Viewpoint






2021-02-15

THIS IS PRODUCT-MARKET FIT

What is Product Market-Fit?


Recently, the term Product-Market Fit attracted much attention in the startup community. However, the concept itself of matching a product to a market dates to the earliest dawns of trade and business, where traders tried to match the demands of the markets (the buyers) they pursued to serve. This is something that has been going on since then in all free-market economies and has been a central concept for everyone trying to do business. However, the recent interest in the concept in the startup community is likely connected to (1) the fact that more than 40% of startups fail because of “No market need”, and (2) how Venture Capitalists (VCs) evaluate potential investees for their Product-Market Fit. With this said, let us take a closer look at what Product-Market Fit is, why it is important, and how Product-Market Fit can be evaluated to understand how well or poor a product scores in terms of meeting the wishes and requirements of its target market.


This is Product Market-Fit


If your product meets the requirements and wishes of your target market well, and your customers are happy with having had purchased your product – congratulations, you have most likely achieved a good Product-Market Fit for what you sell. In other words, your product successfully addresses your target customers’ needs. In such a situation, your product most likely has been correctly designed, produced and delivered for and to those that you have set out to service. If on the other hand your product would not be well received by your target customers (they do not buy it, or the purchase is very limited), no matter how much marketing and advertisements you throw at your market, then most likely your product scores low on the Product-Market Fit scale. Worth pointing out here is that Product-Market Fit is not binary, meaning it's not either good or bad, but tends to be a scale ranging from good (high) to bad (low). Where a product falls on the scale depends on many different factors. This also suggests that with sufficient clarity, a company can address and improve the individual rating-components to achieve an improved Product-Market Fit.


What is also important to remember is that Product-Market Fit is not isolated to a product per se, but also include the business’ and product’s business model, delivery and post-service (if relevant) of the product. As such it is important to view a product from a customer’s perspective with everything that this includes gaining a more correct Product-Market Fit view. A product might have been correctly designed for its target customers, but if the business model or post-purchase service falls below expectations or is incompatible with the market and the product sold, Product-Market Fit is likely to suffer.


The Product Market-Fit Pyramid


To better understand the relation between a product and its target market when looking at the Product-Market Fit the Product-Market Pyramid is frequently referred to in the Product Management sphere. Although originating from the world of startups, software development and building of new digital products, the Product-Market Pyramid serve well to illustrate how a Product compare to the demands, needs and requirements of its target customers. As you can see from the Product-Market Pyramid, without going into the details of it, it encompasses various key-elements to pit a product’s Value Proposition against the selected target customer’s needs.

Source: https://leanstartup.co/

Why Product Market-Fit is Important


From a business and sales-perspective, having a good Product-Market Fit makes sales so much easier compared to trying to sell a product to a market that is not willing to buy what you sell. As sales and revenue lay the foundation of growth, achieving a high Product-Market Fit is essential and, in many cases, critical for a business and its future.


From an innovation and product development perspective, achieving a high Product-Market Fit tells not only that a new product has successfully been designed, planned and developed; but also, that the company can now shift its focus to production, marketing and ultimately revenue and profit generation based on the product. The choice that a company face in determining whether to launch and commercialize a newly developed product or to spend additional time and investments to refine it further, tends to be both highly important and also risky if there is not a clear picture of the specific requirements and wishes of the market for which the product has been built to serve. A product that is not good enough, or fails in a critical aspect, can lead to serious consequences for a business. On the other hand, waiting to commercialize a new product to refine it further raises the risk for a business to lose its window of opportunity, delays revenue generation and ultimately risks the company’s and its investor’s capital. In this type of situation, deciding whether to launch or refine a new product further, knowing how well or poor the product scores in terms of Product-Market Fit is highly valuable.


From an investment perspective, a high Product-Market Fit is important as it tells much about the growth and competitive strength and potential of a company. A company in need of capital for product development (to raise its Product-Market Fit) is traditionally a far riskier investment compared to a company that needs capital to scale sales, production and delivery of a product that has achieved a high Product-Market Fit.


Evaluating Product-Market Fit


To date there is not a universal method to evaluate Product-Market Fit. There are several ways, ranging from asking customers a single question of what they think of a product to conducting more exhaustive studies and research to uncover, pinpoint and value specific needs, requirements, product features and product characteristics. Many of the methods build on proven market research tools and strategies, and the choice of which method to use depends on what outcome, insight and conclusion a business wishes to draw. However, a prerequisite of all methods is access to and dialogue with the customers, as well as having the method and tools to collect, store and transform answers (data) into conclusions and insights.



Longevity - Nothing is Forever


Industries, markets and customer preferences change over time, ultimately impacting a product’s Product-Market Fit. Nothing is forever. Kodak had an impressive Product-Market Fit and global recognition for many years with their camera and film products, but is today - after technology disruptions, reconstructions and bankruptcies - virtually unknown except to a few in need of niche products. Another example is Nokia, which had tremendous success (high Product-Market Fit) with their mobile phones in the late 1990s and early 2000s; but who has since then, not able to follow the consumer technology preferences (a continually receding Product-Market Fit scoring) largely withdrawn its mobile phone business. With this said, Product-Market Fit is often fleeting, especially in the technology sector, confirming that products tend to need continual updating, reinforcement and investments to stay relevant to their target market.



Benefits of a Product Market-Fit Evaluation


Doing a Product-Market Fit evaluation can be well worth the time, effort and investment as the outcome could tell how well-positioned a business is to promote and sell its products and services to its target market. Also, an evaluation can help a business answer questions such as: Is more time and capital needed to develop and refine our product, or can we commercialize it now with what we have? How well does our product meet our target customer’s needs, preferences and requirements? Of all the features and characteristics our product offers, which need further development?


With this said, a Product-Market Fit evaluation can help a business to clarify and define a product roadmap for further development, validate target customer groups, identify strong and weak spots of a product or value proposition, tell how competitive a business stands in its market, and can tell if a company can start to shift its attention and resources from product development to production, sales and delivery.



Product Market-Fit From an Investor's Perspective


A business in need of capital to develop a product (gain Product-Market Fit) is one thing. Another thing is helping a company to scale its business of a product with a proven and high Product-Market Fit. Investing in the former is typically far riskier than investing in the latter, which also explains why the latter is likely to find it easier to raise the needed capital and do so at aa more favorable price (better valuation).


Another dimension for an investor to look at is how efficient a product (solution) addresses and solves its target customers’ needs. If the target customer group needs e.g. a transportation service to go from point A to point B, then perhaps providing a taxi service will be sufficient and a better capital use compared to a solution based on providing a helicopter service? A product that under-delivers will not easily sell, but a product delivering more features than necessary is often fraught with capital inefficiencies and prohibitive pricing.


Looking at Product-Market Fit from a Venture Capital (VC) perspective, a good Product-Market Fit might not be “good enough”. The reason for this is market potential and opportunities for scaling efficiency. Selling hot-cocoa to Eskimos might be a business with an excellent Product-Market Fit, but from a VC perspective, it would be better to invest the capital in a business selling ice-cream in Brazil due to potential market size (183,000 Eskimos vs. +210 million Brazilians) and easiness of scaling up the business.



Conclusions


Product-Market Fit has always been, and remains, a key metric determining how well a company can serve its target customers and succeed in doing business. A Product-Market Fit evaluation can help a business understand if its product is ready for its target market or not, and (if sufficiently detailed) tell which features and characteristics that need improvement for the product to achieve a better Product-Market Fit. Product-Market Fit evaluations rely to large extents on the methods and tools of traditional market research and can range in scope from simple to complex. However, irrelevant of complexity, a prerequisite is contact with the target customers and end-users to gain direct feedback. While the simple evaluations can answer if a market appreciates a product or not, a more complex evaluation can tell what it will take to make a product score a better Product-Market Fit and potentially serve as the foundation for a product road map. From an investment decision, a Product-Market Fit evaluation is highly valuable as it can help to explain risks, strategies and valuation foundations.


In future articles I will cover more of the topic of how to evaluate Product-Market Fit. Until then, stay tuned and work on making your products amazing. :)