There’s no such thing as a product that sells itself. Or is there?
It may sound too good to be true, but if you have a product that targets customers who want and are willing to pay for it, you can sit back and watch the profits roll in. Just don’t lean back.
Product-market fit can help you achieve business success. But finding it isn’t easy. Many SaaS startups fail because they think they’ve reached product-market fit when they have only achieved product-to-problem fit.
So, this article will explain what product market fit is and how to measure it. You’ll also learn how to create product-market fit.
What is Product-Market Fit?
Product market fit is a concept that helps you determine the right market for your product. The term was coined by venture capitalist Marc Andreessen.
SaaS product-market fit goes beyond solving a real problem potential customers have. You must generate a critical mass of leads, conversions, and retentions. In other words, there is a need for your product and enough people to buy and use it.
Why Product-Market Fit is Essential
First, you need clarity on whether or not your product solves a problem your target audience has. Otherwise, you’re burning cash investing and scaling a venture that isn’t commercially viable.
Think about this – the lack of market need (so poor P/M fit) is responsible for 35% of startup failures.
Second, understanding your product market fit directly impacts other aspects of your business strategy, like advertising, market messaging, growth rates, and retention.
If your product market fit is misaligned, you’re likely marketing to and attracting the wrong customers. This leads to high churn rates.
The incorrect market also means you’re not communicating your value proposition effectively, causing stagnant growth. Essentially, you’ll be blowing your SaaS marketing budget and not seeing any substantial growth.
Third, potential investors use SaaS product-market fit as a gatekeeping tool to determine who gets series A funding. With a median series A investment of $8.6 million, it helps SaaS businesses demonstrate organic growth and sustainable revenue growth potential.
How to Determine Product-Market Fit
There are two ways to determine SaaS product-market fit: the qualitative approach and the quantitative approach.
1. The Qualitative Approach
The qualitative approach helps you understand how current customers feel about your product. The best way to do this is through surveys, specifically the Sean Ellis Test.
The main question on the survey is: How would you feel if you could no longer use the product? Response options are very disappointed, somewhat disappointed, and not disappointed.
If more than 40% of respondents answered, they would be very disappointed, congratulations, you have found a product-market fit. Scoring less than 40% means your product isn’t ready for market expansion.
You may need to send a follow-up survey to learn what problems or aspects of your product customers would love to see improved.
This product market fit survey template includes questions about where customers discovered the product, alternatives they would use if the product became unavailable, and the primary benefits they receive from it.
You also want to segment respondents by user frequency for a detailed analysis of the survey results.
For instance, if a vast majority of occasional users would not be disappointed if your product became unavailable, you have not effectively demonstrated your product’s value proposition. On the other hand, results from frequent users who would be disappointed tell you what makes your product valuable, helping you adjust your messaging appropriately.
Ellis recommends these three conditions:
- Customers who have experienced the core product
- Customers who have experienced the product at least twice
- Customers who have experienced the product in the past two weeks.
Other qualitative measures include referrals and social listening to see what users are saying about the product.
2. The Quantitative Approach
The quantitative approach gives you a clear picture of the demand for your SaaS. It defines SaaS product-market fit by analyzing the total addressable market (TAM), market share, churn rates, and NPS scores.
TAM refers to the revenue opportunity for a product or service. To calculate it, multiply the ARPU (average revenue per user) by the estimated number of customers in the market to get the total potential revenue you can generate over a time period.
If your TAM is small, the product market fit may be off. You might have to broaden your target market.
Once you have your TAM, you can determine how much of that is from your business. A high market share demonstrates high demand and product market fit.
High SaaS customer churn is a strong indicator of product-market mismatch. While some churn is unavoidable, you want to keep retention rates as high as possible as it underpins the viability of SaaS businesses.
One way to monitor churn rates is using the Net Promoter Score.
The NPS measures customer satisfaction by how likely they are to recommend your brand or product to their peers. The range is from 0 to 10. You should aim for a score of 6 or more to demonstrate product market fit.
While you can use either the qualitative or quantitative approach, we recommend using both. Quantitative metrics provide concrete numbers but don’t give insight into causal relationships like qualitative measures can.
How to Achieve Product-Market Fit
We’ve seen what product market fit is, why it’s essential, and how to measure it. Here are tips on how to achieve it now.
1. Start with Market Research
You must understand the market you’re building a product for. This means conducting research on your customer base and existing market solutions.
Knowing who your future customers are is vital for SaaS product-market fit success. Comprehensive buyer personas define your ideal customer profile by identifying common geographic and psychographic factors. They also provide insight into customers’ needs, goals, pain points, and buying capacity.
Below is an example of the B2C buyer persona.
In addition to outlining goals and frustrations that highlight the customer’s pain points, it contains demographic, psychographic, geographic, and behavioral data that can impact SaaS product marketing.
Here’s another persona example, but for a B2B client.
Unlike B2C customer profiles, B2B personas don’t highlight demographic and psychographic data. These pieces of information don’t provide actionable insight because the company’s needs supersede the individual.
The average B2B sales cycle is longer than B2C cycles, ranging from four to seven months. There are also multiple decision-makers involved. So, if you have an attendance tracking app, you will need different personas for the HR manager, CFO, and CEO.
Furthermore, B2B business decisions aren’t made impulsively. Consequently, marketing appealing to emotion isn’t as effective as one that appeals to rational. We have an interesting article on how to get enterprise SaaS customers that you may want to read after this.
In addition to customer research, you must also investigate your competitors’ offerings. What are the gaps, if any, in the market? What solutions are available, and how are they different from yours? The answers to these questions are critical to defining your unique value proposition, whether it’s intuitive design, targeting a niche audience, or your CSR (corporate social responsibility) stance.
Marketing personas don’t just help you understand target customers. They are practical tools for formulating value propositions. For instance, how many coding apps in the market offer free coding programs for underprivileged children? This CSR program could be a unique selling point for socially-conscious customers.
2. Create a Sample Product
So, you’ve identified gaps you believe your SaaS can fill. But it’s all just theory until you release your product into the market.
As a prudent or cash-strapped early-stage startup, you want to avoid wasting resources on product ideas that may fail. So, what do you do? Create a prototype or minimum viable product (MVP). As the first iteration of a product, it should have enough features to validate the product idea.
Airbnb’s MVP was a minimalist website listing the founder’s apartment for peer-to-peer, short-term rental. Instagram’s MVP (Burbn) allowed users to check in and share travel experiences.
In addition to proving demand for your product, MVPs allow the product team and your SaaS marketing department to collect feedback from customers on features and benefits they haven’t considered.
Sometimes, our assumptions don’t align with the market reality. MVPs allow SaaS businesses to learn what resonates with customers and what doesn’t.
3. Validate Your Idea
In this step, select a group of customers to test your product prototype. You want as much customer feedback as possible.
You can collect feedback from user interviews and surveys. Your questions should focus on what the customer is trying to achieve using your product. Examples of questions to ask include
- What is your goal in using the product?
- How does the product help you achieve your goal?
- Are your expectations being met?
- How do you use the product?
- Is the product worth the cost?
- What features would you like to see added? Why?
- How easy is it to use the product?
These questions help you understand why and how customers use your product.
Another way to collect feedback is with product experience tools, like heatmaps and session recordings. Heatmaps analyze user interactions with your website, such as mouse clicks, scrolling behavior, and clicks.
The bright section of the map represents popular app elements, while the cool area indicates features customers don’t interact with. So, if your dashboard has hot spots on charts, customers are clicking these sections for more information. That tells you which parts of your product are really important to your users.
Session recordings give you a play-by-play of customers using your app. You get a first-hand view of the customer’s experience. This insight helps identify areas you can optimize for maximum impact.
Validating product market fit takes up to three times longer than expected. Moreso for B2B SaaS that have more than one decision-maker. If you have an innovative product, you need to educate these users. However, the results are worth the effort with a tailor-made product for your market.
4. Iterate Your Product
Using the collected feedback, you can start working on getting your product closer to product market fit. However, not all feedback is equal. It would be best if you didn’t implement every suggestion. Instead, prioritize input that aligns with your business goals.
Also, examine who is giving input. Feedback from paying customers should be weighted differently from customers on the freemium model. Suggestions from occasional users can skew your priorities away from customers who pay and regularly use your product. Then you have to deal with unhappy customers and churn.
This doesn’t mean you should ignore insights from freemium or occasional users. Their feedback is beneficial in creating product roadmaps that help prioritize resources and refine product iterations further down the line.
Giving people what they want is tempting, but you can’t please everyone. Therefore, you should only act on requests that align with your vision and business goals. Be transparent about your product roadmap and inform customers that while you appreciate their feedback, a particular feature request is not in the works for such and such reason.
SaaS Product-Market Fit FAQs
SaaS product market fit is the successful pairing of subscription-based products or services to the right audience. It’s when your product is successful at meeting the market demand and addressing customer pain points.
You can measure SaaS product-market fit qualitatively (how customers feel about the product) or quantitatively (how much demand there is for the product). Both are key metrics for understanding product-market fit.
The 40% product-market fit rule states that if 40% of surveyed customers say they would be very disappointed if a product is no longer available, then the product has achieved product-market fit.
Wrapping Up
Product market fit represents a critical milestone for early-stage startups. When customers are breaking down the door to get your product, it is commercially viable, and you can confidently scale sales and marketing operations.
Product market fit doesn’t look the same for every SaaS business, even for similar products in the same market. But there are specific ways you can recognize and achieve it. You saw qualitative and quantitative measures of product market fit and learned of the four steps to get your product market ready.
Developing a product that fits your target market is the first crucial step. You must provide stellar customer service to keep customers loyal. Moreover, the market doesn’t remain stagnant. Changes in customer behavior and technology mean you have to continuously tweak your product to meet current market trends and stay ahead of competitors.
Nico is the founder of Crunch Marketing, a SaaS marketing agency. He works with enterprise SaaS clients like Writer, Right Inbox, and Surfer SEO, helping them scale lead generation globally across EMEA, APAC, and other regions.
