How to measure product market fit

Product market fit is one of the most prominent concepts in todays startup world, especially for saas companies. Its also one of the most (mis)used buzzwords in pitches and talks with investors. This article is about the concept of product market fit and the most relevant methods to measure for product market fit.

What is product market fit?

There are dozens of overlapping definitions of product market fit. The original one was published by venture capital legend Marc Andreesen back in 2007, who originally coined product-market-fit in his post “The Only Thing That Matters”.

“You can 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.”

When your customers spread your product

Josh Porter stated it differently in Principles of Product Design. He states the most relevant indicator of product-market-fit is the level of dedication and excitement your customers show:

Product market fit is a funny term, but here’s a concrete way to think about it. When people understand and use your product enough to recognize it’s value that’s a huge win. But when they begin to share their positive experience with others, when you can replicate the experience with every new user who your existing users tell, then you have product market fit on your hands. And when this occurs something magical happens. All of a sudden your customers become your salespeople.

How to get product market fit

Getting to product market fit is the holy grail for every saas company and startups in general. The obvious question is ‘How?’. There is no one fits all approach as the way to product market fit is unique for every company (or it fails). Founders need to be honest and ruthless in analysing wether or not they have reached product market fit. Everything can be a possible lever to move you toward product market fit, and might be changed in that endeavour.

Do whatever is required to get to product/market fit. Including changing out people, rewriting your product, moving into a different market, telling customers no when you don’t want to, telling customers yes when you don’t want to, raising that fourth round of highly dilutive venture capital — whatever is required.

When you get right down to it, you can ignore almost everything else.

Marc Andreesen

From changing markets and products to completely shifting visions and replacing team members are all reasonable measures in the search for product market fit. There are prominent examples of companeis having gone through that, e.g. Instagram, Soylent, Anyperk, Twitter. All of them need to drastically change course to find product market fit.

Product market fit is everyone’s job

Product market fit is not a task of marketing or product development. Its rather a mission every employee of the company needs to contribute to and they better expect that it’s going to be a tough journey. It cannot be found by making inear progress and most of the time the company invests in trying to find it will be lost.

How to measure product market fit

Many startups die before they have a chance to get to product market fit. Founders are well advised to constantly measure relevant kpis to makes sure they are on the right path. As management legend Peter Drucker always put it: “What gets measured gets managed”. So how here are some practical methods to measure if you company is getting closer:

When you measure product-market fit, you measure things like:

  • How satisfied are your customers
  • How engaged are your customers with your product/service
  • How often do your customers use your product/service
  • How many new users (or customers) do you acquire through word of mouth

What are the essential product market fit metrics?

There are number if key business metrics that saas companies and other startups need to track independent from their acutall business model. Whether it is an e-commerce business or a software as a service company. When it comes to quantify product market fit you should recommend on three key performance indicators:

1) Net Promoter Score (NPS) and an important supplementary question

The Net Promoter Score (NPS) is a simple survey, asking customers to rate from 1–10, “How likely are you to recommend _____ to a friend or colleague?” Check this post for a basic explanation of the Net Promoter score metric and how it is calculated. Customers ranking 9 and 10 are considered to be your promoters. Those answering 0 to 6 are detractors while 7 and 8 are considered neutral. To calculate the net promoter score you first calculate the percentage of promoters (customers answering 9 and 10). As a second step you calculate the percentage of detractors (customers ranking 0 to 6). The actual net promoter score is then computed by substracting the two percentages.

Percentage of promoters – Percentage of detractors = net promoter score

So, if 80% of your customers are promoters and 15% are detractors your NPS would be 65. The NPS is essential because it tells you two things:

  1. How happy your current customers are with your products and services
  2. How likely it is that they bring new users or customers through word of mouth.

Benchmarks:
Its worth mentioning that NPS benchmarks vary significantly across industries. The reason is that people have a certain attitude towards different industries from the outset. E.g. material goods normally generate more enthusiasm and a greater willingness to recommend while non-tangible services generate a decisive degree of skepticism and reluctance among customers.

Tools:
There are many great tools out there to implement NPS surveys and feedback into your product. One I would recommend to use is Zenloop.

NPS — a supplementary question

A simple but very important complementary question to NPS, which is measuring how many customers really value your product or service, is this approach which measures how many of them would be distraught if they couldn’t have your product/service anymore.

How would you feel if you could no longer use [product]?

The answer aoptions are the following:

  • Very disappointed
  • Somewhat disappointed
  • Not disappointed
  • I no longer use [product]

Growth hacker legend Sean Ellis summarized his findings in this post post: 

“If you find that over 40% of your users are saying that they would be “very disappointed” without your product, there is a great chance you can build sustainable, scalable customer acquisition growth on this “must have” product. After benchmarking nearly 100 startups in his customer development survey, Ellis found the magic number to be 40% – that is companies that struggled to find growth almost always had under 40% of users respond “very disappointed”. Companies with strong traction almost always exceeded that threshold.”

He also introcuded a tool to send out this question called survey.io.

2) Retention Curve and Churn

Another critical metric is the retention curve that shows the average percentage of active customers (or user) for each day within a specified timeframe.

E.g. if the retention curve would show you that after 90 days on average still 60% of your users are active users you most probably have done a good job. So, the higher the retentation rate the more value the customer gets out of your product and the more likely for you to reach product market fit.

As product market fit is nothing that happens accidentaly over night but rather is an iterative process you should analyse carefully for retention. This usually involves to analysis cohorts (e.g. per calendar week) to see if retention gets better over time and which changes to your product or service caused the improvment in retention.

If you reach at a smiling retention curve: Keep smiling! And never forget that retention is the secret sauce for exponential growth.

Here is also a very good and detailed article on retention published by sequoia.

Benchmarks:
The N-day retention and the retention rate of your saas product depends on your business model, the industry you are operting in and the product itself.

Churn Rate

Directly linked to retention you should carefully examine your churn rates. Do customers stick with your product? If yes, what can you do make your offering even better; if not, what are most important reasons why customers stop using your product? Many founders and marketers working with tech products will tell you that the churn rate is among the most critical metrics for your business. It’s also extremely important to help you measure your product market fit. Keeping your churn rate slow in the early stages of your company, is a sign of a company that has found—or is close at finding—a product market fit.

Benchmarks:
As always benchmarks will depent on your product, your industry and your target group. However, focussing on software as a service startups (Saas) here is very good summary about SaaS churn benchmarks. As a rule of thumb you should aim for a range of 5% (customer churn) to 7% (revenue churn) per year.

Tools:
A lot of tools are out there for tracking customer churn. Two of them are Baremetrics and Chartmogul.

3) Changes in Lifetime Value

Last but not least you should also measure how your customers’ lifetime value (LTV) develops over time. The LTV is a metric that is highly correlated to value customers get out of your product. Consequently, increases in the lifetime value (generally) means two things:

  1. That actual value has increased,
  2. That users are more loyal, and therefore don’t have a reason to look for alternatives.

Measuring the LTV of your customers is a metric that—combined with other metrics—will give you a clear guidance to what your customers think about you. It also directly linked to your retention and churn rates, as customers that stay longer with your company automatically generate a higher LTV.

Conclusion

To reach product market fit is critical mission for each an every startup that wants to scale its business and become a long lasting company. It is not reached over night but rather an ongoing and iterative process. To understand whether you are close to it you need to constantly measure relevant KPIs.

The three most relevant metrics for measuring product market fit are Net Promoter Score, retention/churn and the changes in lifetime value. A lot of great tools exist out there to help you with the data collection and also the interpretation. One of the key concepts is to think in cohorts and understand changes that occur over time. They will guide you the way to creeping towards product market fit.

Good luck!

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