May 26, 2021

What Is Product Market Fit?

The term “product/market fit” was first coined by renowned entrepreneur and venture capitalist Marc Andreessen. In a 2007 blog post entitled “The Only Thing That Matters,” he said that “Product/market fit means being in a good market with a product that can satisfy that market.

Put another way, it’s about getting the right product to the right customers at the right time. As Francisco Ponce, Operations Director at 3Pillar Global, explains, product/market fit really comes down to “solving problems that customers are willing to pay to have solved.”

Among other considerations, this means that there needs to be a clear connection between what a product claims to do and how it will benefit users. After all, if you aren’t solving a real problem, then there isn’t any market potential for your product. Patrick Campbell, CEO of Profitwell, a financial reporting SaaS company, points out some of the serious ramifications of failing to achieve product/market fit: “Having a misaligned product/market fit will affect your business model and means your advertising, marketing, rate of growth, and churn rates will take a hit.”

Clearly, understanding whether or not there is a real market for your product is critical. This article will discuss how to find the market potential and evaluate the target market share for your product to ensure that you’ve nailed product/market fit.

Understanding Your Product’s Market Potential

It’s tempting to think that once you’ve come up with your product idea, the hardest part is over, when in fact, the hard work is only beginning. According to the Pragmatic Institute, “Creating a product is just the first step in a long, complex equation. The world must be ready for your product, and people must understand how your product solves their problem.” As important as your first sales can be, understanding why buyers buy and why users use your product is critical to the ongoing development of your product. Understanding this is your most important competitive advantage.

With that in mind, let’s look at the steps that will help you uncover your product’s market potential.

Define Your Target Market

Cassi Lup, Senior Manager of Product Development at 3Pillar Global, defines target market share as “the total 20 buyers or users with the same problem that your software is aiming to solve.” So it makes sense to begin by gaining a better understanding of who exactly these users are.

Dividing your market into manageable segments is a good place to start. You should be able to describe both the demographics and the psychographics of your target market. Demographics include things such as age, education level, income, and location. Psychographics encompass less tangible qualities such as attitudes, beliefs, personality, and values.

For each market segment you identify, create personas to breathe life into your target customer’s profile. An empathy map can help you do this by encouraging you to brainstorm about your target market’s goals, challenges, needs, and pain points. Be aware, however, that it’s best to cap your personas at 3-5; otherwise, you’ll end up with too much information, and it won’t be easy to focus on what really matters. You want to go deep enough to understand what motivates them to make a change and then continue using something – even the alternatives to your product.

As you do this, it’s critical to keep in mind that the buyer and user of your product may not be the same person. Scott Varho, SVP, Product Development at 3Pillar Global, explains that “The one feature in B2B software products that many people overlook is the fact that there are differences in the motivations of the buyers and the users of the product. A lack of understanding of these dynamics can undermine a product’s success. This is not totally unique to software products as the same applies to, say, a construction company buying tools for builders to use, but seems to be more frequently missed.” Offering an elegant solution that both the user and the buyer will value will drastically increase long term value potential by reducing churn. Gaining customers is hard. Keeping them can be just as hard. Losing them and trying to win them back is harder than either of those things by several orders of magnitude.

The most important aspect of this stage is to talk to real potential users and buyers. Personae that capture and reinforce your internal biases are nowhere near as valuable as talking to real people who stand to gain from your product. As Steve Blank, Entrepreneur and Professor of Entrepreneurship at Stanford, points out, you must “get out of your building,” and the most critical flaw of entrepreneurs is waiting too long to talk to actual customers to assess real interest in the products they intend to build.

Once you get a better sense of who your customers are, what motivates them to buy, you can map out their possible customer journeys to get an even greater understanding of where and how your product may fit into their lives. Once again, real insights won’t come from a whiteboard unless you’re in regular communication with potential buyers and users.

Identify Underserved Needs

Once you better understand your target market’s needs, consider specific pain points that aren’t being addressed or met by other products and evaluate your market potential. What underserved needs could your product fulfill? You probably wouldn’t want to enter a market that’s dominated by a solution that customers already love and are loyal to unless you’re prepared to offer much greater value (in the realm of 10 to 30 percent), which is a high bar to clear.

Being a disruptor or serving an underserved market segment can potentially put you in a great position when it comes to market potential. But depending on your product, you may choose to enter a crowded market and scale fast based on the mistakes or overlooked factors of your predecessors in that space.

While exploring and defining your target market segment(s), you should also evaluate the competition in terms of market saturation. Are the problems you solve already being solved in such a way that the solution has become a coveted commodity? This kind of intel can either shape your strategy or compel you to pivot and find a better problem to solve.

Use Prototypes! Not MVPs

The best way to understand your users and buyers is to make aggressive use of prototypes. A prototype is the cheapest possible way to convey your product concept without building a production version. Too many companies jump to execution and try to skip research by calling it an “MVP,” or Minimally Viable Product. The word “viable” here is important. A prototype doesn’t need to be viable. To be effective, it just needs to convey the product concept and provoke a response from prospective users and buyers in your target market. Eric Ries, author of The Lean Startup, pushes the same build-measure-learn feedback loop, but he conflates MVPs with prototypes and in so doing, has increased confusion in the industry. When he describes a good MVP, he’s not talking about the first production version of your product, but a thin, non-scalable test of commercial viability. In other words, a prototype. Prototypes are cheaper to build by order of magnitude and can be changed at a fraction of the cost and time. If you are learning quickly, you want to respond quickly (and cheaply) to that learning and re-test.

According to Scott Varho, SVP of Product Development at 3Pillar Global, there are two major problems with building an MVP before going through a prototyping phase:

First, hiring a team to build your product will drastically increase your investment in your concept. You now have a financial stake in the success of your product, and you haven’t reduced that risk through unbiased commercial testing.

Second, by skipping that phase, you missed all the potential learning that could contribute to the success of your product.

For example, knowing what motivates buyers will give your sales and marketing team a direct edge. Even if your product is successful, if your pitch misses the mark, you may not get the commercial results your product deserves. Similarly, if your product is unsuccessful, the prototyping phase is even more important. If your MVP flops, what will you do next? Without solid understanding, you can’t pivot with confidence, and your internal stakeholders and investors are going to ratchet up the pressure at this point.

If you have solid user/buyer research, you should have evidence for hypotheses on why it missed and how to fix it. This will allow you to move faster with confidence and bring your internal and external stakeholders along.

Identify Your Value Proposition

Customers are always going to compare your solution to what’s already on the market, making it critical to understand the competitive landscape. As we’ve said, finding your market potential involves knowing both the problems you solve and the benefits you offer: Why choose your product to solve this problem? That means that researching the competitive landscape is a step you must not skip. Francisco Ponce points out that this field may be wider than you think. Remember to consider “the alternatives that may include using no product at all.”

As part of your research, make sure to ask yourself:

  • What needs does my product fill?
  • Is it a must-have or nice-to-have?
  • What unique features may excite my target market?

Looking at your target market’s pain points and needs in tandem with what you learn about the competition will help you identify your unique value proposition and, just as importantly, who it is likely to appeal to. This is your product’s strategy to meet customer needs better than their alternatives. While your product could address multiple needs, it’s important to choose those that focus on and align with unique value to your target segment that you plan to address.

It’s worth mentioning that if your product is similar to a competitor’s, it doesn’t mean you have to start from scratch and come up with something brand new. It can be enough of a competitive advantage to leapfrog them and do as they do, only much better. Keep in mind, however, that if you decide to take this route, you’ll need to be 10 to 30 percent better than the competition to stand out in the crowd. In other words, differentiating yourself by offering superior value in a crowded market can work, but it’s not simple to achieve.

A Value Proposition Canvas can be your best friend in this endeavor. First developed by Alex Osterwalder at Strategyzer, this canvas can help you graphically visualize your value to the customer—how you “relieve pain and create gains”—and adjust your value prop based on what you learn for achieving the perfect product/market fit.

How To Evaluate Market Size

Once you’ve found your market potential by understanding the underserved need or problem your product will solve, it’s time to evaluate the market size.

Gartner recommends a structured approach that “narrows down market opportunities from broad estimates to more targeted, segment-based opportunities.”

In practice, that means:

  • Combining a top-down and bottom-up approach to research for getting a complete picture of your potential market share
  • Shifting focus from defining the global market for your product to defining the actual addressable market
  • Realistically assessing your company’s total serviceable markets. In other words, to get an idea of your target market share, Gartner advises that you “gauge how many customers are expected to buy either as early adopters or as more mainstream adopters in your targeted market.”

Keep in mind that it’s not just about market size—you need to consider saturation as well. Saturation happens when new demand for a specific product or service is no longer being generated because the market is already crowded. While it’s not impossible to succeed in a saturated market, competition will be fierce; you’ll need to up the ante when it comes to the unique value you’ll offer.

Final Thoughts

As we’ve seen, finding product/market fit is ultimately about solving problems in ways that users would pay for. And that comes down to providing tangible value that excites your target market.

As Alina Perde, Technical Manager at 3Pillar Global, puts it, “I don’t believe a software product serves a business. I think we should look at software products as the business. Products should serve a purpose, they should be built for a very specific need, and they should always delight their users.”

To learn more about 3Pillar’s services and how we can help you understand your market and create products that solve real problems, contact an expert today.

Special thanks to these members of FORCE, 3Pillar’s expert network, for their contributions to this article.

FORCE is 3Pillar Global’s Thought Leadership Team comprised of technologists and industry experts offering their knowledge on important trends and topics in digital product development.