Even an excellent product can only succeed if people will buy it. That’s the core message of the product-market fit concept. Achieving product-market fit is crucial for any startup and signals a product’s potential to thrive.
This guide breaks down what product-market fit is, the steps to validate it, and how to measure it successfully.
Defining Product-Market Fit
At its most simple definition, product-market fit is when a product fulfills a strong market demand. The product-market fit concept was developed, and the term coined, by venture capitalist Andy Rachleff.
Rachleff was inspired by the legendary venture capitalist and Sequoia Capital founder Don Valentine, who insisted that the market had to be the first consideration of entrepreneurs. “My position has always been: you find a great market and you build multiple companies in that market,” Valentine said.
Rachleff argues that while a product itself and a company’s team can be changed, a market is fixed. Therefore, product-market fit can only happen when you develop a product to meet the needs and desires of the customers that make up a market.
This famous quote about product-market fit from Rachleff sums it up:
“If you address a market that really wants your product — if the dogs are eating the dog food — then you can screw up almost everything in the company and you will succeed. Conversely, if you’re really good at execution but the dogs don’t want to eat the dog food, you have no chance of winning.” Andy Rachleff, Venture Capitalist and CEO
What is the 40% Rule of Product-Market Fit?
The 40% rule is a simple way to gauge product-market fit. Also known as the “Sean Ellis Test” after its creator, the rule states that if at least 40% of surveyed customers say they would be “very disappointed” if they could no longer use the product, it indicates a strong product-market fit.
The number 40% was determined by comparing the results of hundreds of startups that conducted this survey. Startups with at least 40% of customers responding “very disappointed” were able to build high-growth business models. Startups with survey results below 40% had a hard time remaining viable.
An Example of a Market Fit Hypothesis
A market fit hypothesis is an educated assumption about how your product will solve a specific customer need.
For a company developing a fitness tracking app, a hypothesis could be: "Young professionals aged 25-40 want a fitness app that provides a variety of quick, customized workout routines that fit into a busy schedule, along with real-time feedback and community features to keep them engaged."
A market fit hypothesis like this helps a startup begin to define and validate its target market’s needs.
Key Activities in Validating Product-Market Fit
Confirming product-market fit requires user data and feedback, so a product needs to be tested in a market before it can be validated. Product-market fit often takes place during the Minimum Viable Product (MVP) stage, when early product designs are tested. But it is an iterative process involving repeated testing and feedback, and therefore truly achieving product-market fit can take years.
Key activities for validating product-market fit:
Define Your Target Market: Start by understanding who your ideal customers are and their challenges. Research market demographics and demands, and customer behavior. Surveying potential users can help refine customer personas.
Conduct Market Research: Analyze market reports, industry trends, and competitors’ products to ensure your product aligns with market demands or gaps.
Build an MVP: Develop a Minimum Viable Product to test your hypothesis. This should be a simple version of your product that still delivers your core value proposition.
Collect User Feedback and Metrics: Use analytics and surveys to gather user data and learn from their behavior. Early adopters, the first and most enthusiastic users of your product, can provide especially valuable insight into which features resonate and what can be improved.
Iterate and Improve: Use that customer feedback to refine and enhance your product. Repeat this process as many times as needed to hone in on your product-market fit.
Assess Customer Satisfaction: Tools like Net Promoter Score (NPS) surveys give you insight into customer satisfaction levels, helping you confirm if your product meets their needs.
The 3 Most Important Steps in Product-Market Fit
While there are many steps in finding product-market fit, these three are especially critical:
Pinpoint Your Core Value Proposition: Determine what specifically makes your product valuable to users. A core value proposition should answer the question, “Why should a user choose my product over a competitor?”
User Feedback Loops: Collect, analyze, and act on customer feedback over and over to align your product features with real user needs.
Data-Based Iteration: Never assume or guess what your users need. Products that evolve based on data such as user behavior and feedback are more likely to achieve product-market fit.
Key Questions to Ask When Validating Product-Market Fit
Ask your users these questions about product satisfaction, relevance, and improvement to assess the status of your current product-market fit:
- What problem does this product solve for you?
- How important is it for you to solve this problem?
- What other solutions have you tried, and how did they fall short?
- What do you like most about this product?
- How often do you use the product, and in what situations?
- How would you describe this product to a friend or colleague?
- What specific features are most valuable to you?
- Is there anything you would improve or change about the product?
- How would you feel if this product no longer existed?
- How likely are you to continue using the product?
- Would you recommend this product to others? Why or why not?
- What, if anything, would make you stop using this product?
Famous Examples of Product-Market Fit
Slack is a case where pivoting was key to achieving product-market fit. Initially, Slack was developed as an internal communications tool for a game development company. However, the team realized its value as a tool to centralize workplace communications and released it publicly. Slack’s market fit indicators included strong user engagement, viral corporate growth, and high adoption rates.
Airbnb struggled in its early iterations, but once the founders found the right users – travelers looking for affordable and unique accommodations – it quickly gained traction. After listening to customer feedback, Airbnb created an easy way to book private homes, a feature that was missing in the travel accommodations market. Airbnb tested its concept in a small market first and then expanded after product-market fit was validated.
Zoom experienced seemingly overnight success due to the Covid-19 pandemic, but the company had already recognized a gap in the video conferencing market. Zoom provided a video tool for businesses that was easy to use, high quality, and reliable. And while that huge surge of pandemic users was a unique market environment, Zoom’s high level of user retention post-pandemic is due to product quality.
Examples of Products That Failed to Achieve Product-Market Fit
Google Glass is perhaps the best-known example of a high-profile product that failed to achieve product-market fit. While innovative and high-anticipated, Google Glass lacked a clear market demand, and its high price and privacy issues made it inaccessible or undesirable to many people. Google Glass proved that even cool, cutting-edge technology needs to be practical for consumers to buy in.
Segway marketed itself as a revolutionary transportation solution, but its developers failed to recognize consumer behavior and environmental limitations. The two-wheeled vehicle was expensive and difficult to operate in crowded settings such as city streets, making it an inconvenient choice for most people. In the end, Segway couldn’t compete with the simpler, more affordable options of walking and biking.
MoviePass was a subscription service that gave customers unlimited movie theater access for as low as $9.95 per month. This model was extremely appealing to users and MoviePass rapidly grew its customer base. However, the company underestimated how many trips to the theater users would make and couldn’t cover its payments to theaters. This too-good-to-be-true business model led to MoviePass’s demise in 2019.