How to measure product market fit?

Importance of product-market fit

Achieving product-market fit is a critical goal for startups and a key driver for business growth. It's the point at which a product meets a strong market demand and starts delivering significant value to its customers. Without this alignment, even the most innovative products can struggle to gain traction.

For product managers, understanding and measuring product-market fit is essential. Utilizing the right product development tools and strategies, they can refine their product to align more closely with market needs. This not only informs critical business decisions but also helps prioritize feature development, driving sustainable growth of the business.

Key metrics that indicate the product-market fit

Product-market fit can be determined by observing a range of key metrics that provide valuable insights into how a product is performing in its intended market. However, the following is not an exhaustive list of metrics that can indicate product-market fit. Product managers have different way of measuring it, but the following can be good indicators:

Sales volume

Strong and increasing sales numbers often indicate a product-market fit. It shows customers are willing to pay for your product, which could also mean that the product answers customers’ needs or provides a good alternative to existing solutions on the market.

Addressable market size

Understanding the size of the addressable market helps determine whether a product has hit a scalable market. A larger addressable market can indicate a greater potential for growth and product-market fit, and more room for new products to enter the market and capture part of it. The addressable market is a good indicator of the growth potential and should be taken into account when making projections of growth.

Customer retention rate

A high customer retention rate indicates customers are finding value in your product over time, which is a strong sign of product-market fit. It shows your product is not just a one-time wonder, but something that customers continue to use and derive value from. Retained customers are what startups and businesses strive for because they increase the predictability of business results and play a significant role in making a robust and healthy growth plan.

Net Promoter Score (NPS)

NPS measures how likely customers are to recommend your product to others. A high NPS means customers love your product enough to promote it, signaling a strong product-market fit. However, NPS score can be better measured when the pool of customers has reached a consistent level. Moreover, when the business speaks to retained customers, as these are engaged with the businesses to a greater extent and more likely to recommend the product to others.

Customer lifetime value (CLV)

A high LTV indicates customers find consistent value in your product, resulting in prolonged use. This continued use and high LTV can denote a solid product-market fit. If the customers don’t provide a good lifetime value, the marketing costs might increase. This is why it’s good to look at LTV in conjunction with CAC.

Customer acquisition cost (CAC)

If the cost of acquiring new customers is significantly lower than the revenue these customers generate, it's a good sign of product-market fit. It shows the product is valuable enough for customers to engage and contribute to a positive return on investment. If it’s expensive to acquire new customers, you want to make sure they stick around for longer, so that their CLV supraseses the cost per acquisition.

Referrals

An increase in referrals often indicates satisfied customers who are recommending your product to others. It's a significant sign that your product has hit its stride in the market. Referrals are different from the NPS score, focusing on how many customers actually refer the product to others, and not only how many customers would recommend the product.

Conclusion

These metrics are typically used in parallel to provide a stronger indication of product-market fit. Consider monitoring metrics that make sense for your business. In addition to the ones mentioned above, other key metrics some businesses monitor include demand, press coverage, website or platform traffic, comments, and influencer reviews, among others. Monitoring these metrics can help businesses identify when they've achieved product-market fit, thereby enabling them to make informed decisions and strategic moves for growth.