Measuring product-market fit isn’t rocket science (though it can feel like it at times). Ultimately, you measure product-market fit by examining a handful of business-critical metrics. If they’re trending in the right direction, you’re on the right track—if not, it’s time to revisit the drawing board.
That’s an oversimplification, but stick with us.
Not every business knows how to determine product-market fit, and that’s why this factor drives 35% of failed startups. We want to help you avoid joining these statistics.
Below, we’ll walk you through everything you need to know to better measure product-market fit. You’ll walk away with the tools you need to measure product-market fit from the get-go instead of waiting for your startup to spiral out of control.
First, let’s get on the same page about what product-market fit is (and why it matters).
Product-market fit evaluates whether you have the right product for the right market. This means you introduce a product your target audience needs and is willing to buy over alternatives and substitutes.
Marc Andreessen, an entrepreneur and venture capitalist, coined the term, and here’s how he defined it:
“Product/market fit means being in a good market with a product that can satisfy that market.”
For example, Spotify solved a customer pain point by making music more accessible in a streaming format. It achieved product-market fit, and it could tell by metrics such as adoption rate, customer lifetime value, and word-of-mouth spread.
Your job as a startup is to provide products and services your customers want and need. However, finding that golden product-market fit can feel a bit arbitrary at times, and that’s probably why we’ve seen monolithic business failures like Snap Glasses, New Coke, and the Barnes and Noble Nook.
These businesses scaled their product before they found product-market fit, which probably explains why hundreds of thousands of unsold Snap Spectacles are littering warehouses in China.
You know what product-market fit looks like. It’s when your products fly off the shelves faster than you can resupply them—it’s when you rapidly have to upgrade your servers and infrastructure to keep up with rising demands.
However, the metrics behind these scenarios aren’t always as obvious, especially when you’re in the thick of everything. Below, we’ll show you how to measure product-market fit and which metrics to prioritize.
You can measure product-market fit using a combination of quantitative and qualitative metrics. Your goal is to measure these metrics before you invest too heavily in your product.
Start with a minimum viable product (MVP). Put this product in front of your customers and see what they think.
Do they like it? Do they hate it? Will they buy it? Will they recommend it?
Analyze your customers and how they interact with your products:
Use your MVP to see if your product is worth scaling. If it has enough potential, you can scale the idea and launch your product to the general market. If it doesn’t, you might have to tweak your product or be willing to scrap it entirely.
Such is the life of a dedicated entrepreneur.
Let’s dig a bit deeper into the individual qualitative and quantitative metrics you can use to measure and achieve product-market fit.
Total addressable market (TAM) or service addressable market estimates the size of your target market. First, use this number to see if there’s a justification for introducing this solution to the market.
For example, if you release a product but can only sell it to a few thousand interested buyers, it might not be worth the investment.
Next, you can use TAM to better understand product-market fit. Determine what percentage of your TAM are current customers—if that number grows, you’re finding product-market fit.
Watch your revenue growth rate and signups. Are you quickly selling your MVPs? Or are they taking up space in storage?
Fast-growing sales could be a sign you’ve hit the mark, but it’s not the end-all-be-all metric.
Take a software-as-a-service (SaaS) solution. While you’d be happy to see rapid signup growth, you’d likely be more interested in long-term customer retention, acquisition cost, and lifetime value.
If customers sign up but quit a month or two later, those sales probably won’t mean much to your startup’s trajectory.
You don’t just want one-off buyers—you want customers that’ll stick with your products and services (even if there’s no monthly contract). Committed buyers will be more likely to buy additional products or future solutions your startup offers, and they’re also more likely to refer your products to family, friends, and colleagues.
Ideally, you want customers to stick around forever, but that’s not necessary to validate your product-market fit. Instead, find the number of months a customer needs to stick with your product (on average) to justify your cost per acquisition and increase the chances of them referring it to a friend.
Net Promoter Score (NPS) measures customer loyalty and satisfaction. It’s ultimately determined by one question:
“How likely are you to recommend this product to a friend or colleague?”
A high NPS score shows that your customers like your product and would readily recommend it. A low NPS score shows that your customers might be a bit on the fence about your product (or they might not like it at all).
It’s not a complete metric to measure product-market fit, but it’s definitely a powerful number to look at in conjunction with other relevant metrics.
Customer lifetime value (CLV) measures the total revenue you expect to make from a single customer. If you sell more expensive, long-lasting products (like a house or vehicle), you might only expect to make one sale per customer.
However, if you sell smaller goods or services (or monthly subscriptions), you want your customer to continue purchasing from you—increasing the CLV.
Use CLV to better understand your product-market fit. If customers stick with your products and services, it’s likely a good fit, and you can consider scaling your idea.
If customers aren’t providing high lifetime value, marketing costs might exceed the individual gain—and that’s where cost per acquisition comes in handy.
Cost per acquisition (or customer acquisition cost) measures the average price it takes to convert new customers. Expenses include advertising costs, time spent creating content, affiliate payouts, and sales compensation.
If it’s expensive to find and convert customers, you want to ensure they stick around long enough so that their CLV surpasses the cost per acquisition.
High growth in demand (that’s sustained) is a good indicator of product-market fit. Demand shows more intentional interest than something like impressions, shares, and likes. Measure demand with factors like:
These factors indicate your product is in demand, and you’ll likely need to scale to satisfy customer orders.
Activation measures your customer’s first impressions of your product. When new customers sign up for a free 7-day trial of your account, do they stop using it after a day, or do they immediately sign up for a paid account when their 7-day trial ends?
Poor activation rates might not indicate a lack of product-market fit—it might just mean you need to improve the onboarding experience or provide different pricing options. Consider revisiting your value proposition and how you articulate it to your target customer.
NPS measures how many people would recommend your product or service to friends or colleagues—referrals measure how many people actually recommend your product.
Track referrals to see if your customers share this product with their community. You might add an incentive to do so, such as credit with your company or a discounted monthly rate.
Regardless—if customers are willing to share it, there’s a good chance it’s catching on with your target customers.
Do you see increased traffic to your product, pricing, or specific landing pages? Traffic is just an entry-level measure—you want to see actions like signups, account activations, and credit card payments.
However, it’s a good metric to watch in the early stages to see if your product is catching on with the market.
Use your traffic numbers in relation to conversion rates to determine the effectiveness of your marketing. Your product-market fit might be perfectly fine—you might just need to update your landing page or improve the copywriting and messaging.
Is your product getting the attention of industry experts? PR and press coverage could grant you higher awareness and exposure, but it can be a bit more of a double-edged sword.
Take Kanoa Wireless Headphones, for example. YouTube technology reviewer Cody Crouch (aka, iTwea4kz) got his hands on the initial version of the headphones and wrote a scathing review of its issues. Four days later, Kanoa ceased operations and never completed the product.
Look for press coverage, but wait until your product is ready to shine.
Influencers have a lot of sway in their communities. What do they have to say about your product or service? If they’re not liking their experience, they’ll likely share it with their following—and that’s going to make it harder for your startup to get traction.
Gather an interest group with members of your target market to hear what they have to say about initial experiences with your product. What do they like? What do they dislike? What would they like to change?
Use these user interviews and market research to make improvements to your product and your marketing materials. Positive feedback doesn’t guarantee product-market fit, but it could let you know if you’re heading in the right direction.
Look at your blog post and YouTube video comments to see the community’s initial thoughts. You’ll likely need to filter through some trolling (don’t take any of that personally) to find the hidden gems. Analyze the feedback and see if you notice any trends.
Don’t be afraid to interact with these comments to try and collect more data. If someone has a problem, ask them what they’d like to see differently. If someone is excited about a feature, ask them why and get to the root of it.
What do initial reviews of your product look like? Don’t fixate on the stars or the numbers—look at the feedback. See what your customer base likes and dislikes, and make the changes early on to improve your product or service.
Poor product reviews from the get-go don’t mean your product is doomed to failure. It just means you might need to make additional optimizations before you scale.
For example, look at No Man’s Sky. This video game initially launched in 2016, and it was one of the all-time biggest disappointments in gaming. It lacked promised features, the graphics were spotty, and the overall experience was lackluster—but the development team at Hello Games didn’t tuck their tails and quit.
The developers heard the community’s feedback and made much-needed updates to the game. Fast forward a few years later, and No Man’s Sky is acclaimed as the biggest comeback in video game history.
Once you reach product-market fit, it’s time to capitalize on the success and take off.
DigitalOcean provides the cloud hosting you need every step of the way. Whether you’re in the ideation, MVP, or growth stage, we have the scale you need to take your product to its fullest potential.
We make it easy to take care of your cloud infrastructure so that you can spend less time managing trivial to-dos and more time on your business—the way it should be.
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