I’ve been asked twice in the last week, “how do you know when you have market fit?” Despite the amount of information readily available online and in books on this subject, it’s very much an appropriate question for entrepreneurs and product marketing leaders to ask themselves and their teams. Ever elusive, you need it most when you don’t have it, and having it doesn’t guarantee your success.
The Short Answer
You already know if you have product/market fit.
A Little Background
Although “product/market fit” was coined a dozen years ago by Marc Andreesen but the concept is as old as commerce. In the Lean Product Playbook, Dan Olsen said it “means that your product meets real customer needs and does so in a way that is better than the alternatives.” Advice I heard early on in my career, “find a need and fill it,” which traces back to Ruth Stafford Peale, offers stark simplicity. This phrase charged me with a lasting enthusiasm for improvement that I still carry with me today.
Aspiring entrepreneurs know that in our mature, digitally-accelerated, international marketplace, finding a novel need is rare. So many great minds and companies have already scoured the world to uncover and exploit existing needs. The explorer may then turn towards the intersections of larger moving forces that churn up fresh needs as they move to solve larger, orthogonal needs. The investigator may look for problems, as issues that people have today but have yet to draw the firm conclusion: the lack of resolution is in fact a need! Clayton Christensen’s “Jobs to Be Done” theory offers another approach to identifying needs. Reframed as a job, the question becomes “what job are they hiring for?” So then, understanding the job—the intention behind consumer actions—is richer ground still.
The Long Answer
The question remains: “what does market fit look like?” Outside of theory, the answer hoped for is innately personal with peculiar timing. Perhaps better asked, “how do we know when we’ve found it?” Or, more naively, “what exactly are we looking for?” My immediate response when last asked this question was to rub my thumb and first two fingers together in the money gesture. Tongue-in-cheek, but yes, money fuels the business! And customers aren’t going to part ways with their money unless you’re offering something they think they like. But to truly answer this question, you do need to get specific to the business and the market. This is a good place to apply leading and lagging indicators.
Applied correctly to your overall set of key performance indicators (KPIs), the concepts of leading and lagging help you to understand what can be known before (leading) and after (lagging) specific events or changes to your efforts are applied to your market. For example, a leading indicator could be organic website traffic, while a lagging indicator is your NPS score—something you don’t get until after you land the customer and they have experience with your offering. If you’re looking at lagging indicators as a way to forecast your market fit, prepare to be disappointed with out-of-date metrics!
To answer market fit objectively you’ll need to explore leading indicators of product/market fitness for your offering, and then refine that down to as few as possible that reflect your efforts and have a strong tie to your revenue metrics (e.g. CAC, conversion rate, deal size and revenue). Examples of leading indicators could be traffic, referrals, faster-than-average deal lengths, positive customer reviews, or high response rates in customer discovery efforts. As you progress you can improve your confidence in each indicator with studied analysis. And remember the old axiom: correlation isn’t always causation! Over time you can plug in your lagging indicators as sales cycles, seasonality and repeatability bear out.
To answer market subjectively requires a more ethnographic approach. Continuous, tight feedback loops with prospective customers, market influencers and your customer advisory board is key to not only scoping your MVP but delivering competitive and innovate value year-after-year. Establish personas for your users, purchase decision makers and if B2B/B2E, other stakeholders within your customer’s organizations. Your ability to understand their needs—their job to be done—accurately and quickly, and how your offering fills those needs, will be a microcosm of your company’s overall success.
Combine your best performance indicators with methodical customer discovery to weave a framework upon which to test your assumptions, make your bets and mitigate risk. Think scientific method here: questioning, hypothesizing, predicting, testing, and analysis. In that flow, when do you know that your hypothesis is correct? From the beginning! The process refines your understanding and reduces your doubt.