What is product market fit and why does it matter?

Considerations for how to build a viable and scaled business.

The more things apparently look the same the more they actually might have changed

Product/market fit is one of those terms that has become ubiquitous in the start-up and VC community. This ubiquity is a double-edged sword where meaning and application has dulled over time. The implication for start-up founders and employees is a disconnect between how success is defined, progress measured, and priorities set and managed. This disconnect often occurs in two places: between VCs and founders and between founders and employees.

This article explores a practical approach for redefining and applying product/market fit as a methodology for building a viable, scaled business in 2020.

First a brief history

The term product/market fit was coined by Marc Andreesen or Andy Rachleff and adopted and popularized by Steve Blank and Eric Ries as a key tenet of the lean startup movement. During the first decade of the twenty-first century the start-up and VC community needed a construct for building and assessing the viability of new internet-enabled products.

Product/market fit was coined in the early 2000s as a framework to understand the interplay between new technology solutions and rapidly evolving, digitally enabled customer behaviors and markets.

In some ways, product/market fit as defined by Marc Andreesen is still applicable to today’s start-up and VC environment:

“Product market fit means being in a good market with a product that can satisfy that market.”

In many other ways, the product/market definition needs a refresh for application by today’s start-ups and VC. Why?

We aren’t in the same climate of rapidly evolving, digitally enabled customer behavior and markets that existed 20 years ago.

The available industries and verticals for innovative digital solutions, regulation, an enhanced focus on customer privacy, and many other factors have added layers of complexity to the identification and capture of a good market. Furthermore the advent of  growth capital  has fundamentally changed what success looks like for founders and VC and satisfying a market is no longer a clear enough goal.

We therefore posit a new definition of product/market fit:

“Product market fit means building and marketing a solution to a problem or need that a specific set of people care about solving enough to pay for it - in a market that is big enough to support your business.”

Why amending the definition matters

Revising the definition of product/market fit isn’t about semantics. It is about applications. If the disease is not understanding what product/market fit is the symptom of not understanding or having a methodology to assess product market fit are companies who:

1. Don’t know what to build, for whom, and at what priority

2. Don’t know how or to whom to market their product

3. Are unclear on what their company business strategy and model should be

Sound familiar?

Most importantly product/market fit matters because

Aligning value to customers who need or want your solution enough to pay for it is the only way to build a viable, scaled business in 2020.

Read on to understand how this definition of product/market fit can be applied to enable entrepreneurs to build viable, scaled businesses.

What’s a product?

A product is a solution to a problem that a specific set of people care about solving enough to pay for it.

The practical application of “pay for it” can mean a payment of money, time, or attention; the latter two often being translated into money through digital advertising and data products. The key questions to answer when defining your product are:

What’s a market?

A specific set of people with a clear problem or need who are motivated to solve it with money, time, or attention

Our definition is very similar to and partially derived from that of Geoffrey Moore who said in summary: a market is a set of customers who have a common set of needs or wants and who reference one another when making buying decisions.

The key questions to answer when defining your market are:

1 + 1 = 5

The real magic of finding product/market fit is the insight generated by clearly defining what your product offering is and the market dynamics and competitive set of the market you’re entering or have already entered.

There are two significant outputs of a thorough product/market fit exercise. The first is the value proposition of your product offering.

Your value proposition is why your solution is uniquely appealing to a specific set of people in a way that is differentiated from other solutions in the market.

A product can be differentiated across one or multiple categories including: features, quality, access, and price.

The second significant output of the product/market fit process is the business model for your business.

Your business model is informed by your underlying cost structure, the way you price and sell your offering, and your addressable market.

In the commonly used nomenclature of TAM (Total Available Market; demand for a solution), SAM (Serviceable Available Market; where you as a company are able to meet demand from an operational and geographic standpoint), SOM (Serviceable Obtainable Market; where you as a company a positioned to take market share), the addressable market is the same as the SOM.

Understanding your true addressable or obtainable market is something it behooves founders to deeply (and truly) understand as soon as possible so that all aspects of the company’s financial and operational plan, especially fundraising, capitalization, and capital allocation are informed by market and executional realities.

Not understanding addressable/obtainable market is the most significant reason for disconnects between VCs and founders and as a result founders and employees. When founders take capital on a misstated or misunderstood market opportunity, VCs often push for a realization of that valuation, whether it is executionally realistic or not.

Chasing a valuation that is out of line with a company’s core product and market opportunity is the main reason founders end up caught between investor objectives and the execution goals and success metrics they have set for their employees.  

Getting your product’s value proposition and your company’s business model right are the most essential elements of entrepreneurial success.

Back to implications

Product Clarity:

When you have clear visibility toward product/market fit you have verified:

  • What your solution is and is NOT
  • The value of this solution and for whom
  • How users access it
  • How and what users are willing to pay for it

When you have verified these considerations the founding team is then able to make logical and transparent value judgements to define:

  • The product offering
  • The product value drivers
  • The access/distribution approach
  • The pricing model

Go-to-market Prioritization:

Product/market fit informs marketing and branding through clear assessment of:

  • The size of the addressable/obtainable market
  • What is valuable in this market and if it varies by customer segment
  • The other solutions at play in this market

By understanding the lay of the land, the founding team is able to make decisions from a place of strength informed by:

  • The market opportunity (size and trends)
  • Customer segmentation by value drivers
  • Competition

Establishing Business Model:

Finally and perhaps most importantly, defining your product in light of your market opportunity informs how you structure your business from a financial and operating model standpoint.

Whether it’s a bootstrapped “lifestyle” business or a growth obsessed venture backed billion dollar business, the founding team is able to create alignment across all aspects of a company strategy that includes:

  • Overarching business goals and success metrics
  • Core/target customer segments and what they value
  • Product development plan
  • Go-to-market plan across marketing and branding
  • Financial and operating model
  • Organization plan and structure including incentives

When you understand product/market fit and have built a strong value proposition and business model, you clearly know the answer to not one but all three of the most important decisions that face a founder:

  • What to build, why, and at what priority
  • Where to invest for go-to-market initiatives
  • How to you structure the business financially and operationally

The real magic of product/market fit is the insight to clearly wrap product development, marketing, and branding into a cohesive company business model.

Jenny Cox
March 11, 2020

Read more.

Get in touch.
We’re happy to chat.