Product Market Fit - Definition and Conditions

Product-market fit is an indispensable prerequisite for the success of a start-up, and the whole company is responsible for achieving it. It is a milestone in the life of a start-up that many founders fail at, which is why it should not be neglected. The product-market fit therefore means the right positioning of the product on the market, for which an extensive market analysis is necessary.

Product-Market Fit means that your product has evolved to the point that the market finds it attractive and you can therefore start to scale up your company.

-TheFounder's Playbook

If the following 3 conditions are met,

1. The target group has a great desire for a (better) solution to their problem.
2. The needs of the target group are met by the product. In addition, it offers significant advantages over the status quo.
3. There are no problems with the target group caused by the product that could delay or prevent the purchase.

it means a good product-market fit. In other words, the product was developed to fit the target group.

According to Silicon Valley investor Marc Andreessen, you can really feel the product-market fit because customers are acquiring the product as fast as you can make it.

A good product-market fit is so important for start-ups that Andreessen divides the life of every start-up into two sections: before product-market fit (BPMF) and after product-market fit (APMF). According to Facebook's CMO Alex Schultz, the biggest problem for companies is that they think they have product-market fit even though they haven't achieved it yet. That's why it's so important for venture capital firms that startups can demonstrate a good product-market fit before making a Series A investment.

But how does a company find out that it has found the product market fit?

In addition to the clear increase in demand for the product, there are other indications by which founders can recognise that they are getting close to product-market fit.

Andrew Chen, a venture capitalist, offers some signals that a company is heading in the right direction.

• Do some of the potential customers indicate in surveys or tests that they will switch to your product?
• Are users who have rejected similar products on the market willing to try your product?
• Is the product grouped with the right competitor offers in user tests?
• Do users demonstrate an understanding of your product's differentiators or unique value proposition?
• How do your underlying metrics (such as user engagement rates) measure up against those of your competitors?

Chen's signals represent a mix of qualitative and quantitative metrics. The method used to measure success should always include a mix of these metrics.

A good product-market fit can also be recognised by the fact that the following metrics suddenly improve.

• The conversion rate, i.e. the success rate in customer acquisition, improves
• The customer acquisition cost, i.e. the cost of acquiring new customers, is falling.
• The churn rate, i.e. the proportion of new customers who drop out again after only a short time, is falling
• The referral rate, i.e. the proportion of customers who recommend the product to others, is growing.

Driving Force vs Restraining Force

There are 2 forces that act on a potential customer when they are considering purchasing a product for the first time. The driving force that makes them buy and the restraining force that prevents them from doing so.

Because founders do not know the wishes and concerns of their target group so well at the beginning, the braking force is usually much more pronounced than the driving force in the very first concepts.

For a good product-market fit, the driving force must be much stronger than the restraining force.

The driving force

When a product offers certain customer benefits, the driving force emerges. The motivation to buy increases with the size and quantity of these benefits. Whether the driving force is big enough is shown by the interest of the customers.

The braking force

The restraining force bails out concerns in potential customers that prevent them from buying the product. These concerns can be, for example, that

• the product is too complicated,
• an undesirable side effect arises from the use of the product,
• the customer lacks the framework conditions for the product,
• the product is not compatible for the (business) everyday life of the customer or that
• the change to the new product is too expensive or time-consuming.

Conclusion

You've reached Product-Market Fit when 40% of your users say that they would be very disappointed if your product was taken away.

-Sean Ellis

In German, this means that customer surveys are a good way to determine whether the product-market fit has been achieved.

After reaching product-market fit, the typical growth curve of a start-up suddenly rises sharply. This is precisely why it is so important for companies to achieve this.

A well-done product-market fit ensures that the market literally snatches the product out of the founders' hands.