.png){kind=logo}
Product-market fit or product/market fit (PMF) is when a product satisfies enough market demand to sustain that product’s growth and profitability.
As an entrepreneur, it’s important you get it right because there’s no point in supplying a product if enough people aren’t willing to pay for it. In fact, failing to match your product effectively with your target market can cost you money through lost sales and investment. It’s about matching one with the other to achieve your desired result.
It's an essential part to understanding your small business strategy.
Before we get into it, here are some quick links to the relevant sections below:
Author of The Lean Product Playbook, Dan Olsen[1], developed a pyramid (shown below) that demonstrates how the pieces need to work together to create a good PMF.
The bottom of the pyramid starts with the market — identifying your target customer and their under-served needs.
The top three segments of the pyramid relate to your product.
The value proposition layer is about identifying which customer needs you plan to address and how you’ll do that in a way that’s better than other products. Effectively, your USP (unique selling proposition).
The feature set is about deciding what functionality your product needs to have in order to satisfy the needs of your customer.
The UX (user experience) is about understanding how your customer adopts a product’s functionality and what it means to them.
How to understand and segment your target market
Looking at the customer and market aspects of this approach, here are some questions you can ask yourself to help you get a perspective on both. As you ask and answer these questions, you need to bring your business strategist skills into play.
1. Are there aspects of the market that are identifiable and can be clearly categorised?
For example, by demographic, particular behaviours or specific characteristics.
2. Do you understand your target market’s pain points?
You need to determine whether your target market has a genuine need or pain point which can be solved by the product you could offer. Your product needs to resonate specifically with your target market’s preferences and desires.
Basically, what is it that’s lacking in the market and how can you fix that? And it’s always worth remembering that customers know their problem but won’t be aware of how to fix it. That’s for you to solve.
3. Is the market large enough?
You need to evaluate the size and potential profitability of the market segment you are targeting. You need to assess whether it offers sufficient growth opportunities and revenue potential to support your business goals.
4. Do you have enough resources and capabilities to serve your target market?
You need to ensure your company has the right resources, expertise and infrastructure to reach and serve your target market segment effectively. This will include marketing, distribution and support channels so your customers’ needs can be met.
5. Does your target market have barriers to entry?
You need to assess the competitive landscape and barriers to entry of your target market. Will your company have a competitive advantage or be able to secure unique positioning that will allow it to succeed in that particular market?
Philip Kotler[2] (commonly known as the father of modern marketing) has emphasised the importance of market segmentation and targeting. He has stressed the value of conducting market research, tailoring marketing efforts and only focusing on the most promising and profitable segments of the market. He eschews the idea of targeting everyone which is often a temptation for business owners.
Al Ries and Jack Trout[3] (authors of Positioning: The Battle for Your Mind) stress the need for products to be positioned as compelling and differentiated so as to capture the attention of the target market segment.
They suggest that entrepreneurs be clear about the unique value or benefit of their product and the way it resonates with their target market. They also stress the importance of effectively communicating those aspects of the product to the target market.
Clayton Christensen[4], who is known for his work on disruptive innovation, encourages entrepreneurs to evaluate the job that customers are trying to get done.
He suggests entrepreneurs establish the specific job or problem the target market is trying to solve. He also discusses the potential competitive advantage from offering a product that is a more effective, efficient and affordable solution for that job or problem. And, again, he talks about aligning product development with marketing efforts.
How to evaluate whether your product is right for your target market
When it comes to assessing the compatibility between product and market, there’s an element of symbiosis — given they need to work in tandem. So there’s some overlap of the questions business owners should ask themselves when they’re considering the viability of their proposed product.
Here are some examples:
1. Does the product solve a problem or meet a need?
You need to be clear about whether your product addresses a pain point or fulfils a specific need with your target market. Is there genuine demand for the solution you believe your product offers? Think like a business marketing strategist – do you think your product offer compelling benefits to customers?
2. Who is your target audience?
You should be able to define the specific characteristics, demographics and behaviours of your target audience. You need to understand their preferences, desires and motivations so you can be sure your product aligns with their needs.
3. What sets the product apart from competitors?
You need to evaluate the unique value proposition of your product, i.e. what makes it different and better to what’s already available in the market. Does your product offer benefits that make it compelling for customers?
4. Have you conducted market research?
It can help to conduct market research to gather insights about your target market. For example, understanding their behaviours, preferences, purchasing patterns and what other competitors do. Your research should help validate the market opportunity and give you ideas about product development and marketing strategies.
5. Have you tested and received feedback on the product?
If you plan to offer a new product into the market, rather than an improved version of an existing product, it’s worth trialling a raw version of it with a select few customers as part of a trial. This will help you understand whether the product solves your customer’s problem and is easy for them to use. The second point is important. If in using your product, your customer has to adapt in a way that adds to their time or cost (i.e. you create work for them), they are unlikely to want your product. Functionality is vital.
So, in trialling your product, you should gather information about its strengths, weaknesses and areas for improvement so you can adapt before a full launch.
As a reminder, customers will focus on their problem or pain point rather than the solution. It’s for you to create the solution. As Ford Motor Company founder Henry Ford is reported to have said: “If I’d asked people what they want, they would have said faster horses.” Their pain point was that transport was too slow and that’s why he created the motorcar.
6. Will my product save my customer time?
This is in keeping with the views of Clayton Christensen (discussed above). Generally, your product will be more appealing if you can save your customer time and/or make their life easier.
7. Are customers willing to pay for the product?
You need to determine if your potential customers perceive enough value in your product that they’re willing to pay for it. To set pricing, you need to explore pricing strategies, conduct pricing experiments or issue surveys to assess the price sensitivity of your target market.
8. How scalable is the product?
Having a product that is scalable can be an advantage and boost profit margins if economies of scale are sufficient enough to drive down unit costs. You need to evaluate if the growing demands of your target market can help you achieve this, i.e. understand the opportunities for market penetration and growth. You should also consider if there are opportunities to expand into new customer segments or other markets in the future.
9. How well does the product fit with your business goals and capabilities?
Your product needs to align with your long-term business goals, values and capabilities. You need to be sure you have the necessary resources, expertise and infrastructure to effectively develop, market and support your product.
How to use the customer satisfaction framework
As you analyse the viability of your product in a particular market in more depth, you’ll start to get a picture of how it may (or may not) fit.
Olsen’s Satisfaction Matrix may help here. See the chart below. It gives a measure of how satisfied customers are with products in the market that provide a particular benefit.
In situations where the product is not of particular importance to the user, the market is deemed relatively unappealing and market as ‘not worth going after’.
When a solution to their pain point is important to the customer and there is a good degree of satisfaction with existing products, this is marked as a potential ‘opportunity’ for new entrants (subject to other factors, such as high barriers to entry, etc).
The most attractive opportunity is when customers would highly value a solution to their problem and they are dissatisfied with current market offerings. This is marked as ‘competitive’ and is effectively the sweet spot.
You can use this framework in tandem with other strategy business tools to help conclude whether your product and market are compatible to the extent they will deliver growth and profitability.
How to develop your Minimum Viable Product (MVP)
When brainstorming the features of your product, it’s good to keep a record of all the options (for learning purposes). However, when a product is released, it needs to be tested in the market and go through iterations to reach an optimal level, i.e. where customer satisfaction and profitability are in equilibrium.
For this reason, it is good to start with a Minimum Viable Product (MVP) — a concept introduced by Eric Ries[5], author of The Lean Startup.
An MVP is a product with just enough features to attract early-adopter customers and give validation to a product idea early in the product development cycle.
Having an MVP allows the product development team to use customer feedback as soon as possible so they can refine and improve the product.
This allows for products to be tested in the market before any real budget and time are committed. It also allows for a learning process as the product evolves and becomes more sophisticated. The process is what Ries describes as build-measure-learn.
The MVP approach is very common in the software industry but can also hold true in many others.
Developing scale and expanding your customer base
When it comes to transitioning from early adoption to mainstream customers, Geoffrey Moore[6] (author of Crossing the Chasm) offers some insights. He suggests entrepreneurs consider the following questions:
Are you targeting a specific market segment or customer niche that aligns with your product's unique value proposition?
Have you identified the ‘beachhead’ market where you can gain early traction and establish a strong presence?
How well does your product satisfy the specific needs and requirements of the target market? Are you addressing any critical gaps or pain points?
Do you have a plan to build a reference customer base to showcase the success and value of your product to wider audiences?
Are you prepared to adapt your sales and marketing strategies to effectively reach and engage mainstream customers?
Moore's framework emphasises the need to understand the dynamics of market adoption and create a focused strategy to cross the chasm and achieve widespread market acceptance.
How to measure the success of your product-market fit (PMF)
While build-measure-learn provides a good foundational framework, there are other clear measures to determine if there is strong demand for your product in the target market you have selected and whether customers find value in using it.
Successful products resonate with their intended audience, they solve a problem or fulfil a need and they offer compelling solutions that are distinguished from what competitors offer.
Here are some indicators of a positive product-market fit:
Customer satisfaction and positive feedback — Customers express high levels of satisfaction with the product. They provide positive reviews, testimonials and referrals.
User engagement and retention — Users are actively and regularly using the product.
Revenue growth and profitability — The product generates sustainable revenue and demonstrates a clear path to profitability, indicating that customers are willing to pay for the value it provides.
Market demand and growth potential — There is significant market demand for the product with a growing customer base and potential for expansion into new markets or customer segments.
Competitive differentiation — The product offers unique features or advantages that set it apart from competitors, making it more attractive to customers.
Achieving product-market fit is crucial for the long-term success of a product or business. It validates the product's viability and market potential, providing a solid platform from which to scale operations and capture a larger market share.
Professional guidance can also help
Of course, all businesses are unique and there’s no single formula or one-size-fits-all approach. And not all entrepreneurs, or their management teams, have business strategy training. This is especially the case for small businesses.
This is when it can be a good idea to seek advice from a small business advisor or a small business coach. An expert industry consultant could contribute too if you want to refine your overall business strategy. If the main area you want to work on is how you market your product or service, engaging a business marketing strategist could also be a smart move. Outside advisors can bring an objective and fresh perspective to bear and can provide valuable insights and guidance.
[1] Olsen, Dan (2015) The Lean Product Playbook. Wiley Publishing. For more about Dan Olsen’s book and other work, see — https://dan-olsen.com/
[2] Philip Kotler — author of over 70 books on marketing. For more information on Philip Kotler, see — https://www.pkotler.org/
[3] Ries, All and Trout, Jack (2001) Positioning: The Battle for Your Mind. McGraw-Hill Publishing. For more about Al Ries, see — https://www.ries.com/. For more about Jack Trout, see — http://www.troutandpartners-eg.com/
[4] Clayton Christensen was the Kim B. Clark Professor of Business Administration at the Harvard Business School and author of several books on disruptive innovation. For more information, see — https://claytonchristensen.com/
[5] Ries, Eric (2011) — The Lean Startup. Portfolio Penguin Publishing.
[6] Geoffrey Moore (2014) — Crossing the Chasm. Collins Publishing. For more on Geoffrey Moore, see — http://geoffreyamoore.com/