How to know when your startup has met product/market fit

Author: Unfold Agency
Digital agency team members in a strategy workshop

So you’ve created your product, been through planning, prototyping and launch stages. You’ve been operating for a while now – but how do you know when you’ve found product/market fit?

We’ve seen a lot in our years of doing website design for start-ups. One of the most common and heinous mistakes start-up owners can make is trying to offer a product for which there is no demand, or alternatively not putting enough emphasis on product quality. This results in a lack of sales or repeat custom – one of the main reasons why startups fail to lift off.

Your product/market fit is the degree to which your product satisfies your target market’s demand. In other words, if there is demand for your product and people love it, then you have achieved product/market fit (PMF). You have successfully created a high-quality product that meets demand and (for the time being at least) your product should be in a happy equilibrium.

There are some nuanced signs available to businesses wishing to examine their product-market fit. Whilst examining these, ensure that you are focusing on the right metrics, view our article on KPI setting for deeper detail. In order to avoid vanity metrics such as site traffic and impressions, be sure to drill down to financial performance and conversion-based metrics (which should be set as KPIs). These will offer you the most valuable insights into your product’s performance and where improvements can be made.

Here are the top ways to see if you’ve reached PMF:

1. You’re irreplaceable – the 40% rule

You cannot reach product/market fit without at least a high proportion of your customer base loving your product. If they love your product, existing customers will support the business either through repeat custom or by recommending it to others. This is an essential element to your success. Conversely, if your product or offering lacks in some way, not only will people not buy from you again, but they are also likely to actively discourage others from doing so. Yikes!

A commonly used metric to guide customer satisfaction and success in the field is the 40% rule. This stipulates that if 40% of surveyed customers say they would be “very disappointed” if they no longer had access to the product or service, then you have reached product/market fit. Another alternative is that 40% respond stating that the product or service is a “must-have”. Reaching either of these feedback benchmarks is a very good indication that your product has met your target market’s needs.

There are exceptions to this however. Generally when we think of a successful business we think consumers must love their product – and for a product to be loved it has to be of high quality, right? RIGHT?

Well, not always actually. Businesses do sometimes puzzle along despite poor product quality – we’re looking at you, Wish.

In cases like viral business ‘Wish’, product quality is low on their list of concerns but the business thrives because it has alternative USPs which attract customers. For Wish, its USPs are novelty-factor, cheap goods – and (by some sick twist of fate) their terrible product quality has also, somehow, become a USP. Their products have become a running joke on social media which has turned the business into a viral sensation. All of this in spite of the fact that their products are known for terrible quality and their shipping time takes around 3-6 weeks (Amazon they ain’t). Believe it or not, they were recently valued at $8.7 billion.

Whilst we would always recommend you make quality a top priority, Wish are a good example that quality isn’t the only thing that your customers can love about your product or your offering, or help you reach your product/market fit.

Market research, followed by a prototyping stage and then continuous development and testing, are the only ways to keep up with the ever-changing digital sphere and maximise your chances of finding product/market fit.

2. You know your customer

Are you solving a real problem of theirs? Do you have a clearly defined and identified target audience? Are you testing with your real-life audience rather than drawing your own inferences? Or are you just testing on family & friends? Alongside gaining real metrics and insights, make sure you’re talking to your customers regularly. Struggling to get customers to talk to you? Why not offer a free gift card or similar incentive to participating customers – research has shown that when offered a reward for their effort, people tend to give more detailed and accurate responses.

We cannot stress how important this is. Market research, followed by a prototyping stage and then continuous development and testing, are the only way to keep up with the ever-changing digital sphere and maximise your chances of finding product/market fit. All the most successful digital businesses operate in this way. Think of the constant updates Facebook and Instagram roll-out. Users might resist changes initially but before we know it, they’re normalised and users lap up the new features. This is because each change will be a data-led decision that is in line with the business’ growth plans. The proof is in the pudding – 16 years on, Facebook still boasts 2.45billion active monthly users whilst being nearly unrecognisable in look, feel and offering from it’s start-up form.

3. Your product/business model cannot be easily replicated

This is of vital importance, those with an easily-replicable offering are vulnerable to being undercut by a competitor. USPs play a key role again here. One of the main ways you can ensure your offering isn’t replicated is by using tech solutions which are tough to build and better than similar options. The continuous improvement model will work in your favour again here, allowing you to be agile with your offering and quickly react to changes in the market should the need arise.

Whilst it’s still possible to meet your product/market fit with a somewhat replicable offering, it does put you in a precarious position for the future. If another business can easily copy and improve on your offering, then you’re in danger of having your business challenged. Reputation-building can help somewhat here. Getting to a place where your reputation leads you to be the go-to choice among your target market can offer a safety net. It is however not a catch-all and you should never rest on the laurels of your present success. Again, a continuous improvement model in your tech development will help you to constantly innovate and keep up with your market’s requirements

4. Your business can keep up with demand

Your scalability both in terms of technology, finances and team bandwidth should be aligned with the demand on your business. Many start-ups struggle because their resources simply cannot keep up with demand. Either that or they are over-resourced for the sales they’re processing and their revenue cannot keep up with their expenses.

It’s a fact of business that you’ll forever be in pursuit of a better balance between your inputs and outputs, whether you’re in the startup stages, or a large corporate. You’ll know when you’re finding success if you reach a tipping point in your resources. If it’s starting to feel like you can’t keep up with demand, this is a great sign (if not a bit stressful). This is where scalability is important and it might be necessary to get a hit of funding to boost resources into line with demand.

5. Your customers bring in more than it costs you to acquire them

This one takes a little longer to track but it’s highly valuable. It’s simple maths, really. If it’s costing you more to acquire your customers than they spend with you, then you’re likely to be operating at a loss.

We’d like to stipulate that it’s normal for your Cost per Acquisition (CPA) to be very high when you start out. The important thing is to plan for continuous optimisation which will bring your CPA down over time. This plan should also be closely monitored against your burn rate and synched with future bids for funding.

Again, tracking the correct metrics will allow you to easily see if and where this is happening. Some common examples are;

  • poorly targeted Ads,
  • high expense on influencers with poor return,
  • poor uptake on marketing campaigns.

All of these can burn a hole in your wallet and turn what looks like a profitable revenue stream, into a loss. We’d recommend monitoring your expenditure on customer acquisition to mitigate the chance of running dangerously over-budget.

Another important principle to remember is that it’s much more expensive to acquire new customers than it is to engage and encourage repeat custom from existing ones. Maintaining engagement with your customers will help to keep your brand front of mind. Remember our first point as well; quality and USP also affect repeat custom.

We hope you found this information useful. Bookmark this article and keep referencing back to it along your journey, to keep yourself laser-focused on hitting these reference points.