While thinking about the different products that gained huge popularity despite a pretty simple business model and value proposition, I thought about Spotify - the favorite for case studies of product management. Back in the early 2000s, right before Spotify came out, it was a pretty tough time for the music industry with the collapse of Napster and other Peer-to-peer file-sharing networks. Album sales were falling as users were turning to online music (often illegal).
Daniel Ek, the co-founder of Spotify, at the time, had a simple business idea in mind - Charging the willing users a small fee for legal and easy availability of music. A very simple value proposition. What then turned Spotify into such a huge success? It was the existence of a large market of music lovers who were willing to pay a small amount to listen to their favorite songs without any issue of legality. The exact offering of Spotify was what this particular market was looking for. The product-market fit was spot on, and excellent.
That brings us, to the topic of this blog, what exactly is Product-Market Fit?
Product-market fit is often defined as an intersection of Viability, Desirability, and Feasibility, something like the diagram above. That is one of the better but more complicated definitions of it.
Personally, for me, what explains product-market fit better is this matrix:
In simple terms, it refers to the placement of a particular product in a particular market where it is capable of satisfying strong market demand. Hence, till the time, your customers do not start displaying high levels of loyalty for your product, you have not yet reached the product-market fit. Now, although, that may seem pretty obvious, this is where most of the start-ups fail. In fact, it is so essential that when you look at products that have replaced competitors in the market, they are always who had a better product-market fit. That brings us to an unconventional conclusion, that in product space, first to market seldom matters. It is always the first to product-market fit that decides winners in the long run.
So, which amongst the team, product, and market has the biggest correlation to the success of a product? Although all of us would be inclined to give it to the team, a great team, a brilliant product, and an impeccable business model will all fail terribly when there is no actual market for the product.
As Marc Andreesen, a serial entrepreneur writes in one of his blogs for Stanford, “
"In a terrible market, you can have the best product in the world and an absolutely killer team, and it doesn’t matter – You’re going to fail. Markets that don’t exist don’t care how smart you are.”
More than a great team or a great product, it is about getting to that product-market fit, that decides the success of a product.
Andy Rachleff’s Law of Start-up Success puts it across brilliantly:
“When a great team meets a lousy market, market wins. When a lousy team meets a great market, the market wins. When a great team meets a great market, something special happens.”
When we understand the importance of product-market fit, that is when the real question kicks.
How do you actually develop a product-market fit?
And the answer when you look at a range of products seems pretty simple. Find your perfect customers and find their NEEDS/PROBLEMS. Product managers or founders have a tendency to hold on to their proposed solutions tighter than they hold on to the problems/needs of the customer. Never misjudge the need/problem basis your own bias.
Take, for example, another favorite of PMs – Airbnb. A luxury room with a scenic view was never the actual need of the customer. It might have been an added feature, a nice to have, but never the actual need. The actual need was “A place to sleep when hotels were fully booked.” The founders of Airbnb understood this NEED and they built a simple website with pictures of their own apartment as an MVP (Next blog on MVPs, subscribe to get it in your inbox!). This simple product had an excellent market fit, and it provided them with the validated learning they needed about their customers.
There are six particular steps to finding a product-market fit, and all of them, at different stages of the product management process, carry equal importance.
1. Know your customer:
a. Always think like the user of the product. In fact, some of the best products like Facebook, Twitter, Slack, etc. were scaled by founders who were the original and first users of their own products. It provides a genuine user's perspective which is priceless for a product manager.
b. Create user personas first. Meet real people, and understand what your perfect customer looks like. Go back to your user persona and refine it.
c. Always run customer interviews with an open mind. Never point the customer in a direction you would want them to go. Ask them about problems, and then ask again, for the underlying problems. Keep digging till you find the actual pain point. Listen to your users for their problems, never for the solutions.
d. When dealing with B2B products, always separate the actual users of the product from the customers.
2. Calculate your market size:
a. The three common metrics for calculating a market size are Total Addressable Market, Serviceable Available Market, and Serviceable Obtainable Market
b. It is always better to use the bottom-up approach for calculating your product market size. It starts with a single user and provides a more realistic overview of the size of the market.
3. Competition Analysis:
a. Understand their offerings. How are they addressing your target market?
b. Read reviews about the competitors. Both their negative and positive reviews will give you a picture of what the user actually expects
4. Value Proposition and Pricing:
a. What is the core offering of your product? It has to be strategically differentiated and compelling with a WHY, Why the customers need your product. The Golden Circle framework of Simon Sinek is a great tool for this.
b. How is your product different from the competitors and what they cannot offer?
c. Define your pricing strategy – Value-based and Competitive pricing are two of the best pricing strategies for a new product in case of a new market and an existing market, respectively.
5. A Strong CAS (Customer Acquisition Strategy):
a. CAS has to be clearly outlined with an outline of your sales funnel at every stage - Awareness, Interest, Decision, Action, and Loyalty.
b. Calculate your Customer Acquisition Cost and optimize it for a sustainable business
6. Measuring Effective Success:
a. The KPIs for measuring success should be differentiated basis the stage of the product.
b. For a product in the stage of introduction like MVP, the best metrics to measure are Acquisition and Engagement Metrics e.g. Customer Acquisition Cost, Traffic, Customer Satisfaction, etc.
c. For a product in the growth stage, you should track the Monetization Metrics like ROI, Net profit, Revenue growth rate, etc.
d. For a product in maturity, you should focus on Loyalty Metrics like Retention Rate and Net Promoter Score.
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