What is this Product-Market Fit Thing Everyone Talks About?

If you’ve looked for capital for your startup, you’ve almost assuredly been asked about product-market fit. It’s a gateway for most investors in determining if your venture is worth their investment. Why is it so important? While hardly a guarantee, it’s a fundamental point in the process of converting your idea into a successful product and testing whether it has a chance to grow into a business.

So, what exactly is it? Product-market fit is the extent to which a good market (many potential customers) is addressed with a product that meets that market’s needs, wants, or desires. It’s proof that both the problem and the solution have value to people.

And by value, it’s the actual monetary value that’s important. Will customers pay for your solution to their problem? That is the ultimate test for product-market fit. Will enough potential customers buy the solution you’re offering?

One of the most high-profile lessons in product-market fit, or lack thereof, is Pets.com. Pets.com was created to sell pet food and accessories via the web, cutting out the middleman and aggressively cutting prices. Sounds like a winning strategy, right? Well, not so much at the time. As it turns out, while Pets.com assumed people wanted such a service, the market just wasn’t ready for it. They had the product, but not a market interested in paying for it. No product-market fit. The company burned through over $300M in about two years and went public before it crashed. It just doesn’t matter how innovative your solution is; if there’s no market, you won’t succeed.

How to Test Product-Market Fit

The best way to test your product-market fit is to talk to actual, potential customers – real people who are part of your target audience. Testing your concept like this takes guts, but it’s the only way to learn whether you’re on the right path with the right idea. Use your connections to gain access to people and offer to discount the product, give them early access to it, or provide a similar benefit in exchange for their time. When you’re not delivering a heavy sales pitch, people are often very open to sharing their time and frank opinions.

You’ll want to discuss as much about the product as possible, even parts that you haven’t thought a lot about yourself. You don’t know what you don’t know, after all, so getting the most feedback you can from others is critical to testing your offering. Remember that testing whether they’ll pay money, in the amount you want, for the solution you’re offering them, is a critical question.

Show Me the Money

The answer to the “How much would you pay for our solution?” question will tell you a lot about your product-market fit assumptions. The price the customers give you will almost never stand up once you’re ready to sell the product, but you should be able to test whether you’re in the right ballpark. For example, you might say to a target customer, “If the price was $150, would you buy this product, which I’ll deliver by May 6?” For some customers, you should even go further and ask who else in their company (if a B2B product) will have to agree to the purchase.

This is a tactic that many successful startups have used, especially when it’s early in the process of vetting if their idea is going to pass the critical product-market fit milestone. By asking an excited customer about their willingness to purchase on the spot, you’ll learn if there’s legitimate interest in your idea and a desire to pay for it. A customer’s readiness to move forward with purchasing your product sends a strong signal that you may have hit upon an idea you can build a business around. Even if they’re reluctant, their reasons for not moving forward may be even more valuable than their early purchase. It’s a great way to learn.

Sometimes, a potential customer who has otherwise been excited about your solution may balk when the discussion of money comes up. Often, there’s a gap between a person saying they like an idea, and their willingness to pay for it by a set date. If this happens, test other price points and delivery dates to see how their reaction changes. Remember to remain completely open to the concept that you may have an interesting idea, but not one that is worthy of the price you need to charge to be successful.

Many people will tell you that product-market fit is binary. You either have 100 percent fit or you don’t. It actually doesn’t work that way. Especially as you’re making your first pass through refining your business model, it’s likely you’ll find some fit, but it won’t be complete. You may find that the group of potential customers that you add value to is small, or the problem you’re addressing isn’t big enough. This is completely normal, and a good reason that you should test for product-market fit as early in your business model development as you can. Testing early gives you plenty of time to fix any issues.

Conform to Your Target Market Rather than Trying to Change It

Markets are hard to change for any company and, as a startup, almost impossible. Obviously, products are easy to change before you actually build them. Rethink your value proposition to see if your target customer will be more likely to buy a different product. Then, go out and test it again with real people. It’s part of the iterative process you should be using to build your business in the first place, after all.

You should also consider the market you’re targeting. Although attempting to change a market in a missionary fashion is close to impossible for an early startup, your idea might have more success in a different market completely.

Remember to be as critical as possible early on. It’s much easier to change things early than doing it later. Keep in mind that product-market fit will also be one of the first things that investors look for. The more prepared you are to answer their questions and provide proof of solid product-market fit, the better off you’ll be during the fundraising process.

As I said, you don’t need to prove that there will be 100 percent adoption to move forward. There are still many steps in the process of vetting your business model. You might find that you can further refine your vision as you go through them to increase your product-market fit. You don’t even need to find 100 percent adoption to ultimately exit the whole vetting process, either. As you grow and have additional resources (including funding), you’ll be able to shape your product and message to address larger groups of customers. Still, you should establish a large enough group of potential customers early on through iterating on your vision and value proposition to be able to convince yourself and others that there is a real market for what you’re creating.

The earlier you establish product-market fit, the easier everything else will go for you and your founding team. Yes, you’ll do a lot of work upfront to make sure you’ve got it, but you’ll save yourself even more time and energy later because you established it early. You’ll iterate less and the changes you need to make will happen when you have the time to do them. If you need to revise your idea or even pivot, you’ll be doing it with less overhead and when you’ll need to implement fewer changes. Ultimately, once you’ve established product-market fit, you’ll be able to raise money faster and at a higher valuation. Wouldn’t that be nice?

Ready to build your first company? Learn how to do it with my book, The Startup Playbook co-authored with Rajat Bhargava. Super easy to read and chock full of startup wisdom. Written by founders for founders. Check it out.

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