In this post where I talked about product development best practices, I shared my recommendations for organizational structures and roles&responsibilities. As one of the core responsibilities for a Product Manager, I mentioned product strategy and long term vision.
Product strategy and long term vision sheds light to all XFN teams on where the product is heading, so that each team and individual can make decisions accordingly. It could take years for a product to be successful, mature and saturated, but how do you know if the product is addressing the needs of the market it originally was designed to address?
This is where “Product-Market Fit” definition and criteria come into play.
What is Product-Market Fit?
While Benchmark and Sequoia founders first developed the thinking, it was Marc Andreessen who made it popular1. He defines the term as;
Product/market fit means being in a good market with a product that can satisfy that market.
It is not the best and most comprehensive definition but it’s a good starting point. Here is how I interpret each of the highlighted parts of the definition.
- ‘A good market’ usually refers to a group of people (B2C) or companies (B2B) that the product is targeting. This ‘market’ needs to be large enough for the investment to be justified. The size of the market can be the number of people, size of the companies or industries it is targeting, or total revenue opportunity (aka Total Addressable Market). A thorough segmentation and prioritization are needed to define the market before proceeding further.
- ‘Product’ is a very broad term. In a product’s lifecycle, there are many phases but first, the product should show early signals of potential ‘fit’, such as with a Minimum Viable Product (MVP). It is crucial to have clear definitions of these signals and how to measure them before developing the MVP. Each company, each product, each feature might have to have different set of signals which defines the success accurately to show the product’s fit in the market.
- “That market” refers to “problem statements’. These problem statements should be clearly identified, stackranked, and analyzed before the product strategy is built against them. Eventually, what product-market fit will mean is the product’s ability to address this (or these) problem statements.
In product development, the correct sequence would be to define “A good Market”, “That market”, and “Product”.
An Example: Build a product for influencers to help them effectively monetize their presence in social media.
Lets use this sample product idea to walk through each question to define product-market fit components.
Question 1: What is the target audience and opportunity size? (aka ‘a Good Market’)?
First, we need to do a thorough segmentation. There are millions of influencers out there. Therefore, we must do divide this large audience properly and understand the needs of each segment. The following dimensions can be used:
- Follower size
- Tier 1: 100m+
- Tier 2: 10m – 100m
- Tier 3: 1m – 10m
- Tier 4: 100K – 1m
- Tier 5: 10K – 100K
- Region / Country
- Category (Beauty, Travel, Sports, Gaming etc)
When we divide this large audience into small groups using each dimension, we are actually looking at the common characteristics of these influencers, so we can identify their problems more distinctly. The monetization needs of an influencer with 10K followers are different than Lebron James, obviously.
Lets say we chose Tier 2 and 3 influencers in Beauty Category, which has a large Total Addressable Market, as Tier 1 is a small group of influencers with dedicated marketing/PR agencies who maximize the monetization of their clients’ social media presence, and Tier 4 and 5 do not show a lot of promise for monetization.
For the sake of keeping this post specifically about Product-Market Fit, I am intentionally not getting into the details of opportunity sizing or how to calculate Total Addressable Market. I plan to write a seperate post about it. Also, final decision on segment prioritization does not have to be done in this phase, it can also be done after the second question is answered for each segment.
Question 2: What are the needs of this target audience? (aka ‘that market’)
Now, in this segment, we need to understand two things very clearly:
- What are their needs/challenges?
- What are the existing solutions trying to address these needs/challenges?
We need to talk to a sample of influencers in each segment to truly understand the needs of them to monetize their identity and brand. For example, which methods do they prefer to monetize: advertising? selling their own merchandising? sponsorship? What kind of tools or agencies are they using to monetize today? What problems do they have with them? How would they stackrank these problems?
Accurate stackranking is critical as this will help us see which problems we should double down first and address through the MVP.
After capturing all these insights, we need to analyze the existing solutions in the market to see whether or not they are addressing any of these problems, and if so, how successful they are.
Lets say that sponsorship is the most preferred monetization method among this target audience, but they are having a hard time finding the brand(s) to sponsor them. At this point, while we are keeping it simple and moving on to the next question, we should acknowledge that there needs to be further in-depth analysis before moving on. For example, what do brands consider and need to sponsor influencers? How did successful partnerships work in the past? In which industries are brands most receptive to sponsorship deals? etc.
Question 3: How should the product solve the problem?
We know which audience we are going after, and we know what problem we want to double down: Tier 2 & 3 influencers who are having struggles to find sponsorship.
Here, we need to define a ‘Minimum Viable Product’.
A minimum viable product (MVP) is a version of a product with just enough features to be usable by early customers who can then provide feedback for future product development2
Lets say our vision is to build the best marketplace for brands to find the most relevant influencers with the highest followers overlapping the brand’s target audience, and for influencers to find lucrative sponsorship deals and execute on them easily. This marketplace will also monitor the influencers on the inflencers’ compliance to the sponsorship agreements and provide creative support to both parties. However, the MVP could be simply the marketplace for brands to find influencers with certain number of followers in certain categories, filter them and contact them.
Now, we have a definition of Product-Market Fit: “We are targeting Tier 2 and 3 influencers to address their challenges of finding long term sponsors with a marketplace bringing the demand from brands and executing on the deal”.
Next step: Success criteria and tracking the ‘fit’
This definition helps us with very clear direction we are heading. However, we need to define success criteria to understand whether or not ‘we have the product-market fit’.
For this particular idea, the success criteria must have three components:
- Does it address the needs of target influencers?
- Sample Metric: More than X% of the influencers say that they are happy and are able to find sponsors and manage their sponsorships
- Does it address the needs of brands?
- Sample Metric: More than Y% of the influencers testing the marketplace are happy and are able to find influencers to sponsor which helped increase their brand equity
- Is it a profitable business?
- Sample Metric: Adoption of the product and % commission of the deals is driving business outcomes.
Usually, the first two are critical. If the product shows early promise to hit these metrics after initial alpha/beta testing, it is a strong signal that product is on the right track.
Closing thoughts:
- The actual numbers need to be realistic and challenging enough for product to show its potential. On Wikipedia, a 40% rule is referred:
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.
You can argue that this number is low or high, but usually it is a healthy signal that 40% of the testers are ‘very happy’ that they would be ‘very disappointed’ if they lost access to the product.
- If you decide to get satisfaction pulse from the customers, you can use a scale (1-5 or 1-10) to measure progress over time (instead of yes/no question).
- For B2C products, the most common metric is ‘retention rate’, meaning % of people returned back to the service after 1 day, or 1 week. 20% is usually a golden rule, and is seen as a strong signal for the product-market fit.
- Be honest to yourself. If you are getting reactions from your customers well below your expectations, that’s a good thing. It means, you need to go back to the whiteboard and understand what went wrong during the process, so you can fix it. If you are biased, see excuses behind low satisfaction ratings, and still believe the product has market-fit, sooner or later you will hit the wall, and it will be too late, and more costly. Figure out and fix the problems as early as possible in the process.
- You may have product-market fit for one group but not another in your target audience. Maybe, for some reason, your product is perfect fit for Tier 2 influencers but not for Tier 3 influencers. That’s ok, you know now that you might need to think differently for Tier 3, and work on a different solution for their problem (or there is no demand from brands for that tier, so you should move on).
- Using these definitions, metrics and tracking progress regularly will help you identify each problem quickly and accurately, so you can address them during your long journey to achieve your vision.
Reference;
- Product/Market fit by Wikipedia
- Minimum viable product by Wikipedia