Identifying that you have product-market fit is essential if you don’t want to sink time and money into a venture that the market doesn’t want, or isn’t ready for right now. Once you have product-market fit – you have the confirmed business economics need for accurate budgeting and forecasting, or potentially raising venture capital.
What is a product-market fit?
Product-market fit is the measure of how successful your product or service offering is within the market you’re selling to.
When you have product-market fit, it means customers are buying, using and telling their family and friends about you in large enough volumes to sustain and grow the business’s operational expenses and profits.
There is a growing demand for your offering and your brand, and you are achieving exponential organic growth. In other words, your customers value your product so much they’re raving about it to their friends, and their friends are also buying.
The better you understand your customers and the problem your product solves, and therefore the value you’re adding to their lives, the more likely you are to achieve product-market fit.
Why is product-market fit important?
Product-market fit is especially important because until you have it, you don’t know whether your product or service solves a real problem and if the business economics can sustain your operation and allow for adequate profits and growth.
You might have identified a need in the market. Developed a solution. Found potential customers… But if customers aren’t willing to pay enough to generate the cash-flow you need, your product may not be a good fit for the market.
Ultimately, it’s important to identify that you have product-market fit as early as possible so you don’t sink time and money into a venture that the market doesn’t want, or isn’t ready for right now. Once you have product-market fit – you have the confirmed business economics need for accurate budgeting and forecasting, or potentially raising venture capital.
And when it comes to the startups… “Startups should spend the first six to 12 months building a great product or service that people love, rather than chasing investors. When the time comes to engage investors, you will be meeting them from a position of strength. This makes all the difference.” – Aileen Lee
How do you know if you have product-market fit?
You’ll know you’ve achieved product-market fit when your product or service sells itself, and you don’t need to use paid advertising to grow sales. Your offering solves a real need in the market, it is highly sort-after, there is an established demand, your pricing represents good value, and essentially, sales grow organically via word of mouth.
How to identify an opportunity in the market?
- Identity a problem or need in the market and confirm there is demand for a solution. Who the customer (the market) is. That the market values the solution highly enough they’re willing to pay for it and have enough money to pay for it. And that the market is big enough to sustain your business operations, profits and future growth.
- Define your value proposition and unique selling points. Why will the market buy YOUR solution?
- Pitch your value proposition to 100 people to gauge their response. If the consensus is that the market is big enough and they’ll pay for your product – develop an MVP.
- Develop a minimal viable product (MVP) that is good enough to demonstrate your offering and use to confirm if customers like and would pay for your solution. Keep in mind, none of the biggest companies the world we all use every day (Facebook, Instagram, Amazon, Netflix etc) are the same as when they first launched – they all pivoted as a response to customer demand.
- Test your MVP. Offer it for free within a small closed test group at first for the sake of getting it out to as many people as possible and getting feedback, fast. That doesn’t mean it’ll be free forever – feedback is your payment at this stage. Remembering one single piece of pivotal feedback could be the difference between taking your idea to the bank, or going bust.
- Determine if there is a market for your product. The size. And what they’re willing to pay, then run your numbers based on estimated production costs. Ask testers what they’d pay. Ask if they’d tell their friends. Or how many people they know that might use it. Nothing is a given in life, but if the numbers stack up, the business is economical and profitable, and the market is big enough and willing to pay for your product, then you may well have identified an opportunity in the market… BUT, don’t count your chickens just yet.
- The most important thing during this exploration stage is to look for signs of organic exponential growth. Basically this means your solution must be so good that for every customer that buys it, they would naturally tell two or more of their friends or family.
What is exponential organic growth?
Exponential growth is usually associated with the growth of a population, but in the business sense, means the growth of your customer base.
Exponential means it isn’t linear, as in, you aren’t buying one customer and only getting one sale. The exponential aspect means your offering is so good you get one customer and they tell two or more friends, and each of those tell two friends, and each of those tell two friends, and so on…
Organic in a marketing sense means unpaid, as in, your growth isn’t reliant solely on paid advertising or incentives. Sure, you can introduce talk triggers and incentives to create word of mouth and get people talking, and these might have a cost to them, but the point is that growth isn’t limited by what you spend on marketing. The network effect you create fuels unlimited growth, until you’ve saturated the market and you hold a substantial, if not the lion’s share, of the marketplace.
“Consider the social proof of a line of people standing behind a velvet rope, waiting to get into a club. The line makes most people walking by want to find out what’s worth the wait. The digital equivalent of the velvet rope helped build viral growth for initially invite-only launches like Gmail, Gilt Groupe, Spotify, and Turntable.fm.” – Aileen Lee
How do you introduce a new product to the market?
Right about now – when you’re about to launch a new product or service from scratch – is when you and your bank account appreciate the effort you’ve put into identifying that you have real product-market fit. Because now you know that for every $ABC you put into marketing, you should get $XYZ in return… or thereabouts.
Knowing your numbers also reduces risk. “Risk comes from not knowing what you’re doing,” legendary investor Warren Buffet says. “If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on.”
How much does it cost to bring a product to market?
How long is a piece of string? It really depends on your product. Here’s the thing… the better your product-market fit, the cheaper it is for you to bring your product to market. But you’ve got to start somewhere, so when you’re putting together your first budget, you should be targeting no more than 15-20% of your gross sales going toward marketing, depending on your margins of course.
When you consider marketplaces like Ebay, Amazon and Uber Eats charge retailers (give or take) 15-30% of sales… you can be confident targeting 20% cost of revenue, or a 5x return on your total marketing dollars, should give you plenty of advertising reach without wasting precious capital.
You might split that 20% into something like, 10% for ad spend, 5% for staff and 5% for events, incentives or promotions (more on this later). And if your margins don’t allow for this level of marketing budget, you might need to revisit your other business expenses and ask yourself if your business proposition is actually economical.
How to get more people to buy your product
This is the million dollar question, isn’t it? The simplest answer is to increase your market share by providing more value than your competitors, and communicate that value (either yourself, via influencers or advocates) so the market is aware of it… and that leads to more sales.
There are four key ways to generate more sales: increasing your number of customers, increasing average transaction size, increasing the frequency of transactions per customer, and raising your prices. Or a combination of the above.
What is market share and how do you grow your market share?
Your market share is the size of your slice of the pie, or more specifically, the percent of total sales in an industry generated by your business. You can work out your market share by dividing your sales by the total sales of the industry you operate in, over a given period.
The higher your market share, the more people are aware of your brand, so growing your market share and sales is generally easier (or at least more economical) for the leaders in the industry And that’s the secret; achieve product-market fit + grow your brand awareness = grow your market share.
10 ways to increase market share
Growing your market share is easier when you invest in two key areas – innovation and marketing.
- Innovate your offering so that your value proposition provides more value to your customers, and is truly unique to you
- Design ‘talk triggers’ into your product offering and customer service to encourage customers to talk about your brand with their friends and family
- Grow existing customer relationships by reselling, cross selling and upselling
- Introduce a loyalty rewards program
- Bundle products or lower prices
- Build strategic alliances and partnerships
- Advertise your USPs to people looking for those USPs, but instead of talking about yourself or your product, show them how much value they’re getting
- Work with influencers who can advocate for your product
- Increase product quality
- Update your market position to better align with your customer needs
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