How to Achieve Product-market Fit in Innovation

What Is Product-Market Fit and Why It Matters in Corporate Innovation

Product-market fit means aligning a product with the desire of customers in the market. An example of this is a service like Uber — Uber's creators identified a genuine customer desire for convenient taxi hailing, rapid response times, and a safe, reliable, comfortable service. They created a product that aligned perfectly with this desire.

Why is this so important? Because the potential customer needs to be at the heart of innovation and product development. A great product can come from entrepreneurial vision and ambition, but the customer needs to be at the center of the innovation process. When a business identifies an idea they would like to develop, they must ensure this is something other people will like too.

Achieving product-market fit means developing a product which customers genuinely love. This means they are likely to stay loyal to a business, and not move to a competitor, supporting better brand loyalty and long-term growth and scaling. Also, as the product is aligned with an existing need, it is already validated, so there's less risk for the business.

How to Achieve Product-Market Fit

Product market fit can be achieved through a straightforward process.

1. Define the Target Customer

Before a business can solve a customer problem, they first need to know who their customer is. While understanding individual consumers is difficult, the business can segment their audience into unified groups with similar needs and desires.

Defining the demographics of an audience and recognizing their behaviors and pain points will help businesses understand exactly who they are aiming their products at.

2. Understand Customer's Needs

The best way to know what customers need is to reach out to them. Provide surveys that gauge pain points and desires. Seek feedback on existing products and services to understand how these offerings can be improved. Interview individual customers within the audience segment where possible.

Broader market research is also valuable here. Research informs businesses how customers are responding to competitor products. All this helps to illuminate the customer's point of view — this should be the business's standpoint as they develop a product.

3. Identify Your Value Proposition

It's not enough simply to solve a customer problem. Businesses need to communicate their solution in real terms. For example, a customer might not want to know that their portable battery offers 20,000 mAh. They want to know that it can charge their laptop on the go and offer 24 hours of reliable power.

Businesses should focus on unique aspects — what makes their product different. This is what's going to bring customers to their brand.

4. Outline and Build Your Minimum Viable Product (MVP)

The MVP is a model with enough features and functionality to showcase what the finished product can do. This is essentially the prototyping phase of the project. With this MVP, businesses are able to test and assess their product without investing too much capital.

While developing this MVP, businesses need to focus on the features that solve core customer problems. It should be a functional but lean version of the finished item.

5. Test the MVP with Potential Customers

Remember, a product is supposed to be solving a problem in the real world. So an organization needs real customers to test the product, asking prototyping testers to describe how the product fulfilled their needs and how it can be improved upon.

Qualitative and quantitive data from these tests should then be fed back into the development process. The initial MVP is just the first version. Innovators now create new versions and iterations to achieve continuous improvement beyond the prototyping phase. This puts the business well on its way to achieve product-market fit.

How to Measure Product-Market Fit

Once the product has been launched into the market, businesses need to monitor the performance of this product across a number of KPIs. This helps to identify whether or not there is a strong product-market fit.

Here are a few key areas to measure:

Net Promoter Score

The Net Promoter Score (NPS) is a customer satisfaction and loyalty metric. Customers are asked how likely they are to recommend a business to a friend or colleague, answering on a scale of 0 (not likely at all) to 10 (extremely likely).

A customer giving an answer of between 0 and 6 is classed as a detractor. A customer giving an answer of 9 or 10 is a promoter. Scores of 7 or 8 are considered passive.

The NPS is the percentage of promoters minus the percentage of detractors. With this equation in mind, an NPS can run anywhere from -100 to 100.

A high NPS means customers are actively recommending the product, a key sign of product-market fit. The NPS benchmarks differ from industry to industry, but businesses should be aiming for as high a score as possible.

User Retention Rate and Churn Rate

User retention rate measures how many customers are sticking around and becoming long-term purchasers. It essentially highlights any disconnect between marketing and product quality. A poor product can still sell if it is marketed well, but customers aren't going to keep buying it.

To achieve true product-market fit, businesses need to be delivering consistent value to their customers. The user retention rate demonstrates whether or not they are accomplishing this.

The inverse of the user retention rate is the churn rate. This measures how many customers are leaving the organization after that initial purchase. Analyzing the churn rate provides some of the same insight as user retention, but it provides more nuance.

For example, the churn rate may offer insight into the pull factors that are leading customers to leave a business. It might not simply be that the product is not good — it might instead be that competitors are offering products that better fit customer needs.

Businesses don't just need to meet the needs of their customers. They need to do this better than their competitors can, so churn rate offers direct insight into how the organization is achieving product-market fit.

Growth Rate

Growth rate is a more general metric, but it ties neatly into the concept of the product-market fit. If a business is achieving a steady or increasing rate of growth, this could indicate a strong alignment between their products and the market.

Understanding where customers are coming from will help businesses gain even more insight here. When the majority of new users are coming from organic acquisition sources, such as user recommendations, this suggests that the product-market fit is strong.

Market Share

This guide has already touched on how misaligning the product with customer needs can drive these customers elsewhere. This is what makes market share a valuable metric for measuring PMF.

If a business is increasing its market share relative to its competitors, this is a strong indication that the products are effectively meeting customer needs. Analyzing this alongside user retention and churn rates provides useful insight into the performance of the product range.

Examples of Good Product-Market Fit

What does a good product-market fit actually look like in practice? Here are four high-profile examples:

Airbnb

Airbnb found a real market desire for unique and quirky places to stay while people travel. Not only this, but customers wanted a hassle-free booking system and flexibility, while property owners wanted to monetize their extra space. All this has become central to Airbnb's corporate identity.

Zoom

As COVID-19 separated families and friends and led to the rapid adoption of remote work models, video-conferencing consumers needed a reliable solution. Zoom was able to deliver this, providing a high-quality, reliable, and user-friendly tool for customers.

Slack

Business teams have become more dynamic in recent years, and organizations need communication tools that bring these teams together. Slack understood this, offering a platform that achieved seamless team collaboration while integrating with existing productivity apps.

Dropbox

The cloud-computing revolution changed the way in which we create and share documents. Dropbox took this a step further, tapping into a core consumer need to store and share files across multiple devices and locations. This led to Dropbox becoming a leader in the cloud market.

Not all of these companies have fared so well in recent years, but each example represents an organization that launched the right offering at the right time, and secured significant success with an excellent product-market fit.

Make Corporate Innovation Part of Your Company Identity

Product-market fit and a customer-centric approach to innovation can give your business a competitive advantage. With these approaches, the end user comes first — the person who will be engaging with and using the product. The product is pitched to solve a real-life problem for the consumer, changing the customer's life for the better and fostering long-term loyalty with your organization and your brand.