good indicator of product-market fit. Another benefit is it provides insights into which type of users are the most active on your platform.

However, an issue with this approach is DAU and MAU may not be the best metrics to measure depending on your product. For example, not all apps are for daily use, such as taxi sharing apps like Uber.

3. Net Promoter Score (NPS)

Your Net Promoter Score (NPS) is a simple way of measuring your product-market fit, which consists of asking customers to rate on a scale of 0 to 10 how likely they are to recommend your product to others.

If you plan to use NPS scores to validate feature ideas, we recommend aiming for a score of at least 6. You should forget about prototypes with an NPS score lower than 5.

Product-Market Reduces the Risk of Each Release

Validating a product and finding product-market fit isn’t a straight-line process — it’s iterative. Product validation helps reduce the risk of pouring money down the drain before finding product-market fit.