It’s my hope you enjoyed the previous episode of our startup guide. In case you missed it, you can get it here by clicking the title Six Perfect Strategies to Achieve the Best Business Growth. In today’s guide, we will be looking at 6 Amazing Ways to Formulate the Best Product-Market Fit
If there is one thing above all that makes a successful startup, it is having customers who purchase and love your product. If you achieve that, it means you have managed to offer the market exactly what they need, and that is what we call product-market fit.
But how comes it is very difficult to reach high levels of success as a startup? What are the steps you need to take to identify your product-market fit? How do you measure results to see if you are doing everything right?
You can think of product-market fit as sailing, where the product is the sail and the demand is wind. For your boat to work, you have to build a sail and locate the wind to power it. – So in simple nautical terms, for a company to succeed, you need to build a product that satisfies the needs of the market and its potential customers.
What is Product-Market Fit?
Product-market fit is a common concept in the startup world. When your product is being ripped out of your hands by eager customers and you are working on your toes to keep up with their demands, you have achieved product-market fit.
When it comes to product-market fit, if there is one name that is common in the startup world is that of Mark Andreessen, co-founder of a coveted Silicon Valley venture capital firm Andreessen Horowitz.
As Mark put it, “Product/Market fit means being in the right market with a product or products that can satisfy that market”. Think of product-market fit as the moment when your customers become your salespeople.
Consider is like a magical moment when existing customers recognize your product’s value and tell others about the great experience with the product. Your company replicates a great experience for new users.
Product-market fit describes the stage of a startup when they have successfully identified a target customer and serve them with the right products. Once you have achieved product-market fit, the next step is to scale by finding more customers within the market.
Indicators of Product-Market Fit
There are different indicators that can send signals to you that you are achieving product-market fit. If you have product-market fit, customers are buying the product just as fast as you can make it. Another indicator is when money from customers is piling up in your company account.
Additionally, you will need to hires sales and customer support staff as fast as you can. You may find reporters calling because they have heard about your hot new thing.
Engagement is probably the most important step in any user’s journey with your product or service. It can be a strong indicator of product-market fit. Early on, your growth rate is largely going to be driven by your spending tactics that you use to acquire new users.
In some instances, products become viral and sell themselves. However, in many cases, businesses have to actually spend money to make money. Money is spent by businesses in the form of advertising, sales and marketing initiatives.
When you spend money to get a new customer, we can track it down to cost per acquisition. It is a metric that conveys how much you are spending on sales and marketing as a representation of the number of new customers you are getting out of those efforts.
Companies oriented on growth can become overly obsessed with CPA and may end up spending too much in the acquisition. The best and true way to go about it is to acknowledge the importance of product-market fit attributes to define your business.
How to Measure Product-Market Fit
If a product-market fit exists, it should also be measurable. However, the most important component in measuring product marker fit is to determine how you feel.
As Eric Ries, author of Lean Startup puts it “If you have to ask whether you have product-market fit, the answer is: you don’t”.
This means from the above definition, there is no clear way to measure product-market fit.
However, if you have to run a test, one way to go about it is to run a survey among your customers, and you will have achieved a product-market fit if at least 40% of your clients say they would be very disappointed if they no longer have access to your product or service.
Another way to go about it is to use online services to measure Bounce Rates, Pages per visit, Time on site Returning visitors and Customer Lifetime Value, to see if they are above the industry average.
Ways to Formulate the Best Product-Market Fit
Dan Olsen, a renowned product management expert and author of The Lean Product Playbook proposed a six-step framework called Lean Product Process to determine product-market fit. Here is the process;
Step 1: Determine your target customer
You need to work to identify the target customer who represents the users that will most likely benefit from your product. This can be achieved with the use of market segmentation to define your ideal customer.
Your research phase is key and should be well crafted around having a good definition of your buyer persona and identify which part of that persona you will target. You need to conduct market research with research questions that help you identify your ideal customer.
Segmentation – The process of partitioning a full market into market segments, will be key to defining your success. You need to define the attributes and characteristics of different target users, in what we refer to ‘persona archetypes’.
It is always a good practice to start with a high-level hypothesis of your target customer and continually revise, refine and improve to give you key insights. Analyze and summarize your findings into useful insights to share with key stakeholders for appropriate actions.
Step 2: Identify underserved customer needs
Right after you have formed a target customer hypothesis, the next key step is to understand their undeserved needs. You need to identify the specific needs that correspond to a good market opportunity.
Determine which customer needs you can best address with your product or services. When determining which challenges to address, do not lose sight on your product roadmap.
Work on addressing customer needs that are insufficiently met, and in that you, you will create value for your customers.
Step 3: Define your value proposition
A value proposition is the core of product strategy and outlines a plan for how a product will meet customer needs way better than the alternatives.
You need to choose which customer your product needs can address. Figure out all unique features and functionalities of your product, how they will delight customers and how they will outperform the competition.
Step 4: Specify your minimum workable product feature set
Making a specification of your minimum workable product feature set is the next step after you have defined your value proposition. Specify what functionality that will define your minimum viable product.
With this approach, you are aiming at building only what is needed to create enough value that your product is headed in the right direction.
At this stage, your goal is to iterate until you have a minimum viable product that can relate to your customer needs.
Step 5: Create your minimum viable product prototype
When you create a minimum viable product prototype, you allow yourself to test an idea before building an actual product.
This means you will be showing your target customers a version of your product, with the aim of getting feedback and integrating that vital feedback into your product.
Make use of prototyping tools as they can simulate the user experience on the final product and help you in obtaining critical feedback from your customers.
Step 6: Test your minimum viable product with customers
Once you have created your minimum viable product, it’s time to perform some tests. You can use a short survey to ensure your market research participants have the same attributes to those of your target customer.
During the testing phase, observe keenly what the target customer says and does. Ask any clarifying questions to gain a deeper insight and get the most value from your users.
Try to avoid asking closed questions as these mandate a yes or no, something you should not be majorly concerned with. Ask non-leading and open-ended questions as they have a tendency of encouraging insightful responses.
When you have conducted user tests, it’s time to analyze and interpret all the feedback you receive. Identify any key patterns and similar feedback and place a key priority on any customer concerns that need to be addressed. Additionally, refine your initial prototype to include their concerns and experiences.
4 Product Market-Fit Examples
In out four case studies, we shall look at how Slack, Dropbox, Spotify and Uber tech startups achieved product-market fit.
Slack: Every User Counts
Slack chartered its path to product-market fit by focusing on individual and team users. It placed a key focus on being effectively responsive to product issues, as well as creating amazing user interactions.
The Slack team managed to turn customers into a word-of-mouth marketing force in its effort to drive adoption.
Launched in 2014, the app grew from 15,000 daily active users to 1.1 million by June 2015. By October 2016, it had reached 5 million users. All this growth happened without having a million-dollar marketing budget.
Its growth can particularly be accredited to its user-centric approach from the top to down. Steward Butterfield was handling the majority of its Twitter comments in the early days.
Even today, the company continues to make feedback on key assets and provides users with multiple ways of communicating within their teams.
What we can learn from Slack is that they were able to boost user satisfaction, get buy-ins sooner and iterate on their products. The act of bringing their product and customer together was key to their fast distribution.
Dropbox: Go to where your market is.
In 2008, Dropbox changed the way we sync devices and access to cloud services.
Drew Houston, Dropbox co-founder devised two successful methods that worked pretty well. First, he made his famous 4-minute explainer video then shared it on different sites, the biggest one being Digg. Their beta waitlist users skyrocketed from 5,000 to 75,000 overnight.
Instead of testing on different distribution channels, Houston placed key focus on an established audience at Digg, where social media sharing was fast growing.
In the second approach, Dropbox started a viral referral campaign that rewarded existing user’s storage space for their efforts to share the service on social media to their friends.
Additionally, Dropbox found yet another great distribution channel that placed it in the midst of the right audience. It incentivized its users and social proof acted as a natural attraction for people to try Dropbox services.
Spotify: Attack the grey area
Daniel Ek saw a great opportunity in the aftermath of the collapse of Napster and other P2P file-sharing networks. Networks had promoted large scale sharing, something now viewed as a wholesale copyright infringement.
At that time, there was a huge grey area of newly widespread internet. At the same time, the music industry had started to see album sales plunge, as listeners started to consume music content online, in most cases from illegal sources.
Ek capitalized on his theory: Would a small percentage of music lovers who listen to music without legal rights, be willing to pay a certain fee for facilitating legal consumption?
That theory proved to be very true, as Spotify was born out of this grey area. The company recognized that many of the elements of product-market fit were already in place, only missing a legal product.
The music content was readily in place and online and mobile devices would provide the perfect distribution channels for legal streamers.
Uber: The Free Ride
Uber captured product-market fit as it started out by offering free taxi rides between technology events in different regions in San Francisco. This made Uber’s co-founders to recognize that the taxi system was very expensive and outdated and only a few people used it.
Uber worked on its app, which gained steam and offered a 50% discount on first-time users. Experts point out at Uber’s ability to solve a problem and create need at the same time.
It has to be noted that consumers were not demanding a better taxi service, but once a more convenient and simpler one emerged, users began to like the concept.
The network effect kicked in and users began sharing their experiences on social media, further providing the much needed social proof for the startup.
With the release of Spotify streaming service, music lovers have access to almost all their favourite songs at no cost, and without any legal issues. It is a simple value proposition, yet a very strong one, that makes Spotify maintain an annual growth rate of between 20 and 30%, even 10 years after launch.
For a startup, meeting some couple metrics is not good enough to achieve vital market traction. Your product should have a very high degree of product-market fit. It is important to understand whether you are just solving a problem or you are just eliminating a huge burden off your users’ shoulders.
In most cases, product-market fit doesn’t happen on the first try. You will most likely test and adjust your product or service a couple of times before you can settle on the perfect combination of value proposition, customer base and distribution.
Continue experimenting based on the feedback you get from your audience. Readjust your concept and prepare the right pivot. Once you have achieved product-market fit, your work becomes easier because your customers and other interested parties will become a key part of your marketing engine.
The most important thing that startups need to understand is that product-market fit rarely does happen by accident. Companies work tirelessly to tweak their products and services, the target markets as well as their sales and marketing tactics to find the ideal balance.
Product-market fit is always an ever-evolving journey aimed at uncovering new demands, modifying the market you’re targeting and adjusting your messaging and communication tactics to reach new users. As a product leader, you need to be both informed and driven by your knowledge, research and efforts.
You need to reassess your product-market fit and rely on common benchmarks to ensure your company or business doesn’t become self-satisfying and innovatively dormant. Understand that getting the right product for your market needs continual adaptation to reach your growth targets and continue being a market leader that your competitors can only admire.
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