29 Apr 2022
Product-market fit: A complete framework to develop it
A product-market fit is to supply a product in the market that meets target customer demands. However, such a task is difficult, especially in today's market, where new products are released daily.
How will you produce and market a product that will reshape the market, overcome the competition, and turn the audience to the product's demand?
The solution can be found in the example of "Uber."
There were taxi companies long before "Uber" existed, and customers used them to get to their destinations. However, consumer pain points were numerous because the service was usually sluggish and expensive.
Nonetheless, they had no choice but to hire them.
So, what did "Uber" actually do regarding the product-market fit?
The company's CEO had heard and investigated the complaints about taxis' high prices and long wait times and ran a service with various cars and private drivers.
In other words, "Uber" provides a quick and convenient service to customers, with more drivers in all of the city's central areas. This was an excellent market to run a service, and now it is one of the world's must-have businesses.
Potential customers appreciate that "Uber" solved their problems, that it is often a more trusted and cost-effective service than hiring a taxi, so they started employing a "Uber" car.
These three conclusions all point to the existence of a successful product-market fit:
- Large groups of customers frequently purchase our company's product and use it to solve their pain points. This is a highly important milestone and why your business model has to hire a highly experienced customer support staff.
- Our product offers consumers good value for money.
- Customers are delighted that they chose us.
This company's example and success do not fully represent the difficulties of carrying a product-market fit. But it is a given that approximately 90% of startup businesses failed in 2019. The reason behind startups fail is their unplanned entry into the market and the lack of or incorrect design of a product-market fit.
As a result, we have two distinct categories of businesses. Money is piling up, and investment bankers are staking out the company for those who have achieved this ideal state. Companies that haven't achieved product-market fit, on the other hand, can sense it because word of mouth isn't spreading, deals aren't closing, and press reviews aren't glowing.
Two leading indicators determine the success of a product-market fit. The first is the 40 percent rule, and the second is the division of Customer Acquisition Cost (CAC) and Lifetime Value (LTV).
The rule of 40% and the value proposition
According to Sean Ellis (founder of Dropbox), the most manageable and effective way to calculate your product-market fit is to conduct PMF research. (Survey on Product-Market Fit)
The only question that monopolizes the survey is. "How would you feel if you didn't use our product anymore?" The participant must respond on a scale of 1 to 4.
- The first scale means "Very disappointed,"
- The second one means "Somewhat disappointed,"
- The third one is "Not disappointed (it isn't that helpful),"
- And the last, fourth one indicates "N / A or I no longer use it."
When 40% or more of your existing users respond that they are highly dissatisfied on the first scale, you have achieved product-market fit (Value proposition).
You can exceed the 40% threshold with some modifications and changes when the percentage is between 25–40%. However, a recovery rate of less than 25% is more demanding and challenging, as it means that changes must be made quickly, the entire idea must be changed, or the product's release must be canceled.
The index that divides the LTV ratio by the CAC ratio is the second indicator of successful product-market fit. What is the meaning of this index? This metric demonstrates your ability to spend less money to get closer to and promote customers than when they buy your service or product.
The Lifetime Value (LTV) of your customer is more important than the Customer Acquisition Cost (CAC).
The ideal result for this index is a 3: 1 ratio, meaning that the Lifetime Value is three times higher than the cost of acquiring/approaching a customer.
What are the specific reasons some businesses fail to find a product-market fit?
1. Businesses do not assess their performance from the start. Instead, they are impatient to see immediate results and act quickly to achieve them. In a nutshell, they don't use a specific strategy.
2. Several companies are solely focused on developing their program, product, or service, with no interest in marketing it. What format will it be presented in? How will the potential customers be contacted? How can we find product-market fit?
3. The key to a successful product-market fit is communication. For example, communicating with current customers, announcing your product to the general public, or even sharing it to get feedback and impressions after testing it. Some businesses do not have the time to run a test like this.
4. In their attempt to create a product, some companies make one that is deficient and has a variety of flaws, then promote it. So the product market will luck in profitability or usability for the customers.
This process is known as the "Shipping Feature." It refers to a company's attempt to sell a product based solely on the consumer's use. Unfortunately, this has disastrous consequences, as customers no longer prefer our company due to their frustration.
On the other hand, many startups can find the ideal product-market fit, but they succumb to the temptation to expand the sales team at the first sign of revenue traction.
Even so, there's always the risk that this early traction is coming from a small group of early adopters rather than the entire market.
We looked at why some businesses failed to process the previous section's product-model fit. Now it's time to see how a company can achieve a market fit and achieve incredible results.
What is causing this? By following a detailed framework that consists of five steps. It would be best to stick to this framework from the start of the launch until you have a consistent percentage of over 40%.
1) Model the industry.
This step is easily identifiable, so it's a good time to revisit and modify your original concept. It's also the best time to spot any errors or changes that need to be made.
It's a great idea to use an appropriate system to make this whole process work, as it will allow you to see an overall picture of your thoughts and the transformations you want to control.
This first step includes digital boxes where you can write what you think or hope will happen after the launch. Then, as time goes on, you can remodel those boxes based on customer conversations and mentions.
"Lean Canvas" is the best solution for categorizing your ideas by filling in the boxes.
Fill in the blanks by answering the following questions:
1) Consumer Features: Who is the target market for your product?
2) Transmission pipelines: What is the best way to contact him? Should you spend a lot of money or time to get him?
3) Situation: How many people are affected by the issue you want to address? How concerned are they about finding a solution? Is it worthwhile to put forth the effort to find an answer?
4) Unique Value Proposition: Where does it outperform your competitors? What are your plans for resolving the problem?
5) Revenue vs. Cost: How much revenue and expense do you anticipate? How much would someone be willing to pay for your product? How much would he spend if he had to buy something new?
2) Validation of the Market fit
It's now time to assess your product, putting yourself in your customers' shoes. Consider whether they will buy it, at what price, if they will recommend it to others, and if your product is within their budget. Develop a whole product market plan using the above information.
You must honestly respond to all of the above without being enchanted by your idea or thinking selfishly. Many company failures and bankruptcies are caused by the insincerity of those in charge of this step.
Arrogance and excessive belief in a statement without considering whether it is feasible to attract an audience is another factor that leads to failure.
So, what are your options?
Create a website where you can describe and present your product in detail. Then, study the results of digital ads on Google and social media (Facebook, Instagram, LinkedIn).
How many people will be able to see the advertisement? How many people are going to click? How many people are going to look for more?
This stage is a great way to figure out how much impact the product has and whether it's essential in the market. So, to reach clear conclusions, don't forget to update your page and run ads regularly.
3) Client consultations
You converse with people who interact with your site and, in particular, with people who have contacted you at this stage. Make a group of 5-10 people with whom you can speak about the product and ask open-ended questions.
Closed-ended questions should be avoided because they can lead to embarrassment and a thick atmosphere in the interview.
Inquire about how they came across the product. What kind of solution does it provide for them? How much would they be willing to pay for it? Would they tell their friends about it?
Please pay close attention to their observations and learn from them. The more interviews you conduct, the more feedback and improvements you will receive, which will help you better prepare for the official launch and product-market fit.
To-do list for the interview:
• Pay more attention to what you're hearing than what you're saying.
• Don't sell anything
• Obtain accurate information and explanations
4) Product Development & Customer Acquisition
Allow time for the product's development as well as the larger concept. The faster you design and build a product, the more likely the result will not meet everyone's expectations.
So, as a first step, ask your customers for feedback and try to invest in your product. Then, create the minor viable product possible, which is enough to give your customers a taste of the solution you promise.
This strategy will save money and time (if the product is rejected) (you will present the final version faster to customers). It's time to build the product now that you've received feedback, and we wish you luck on the market.
5) Analytical Results
The market's time has arrived. However, don't think your search for product-market fit is over. It's a never-ending process with numerous roadblocks along the way.
Assume you have many website subscribers, some of whom have purchased your product. However, the most critical natural question is how it will be used.
After releasing your product, it's best to start using the "Pirate Metrics" (AARRR) created by 500 Startups, Dave McClure.
This framework will help you understand the product's flaws, process difficulties, and why customers give up. You can, for example, look for bugs on your site or see if one approach is more complex than the other.
3) The rate of growth
The first step, according to Retention, is to establish a specific goal for users to use your product and then try to level the retention angle at a reasonable level that meets your goal.
Maintaining a 40–20–10 (D1: 40%, D7: 20%, and D30: 10%) ratio.
Stickiness is a result of combining daily and monthly users. However, prominence only applies to active users of the product, as only then can the level of engagement be accurately calculated.
Typically, the ratio is between 10% and 20%. So anything over 20% is good, and anything over 50% means you've conquered the world.
The rate of growth
Calculate the monthly active users as well as the monthly revenue. Even so, calculating all of the above weeklies is a good idea. Set the weekly base to 5–7% and the monthly base to 15–20%.
When these percentages are exceeded, your company has achieved program-market fit. Both weekly and monthly measurements can predict events and get a broad picture of the market.
Rep Stages 3, 4, and 5 until product-market fit is achieved.
Repeat interviews focus on the "why," attempting to learn and evolve due to them, and experimenting with new measurements and methods to reach fundamental conclusions. Don't overlook the 40% rate and the impact of the LTV: CAC division.
Do not hesitate to contact us if you want to boost your business performance and learn all the secrets of the marketing world. Our approved team is here to assist you with anything you require!