Bengaluru-based bike rental startup Tazzo Technologies had to shut down four years after it commenced its operations in 2014, despite receiving seed funding of Rs 1.5 crores to scale its operation. The reason for this collapse is the organisation’s inability to prove product market fit, following which it couldn’t raise more money to become profitable. Hundreds of startups have witnessed a similar fate for the same reason.
According to the CB Insights report, poor product market fit is the second topmost cause, after lacking capital, that is responsible for a failed startup. In this blog post, we will discuss what the term suggests, its metrics, and how a suitable fit can be found.
What is Product Market Fit?
Just thinking that you have built a cutting-edge product is not enough. Its success depends on whether it can address customer pain points effectively so that they are ready to pay for it recurrently, which can eventually grow your business.
Product market fit is a make-or-break factor for any startup. Moreover, it is often a precondition to secure early-stage funding from investors, giving them an estimate of the size of the market opportunity for your business.
Finding the Suitable Product Market Fit
There is no proven formula for identifying product market fit. However, you may consider this framework below to increase the odds of success.
1. Determine the Target Audience
Focusing on the specific segment of your potential customer base will offer an in-depth idea about your potential customers and their common characteristics. You can identify your target audience based on the following:
- Demographics (age, gender, income, education, gender)
- Geographics (location, climate)
- Behavior (hobbies, purchasing style, mobile and social media usage)
- Psychographics (values, beliefs, attitude, pain points, budget)
You must conduct in-depth market research through customer surveys, questionnaires, focus groups, or other methods to define your target audience.
2. Establish a Value Proposition
The value proposition is another critical consideration for product market fit, and it is the promise of value you will deliver to your customers via the products. Simply put, it decides why customers would prefer your product over a competitor's.
You need to assess your product’s value proposition in terms of its features, benefits, use cases, and differentiators. You also need to ascertain how you can deliver this value proposition to customers and the way they will experience or acquire it.
For example, when Uber commenced its business, it established strong value propositions for customers and drivers. Customers can get a cab more quickly than a private taxi at an affordable rate, whereas drivers can earn an additional source of income and work according to their time preference.
3. Choose a Single Market Segment
You may want to start selling your product to different market segments and industries, but this approach could be a doomsday for your startup. Don’t forget that you also have a limited budget; therefore, you should direct it where your product needs it the most.
The right strategy to find the proper product-market fit is to discover a niche for your product. You should focus on a specific benefit, that is, the unique selling proposition of your product. A single vertical will establish you as an industry expert.
4. Validate Minimum Viable Product (MVP)
According to 14 international accelerators, inadequate testing is the number one reason for startup failure. Greg Wright, the founder of startup competition platform HATCH pitch, explains inadequate testing as a ‘failure to test and validate hypotheses and assumptions’.
Hence, when your MVP prototype is ready, you must test it in the market at different price points, distribution channels, and messaging. Ask customers to use your products and compare your products against competitors’ products. Pay attention to customer feedback, especially complaints. Be ready to iterate the product multiple times and improvise its features, functionality, UX design, etc.
Key Metrics to Measure Product Market Fit
There is no unique formula to measure product market fit. However, Sean Ellis, the author of the best-selling book ‘Hacking Growth’ believes that the magic number is 40% based on a benchmark of nearly 100 startups. This rule suggests that if at least 40% of customers would be disappointed if they could no longer use your product, you have found the product market fit.
However, you should not exclusively rely on this rule. There are various other metrics you should measure to find the right fit. Such as:
- Growth Rate: How many customers do you attract?
- Churn Rate: Do your customers want to stay with you?
- Net Promoter Score (NPS): How much do customers refer your products to others?
- Customer Lifetime Value (CLV): How much average profit do you get from every customer during their total product usage lifetime?
- Bounce Rate: What percentage of users visit your product webpage and leave before taking action?
Establishing product market fit is a challenging and time-consuming task for any startup. However, turning your product into a profitable, scalable, and investable business model is crucial.
Scalix is an integrated platform for founders to access vital components of business-building, like capital, community, and customers. With our personalized guidance from startup mentors and industry experts, we can help you find the right product-market fit to build a sustainable business in the long run.
Contact us today!