What is Product-Market Fit and How Do You Determine it?

What Is Product-Market Fit?

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

– Marc Andreessen

Countless companies have put together great teams, who built great products that never found the success they anticipated. Why? Because they weren’t rigorous enough at establishing product-market fit, which is what we are really seeking when we explore any new opportunity.

Startups often use the “lean startup” methodology to try to achieve and validate product-market fit, but the methodology is applicable to any product or service. This methodology investigates three dimensions that make up product-market fit:

  • Is the product valuable?  First, you must determine if your product is valuable. In other words, “Do customers want this product?”
  • Is the product viable? Is this opportunity economically attractive?  What’s the appropriate business model?  “Should we do this?”
  • Is the product feasible? What technologies are needed, what are the support requirements to deliver the desired quality, what people and partners should be involved, and how much time and money will it take to develop the product? “Can we do this?”

For internal products or IT projects, “Problem/Solution Fit” is probably a much better term, but regardless of what type of product we deliver, we must iterate through each of the three dimensions quickly and frequently, because this is the crux of product management.

Why is Product-Market Fit Important?

To help illustrate why Product-Market Fit is important, let’s use a well-known example of a product that failed.

Remember when 3D televisions hit the market? 3D movies made a big comeback in theaters around the world about 15 years ago, and consumer electronics companies made a bet on increasing demand for this type of content at home. They saw some early adoption by tech enthusiasts, but the technology never penetrated into its target market.

In other words, 3-D television never achieved product-market fit.

Why? It was mostly feasible – decent libraries of content already existed, and content providers like ESPN and BBC made commitments to produce more. The technology existed to support home viewing, and the electronics companies could manufacture 3D televisions at scale, with some seemingly minor compromises to the viewing experience.

But the product was neither valuable nor viable.

  • Why wasn’t it valuable? Many consumers primarily watch TV casually, often in the background while multitasking. With 3D TV, they needed to wear special glasses and sit at certain optimal viewing angles, which was unappealing, especially with a hefty price premium attached. Some early adopters complained of eye strain and headaches due to the use of active shutter glasses, which made consumers even more skeptical of the technology. Essentially, 3D television was not that much more valuable than existing TV.
  • Why wasn’t it viable?  Suppliers drastically misjudged market demand. 3D television was only valuable to a relatively niche group of home theater enthusiasts who were willing to pay high prices for an incrementally better viewing experience. Sustained demand never materialized, and content providers such as ESPN and BBC, who had launched 3D content with much fanfare, began to quietly withdraw their offerings.

3D television never achieved product-market fit because the product wasn’t that much more valuable than current solutions to a large enough market to make it a viable business.

In retrospect, it’s clear why 3D television failed. It was a solution in search of a problem — and it never found one. But it serves as a good example of common mistakes even large companies and entire industries can make when bringing products to market. 

So, how do you achieve product success, and avoid making the same mistakes with your products? You need to become an expert at establishing product-market fit and be willing to accept what the research and data tell you, if the results don’t show a good fit.

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How Do You Determine Market Fit for a Product?

The Product-Market Fit Pyramid

When evaluating potential ideas, the problem must be worth solving and developing, it should align with your business and brand, with enough people willing to pay for it. The product-market fit pyramid is a useful tool to start with.

A blue and white diagram representing how a product operations process functions

Each element of the triangle depends on the others. Think of it as spinning three plates: one in each hand and one on your foot. It’s hard to keep everything spinning and balanced at the same time!

Market Opportunity Hypothesis

Let’s explore another familiar example in the consumer electronics space – the introduction of the iPhone. Back in the mid-2000’s, leaders within Apple developed a Market Opportunity Hypothesis: “smartphones” existed in the form of predominantly business-focused devices designed for managing email and a limited number of specialized software applications.

There was room for disruption in the consumer mobile phone space, where most people still used basic flip phones or messaging phones with inadequate internet browsing capabilities. But consumer phones also posed an existential threat to the iPod’s dominance – as technology improved, their media playback capabilities could begin to compete with stand-alone media players. And who would want to carry two devices if they didn’t have to?

Since the iPod accounted for nearly half of Apple’s revenues, would they eventually be forced to venture into the wireless business?

Screen

When you’ve identified a problem, it’s important to determine whether developing a new product in that space aligns with your corporate vision and strategy. Apple wasn’t just a computer company by this time. They had developed one of the most popular consumer devices ever created – the iPod. And not only did they build the device, but a whole new music distribution platform to go with it, in iTunes. If they built a phone that’s also an iPod, it aligns perfectly with their strategy.

However, it’s possible for a new product to align with your corporate strategy, while being a poor fit with your brand. Fortunately, this wasn’t the case for Apple. By this time, they were already masterful at advertising to consumers. They understood how to make technology fashionable – a status symbol – which they leveraged perfectly as part of the iPhone marketing strategy. This was a fairly easy fit for them.

You also need the internal competencies necessary to enter a new market. And this is where Apple faced most of their early challenges and criticism. They had brilliant people who knew how to develop computers and music players, but what did they know about the mobile phone space? There were dominant players like Motorola and Nokia with decades of experience building consumer phones.

And the “smartphone” arena was already crowded with the likes of Blackberry, Palm Treo, T-Mobile Sidekick, and Windows Mobile devices, all of whom had existing platforms to support their devices. Apple would need to invest in order to build this muscle.  

So far, this is a good idea, with reasonable alignment. But it still needs to be validated.

Validate Market Problem

Once you have identified a problem worth solving, it’s tempting to move directly into the solution space – but remember! The critical next step is testing your ideas with customers. To that end, Alberto Savoia introduced the concept of “pretotypes” in his book, The Right It.

You’ve probably heard of “prototypes”, but what’s a “pretotype”?

Pretotypes help you gather qualitative data on product value and viability at a much earlier stage in the development process. Pretotypes help determine whether anyone wants to solve this problem you’ve identified, and what they will pay to solve it. They answer the question: “SHOULD we make this?”

Prototypes come much later, and they answer questions around product feasibility: will it work, and what will it cost to make? They help answer the question: “CAN we make this?”

Here is a sample of the techniques that can help you pretotype quickly, without having to invest much (or at all) in new technology:

  • Concierge Test: Concierge testing is a service offered manually to validate the value of solving a particular problem. Wealthfront, for instance, initially created a concierge test to provide wealth management advice and portfolio management. They would sit with customers, pen and paper in hand, and figure out solutions to wealth management issues, step by step. They added scalability through technology later in the process, but this test proved that the concept was valuable.
  • Wizard of Oz: Similar to a Concierge Test, the Wizard of Oz method expects that the humans performing the service are hidden such that the user believes the service is automated. Zappos validated their service using the Wizard of Oz method.
  • Landing Pages: Web pages can be set up to help gauge interest around a particular product or solution that isn’t yet available, so potential customers can interact with them. The people testing an idea can collect data on searches, page clicks, and/or registrations, without an actual product to back it up (yet).
  • Explainer Videos: These videos describe the value of a potential product and can be used to help solicit feedback on how well the idea resonates with its target market.
  • Crowdfunding: Potential customers are given an opportunity to invest up-front based on a future value proposition.
  • Storyboards: Storyboards can be similar to explainer videos in that they illustrate how a product will solve a customer problem. They are quick and easy to create and can be used internally to gain alignment and buy-in, or externally to ask potential customers “Does this describe your problem and a solution that you might want?”

Remember that as you are using these techniques, you are trying to prove that the product is valuable to your potential customers, and that they’re willing to pay enough to make your investment worthwhile.

Once you confirm that the market is large enough to be viable and that customers will find your solution valuable, you can return to building prototypes or basic services to confirm that the product is feasible for your company to build profitably.

TAM/SAM/SOM model

Now you’ve validated the market problem qualitatively, and you’ve decided you can and should build a product! But how do you quantify the market opportunity? This is where TAM, SAM, and SOM are helpful.

When Apple first introduced the iPhone, they sought out to capture just 1% of the mobile phone market. Now they are a clear leader in the smartphone space domestically and internationally, with millions of new iPhones shipped each year. So why did they start so conservatively?

Apple evaluated the Total Addressable Market (TAM) for cellular phones, and they quickly came to the conclusion that they couldn’t tackle all of it at once.

They lacked the scale to service the entire market. Not everyone would be able to purchase an iPhone because Apple didn’t have the capacity to churn out enough of them. This is called the Serviceable Available Market (SAM) – the portion of the TAM your company can reasonably expect to serve.

Even in a crowded market, there is typically room for disruptors, and in a market with no commercial solutions, people have likely developed an internal solution or workaround. As such, you are unlikely to obtain all of the SAM.

As a new manufacturer of mobile phones, a key constraint for Apple was finding a cellular network partner who would grant them a great deal of flexibility. They launched in the US with an exclusive agreement with AT&T Wireless that limited them to that one carrier for the first three years. This reduced their Serviceable Obtainable Market (SOM), which is the slice of the SAM a company will initially target. It may grow over time, but it’s wise to make a conservative estimate at first.

As you develop your own TAM/SAM/SOM model, you will need to take many internal and market constraints into account, and make a number of assumptions. Be as conservative as you can, so that if your results show a profitable opportunity, you can be confident in the estimate.

Ideate

Now it’s time to transition into the solution space. Based on what you’ve learned, further flesh out and refine your ideas. Apple took several years – between 2004 and 2007 – to ideate before releasing the iPhone. They also ran some experiments.

For example, as they didn’t yet have any experience in the mobile phone space, they first approached Motorola, and co-developed the ROCKR E1, which was a fairly basic cellular phone with a key feature – integrated iTunes support. This early “iPod Phone” essentially built the capacity of an iPod Shuffle into a consumer-focused phone.

It didn’t achieve broad consumer success, but it wasn’t really meant to.  This was part of the ideation process that ultimately helped Apple confirm that making “dumb” phones play media wasn’t enough. Consumer phones also couldn’t access the internet well – a problem which had no compelling solution. This is what Apple ultimately solved for. 

After several rounds of ideation, Apple didn’t end up building a “phone” at all. Instead, they set out to build a tiny computer that could also make phone calls.

Develop & Validate a Product Concept

Apple knew how to build full-featured computers, and they knew how to build small consumer devices like iPods. But they had never attempted to build something both as small and as powerful as the iPhone would need to be.

They went through many product concepts before settling on a single pane of durable glass, with a multi-touch interface. They knew it solved the problem, and it was delightful to use. But it wouldn’t be cheap.

So how could they validate customers’ willingness to pay?

They built a hypothesis based on their research during the validation stage. Clearly, they couldn’t target broad market adoption initially. But if their Serviceable Obtainable Market was only 1% of the total mobile phone market, they could focus on consumers with sufficient disposable income.

After multiple rounds of market testing, they targeted consumers who were fashion-forward, cared about convenience, and likely already owned both a mobile phone and an iPod. This put the iPhone’s $499 and $599 price tags within reach of the target market.

Finding Your Product-Market Fit

All the recommendations we covered here can provide a framework to help you gather and analyze this data. To achieve Product-Market Fit, remember that your product must be valuable, viable, and feasible.

Develop a market opportunity hypothesis, screen for fit, validate the market problem, ideate, and finally, develop and validate your product concept.

At the heart of product-market fit is listening to the Voice of the Customer: observing their behavior and determining what problems they are looking to solve when they purchase your products and services.

The rest is up to you.

Voice of the Customer: The Complete Guide

An effective Voice of the Customer (VoC) strategy will help to identify what customers need, want, and what their pain points are. We have created this guide to assist you in achieving greater success with your VoC activities.

Product-Market Fit Tools

If you want to learn more about the tools and techniques needed to find Product-Market Fit, consider taking one of our Digital Product Management courses that will provide you with more knowledge about these tools, and give you opportunities to learn them by trying them out. We offer this course in several learning styles to meet your needs.

Develop Digital Products That Matter

Learn the iterative customer-led product management methodology used by successful companies.