Product/market fit, also known as product-market fit, is the degree to which a product satisfies a strong market demand.
Product/market fit has been identified as a first step to building a successful venture in which the company meets early adopters, gathers feedback and gauges interest in its product(s).
Marc Andreessen defined the term as follows: “Product/market fit means being in a good market with a product that can satisfy that market.” Many people interpret product/market fit as creating a so called minimum viable product that addresses and solves a problem or need that exists.
In Alexander Osterwalder's Business Model Canvas paradigm, product/market fit could be interpreted as a business model's value proposition, customer segment, relationship, and channel are fixed without requiring additional pivots.
The 40% ruleEdit
One metric for product/market fit is if at least 40% percent of surveyed customers indicate that they would be "very disappointed" if they no longer have access to a particular product or service. Alternatively, it could be measured by having at least 40% of surveyed customers considering the product or service as "must have". Sean Ellis is noted for popularizing this heuristic after examining many startups. Rahul Vohra of Superhuman has developed a survey-based model based on the 40% Rule to help post-launch startups test and optimize for this metric.
There are five metrics any online business can measure to empirically verify if they achieved Product / Market fit. They are 1. Bounce Rate, 2. Time on Site, 3. Pages per Visit, 4. Returning Visitors, 5. Customer Lifetime Value. Low bounce rates means a visitor's expectation is being met. High Time on Site and Pages per Visit indicate that the experience of the user is satisfactory. High Returning Visitor reflects the lasting impact a product has on their customers, causing them to come back, and Customer Lifetime Value measures the profitability each customer brings to the company. If these 5 metrics are above average and your 40% rule is met, you'll know you have a Product / Market Fit company.
There are a wide range of metrics entrepreneurs can use to show that they’ve achieved product/market fit, and it's important that businesses pick the ones that are most relevant to their industry. For instance, software as a service (SaaS) companies primarily rely on gaining and retaining customers to grow their revenue stream. For these companies, there are two commonly-used growth metrics that indicate how well they are doing: customer churn, and monthly recurring revenue (MRR) churn. Customer churn is the percentage of customers that cancel their subscriptions in a given time period. MRR churn is the monthly revenue lost from canceled contracts during that month.
It is important to differentiate between product/market fit and problem/solution fit when measuring a company's customer base. More specifically, when gauging a customer's desire, companies need to be sure they are measuring desire for the product or service—not just for a solution. Misinterpreting customers' desire for a solution as desire for a company's product or service will end up being a false positive for product/market fit.
Product/market fit is not binary. For a fledgling startup, a minimum degree of product/market fit will not be adequate in order to achieve market traction and success. Rather, what is actually required is a high degree of product/market fit, or extreme product/market fit.
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