Product-market fit is a key milestone every business should strive for. It means that your audience is recognizing and demanding your solution.
But defining and measuring it is a tricky task. The best way is to look at qualitative and quantitative metrics to identify if you have reached product-market fit.
Net Promoter Score
Product-market fit is when a startup feels a strong pull from its target market. It’s an unmistakable feeling that startups often describe as a “lightning bolt.” Once a business achieves PMF, it can start growing much faster.
The Net Promoter Score (NPS) is one of the most often used measures to gauge PMF. Customer loyalty is measured by the single, simple-to-understand indicator known as NPS. It is derived by deducting the promoters’ proportion from the critics’ percentage. Companies that have achieved good NPS usually grow at twice the rate of their peers.
NPS is a great way to measure product-market fit because it’s easy to understand and correlates with other important company metrics like revenue and growth rate. The best part is that NPS can be tracked for individual businesses, products, stores, or geographic units.
Another useful metric to measure product-market fit is the cohort retention rate, which measures the percentage of new users returning to the product after their first week. The higher the cohort retention rate, the better the product-market fit.
Growth Rate
Measuring the growth rate regularly is important to see trends and avoid surprises. Growth rates can be calculated in a few different ways depending on the metric you are measuring, such as revenue growth, user growth, or market share growth.
One of the simplest ways to calculate growth rates is to look at historical data. However, this method is unreliable since industrial and economic conditions change and may be cyclical.
To get a more accurate picture of your business’s growth, you should filter out any test accounts or customers intended to be outside the data. This includes employees at your company who sign up for an account to test a feature or support reps who delete customer accounts when trying to resolve a problem.
To perform a product-market fit analysis, your startup needs a sustainable and rich market that your product can tap into. The best way to do this is to conduct consumer research and develop a persona, a profile of your ideal consumer.
Churn Rate
The churn rate is the number of customers or clients that leave your business within a specific period. It can also refer to the total recurring revenue lost (MRR or ARR churn).
Churn can be a great indicator that your product-market fit is working, as it indicates that customers are finding value in your product and returning to use it. However, it’s important to remember that achieving product-market fit isn’t an end point—it’s a process that needs to be continually tested and improved upon.
Ultimately, the best way to test your churn rate is by tracking cohort retention over time and comparing it to industry benchmarks. This will give you a more complete picture of your customer experience.
A cohort retention curve is a great indicator of product-market fit, but it requires data that most startups need help accessing in their first months. Instead, it is recommended to calculate your ARR or MRR churn rate, which can be a useful metric. This is because it includes all of the lost revenue from your recurring customers.
Retention Rate
The percentage of clients that consistently make purchases of your goods is known as your retention rate. This is a crucial measure for companies that charge subscription fees, such as software and mobile app developers. A high retention rate demonstrates that your product has found its target market and that your consumers are pleased with your offering.
Similarly, a high churn rate is a negative sign that your product is not meeting customer needs. In this case, you should improve your product’s functionality and user experience.
Other metrics to measure product-market fit include Net Promoter Score, Growth Rate, and Market Share. Ideally, you should measure these metrics regularly to ensure your business is on track to achieve product-market fit.
Advocacy
Product-market fit is when a startup recognizes that it has identified its target customers and created a product that solves their problems. This usually occurs after the company has conducted proper research, including defining its buyer persona based on psychographics, demographics, and purchasing capacities.
This is followed by conducting customer interviews to learn more about their needs, pain points, and the problems they are trying to overcome with existing solutions. The resulting insights will serve as the basis for creating a product tailored to those needs and offering a strong value proposition.
Measuring the traction and success of this product is then reflected in metrics like growth rate, churn rate, retention, and even market share, defined as the percentage of a total market controlled by a particular company, product, or entity. A growing market share is a very good indicator that product-market fit has been achieved. Other reliable indicators include referrals, loyalty, word of mouth, and the brand’s media coverage.