Product Market Fit for Your SaaS Business
February 7, 2022 Edwin Kooistra
Startup founders especially in the tech space are obsessed with revenues and profits and cash flow statements. But what they fail to realize is that if they don’t develop an appropriate product-market fit then all their business will do is become a financial burden that churns out minimal results and requires heavy financial injections.
For the SaaS (Software as a Service) or tech-based business especially entrepreneurial ventures a product-market fit is critical because not only do you want your target audience to know your product, but you want them to buy it as well as spread the word about it, which can only be achieved if there is a fit and match between your target segment and your service offerings.
- What is Product-Market Fit?
- Product Market Fit Examples
- The Importance of Having Product Market Fit
- How To Achieve It for Your Product?
- How Can You Measure Product Market Fit?
- Product Market Fit Goals for Startups
- Can A Team Be Responsible for Product-Market Fit?
- How Can You Tell Whether You Do (or Don’t) Have Product-Market Fit?
- Frequently Asked Questions
- What Is the Product-Market Fit Phase?
- Why is Product-Market Fit Is So Important When Developing a Product?
- Way Forward
What is Product-Market Fit?
Product market fit refers to a situation where a business’s target market segment is purchasing their product or service, using it as a part of their daily life, and are also letting other people know about its benefits. And this word of mouth and buzz is so much so that it is more than enough to not only help the company grow but also sustain its profitability.
Mark Andreesen the famous investor and entrepreneur, who is also known to be the father of this concept simply defines the product-market fit concept as being able to find a suitable market whose needs a satisfied by your product offerings.
When it comes to startups specifically those operating in the technology sector, the presence of a suitable market fit as a part of their business plan and elevator pitch when attracting investors has become an imperative. Every investor now demands evidence of an effective product-market fit before investing in any sort of startup venture.
This of course is a compulsory requirement because how can you even judge whether the value proposition of a product that you are investing in is even a match for the segment at which it is targeted. Because if your product is literally groundbreaking and has this amazing set of benefits but they do not cater to the market’s need or vice versa then not only will you suffer financial loss but the whole motivation of developing the product in the first place will stand null and void.
Product Market Fit Examples
Let us now look at some examples of product-market fit executions that will help us further elaborate and understand this concept and why its appropriateness and match are critical to any SaaS or technology-based business’ success.
We saw the end of Napster due to copyright issues, but it did prove the point that a music streaming service was needed by the market. Spotify came into the market with a smart solution and incentivized people by paying a small amount to literally own music. After that, there was no looking back.
Messenger service for use within teams, the product team itself was developing a role-playing game when they made Slack for communicating within themselves and before we know it, they recognized a market for it, and instead of taking the role-playing game to market they took Slack to their target market segment
It is the perfect example of how your product-market fit evolves. Starting as a DVD subscription service to help people get rid of brick and mortar stores and late fees, it eventually transformed itself into a streaming service where it’s sold the DVD player fading out.
The Importance of Having Product Market Fit
The imperativeness of having a product-market fit for your SaaS or tech-based service or product cannot be ignored. A product-market fit analysis along with results plotted using product-market fit metrics is one of the critical requirements of today’s venture capitalists’ market.
The world of venture capitalists has transformed over the years and not in a way that may seem to benefit tech startups inherently. From 2017 onwards a gradual decrease in the funding that is up for grabs has been recorded in the US market especially whereas the standards and requirements of venture capitalists and investors for putting their money in an idea are becoming stringent day by day.
With a decrease in market funds available to be invested in your SaaS business, entrepreneurs must prove to investors that their idea does not only seem good on paper but is the right and perfect fit for the market they’re targeting.
Sometimes the appropriateness of a product-market fit is proven when you were asking for investments, such as in the case of high demand in the market and production being put at pace. Here you might want to conduct a product-market fit survey to determine whether the fit exists or not.
The survey will ask questions from a percentage of actual users of your product or service and if more than 40% of them respond negatively over the possible removal of the product from the market then only do you stand a chance to receive an investment.
This may seem like a very strict standard or rule to be followed by investors, but you must understand that they’re putting in their hard-earned money in your idea so for them to trust you and ensure that you just do not burn their money to the ground, they need to see your product-market fit analysis in a tangible form.
How To Achieve It for Your Product?
Now that you have developed an understanding of what a product-market fit is and why is this framework necessary for your SaaS business, we should now look at the steps or actions that you can take to develop the same for your SaaS product.
Knowing Your Customer
The first step is to define your customer persona, which means who exactly is your target market segment will buy your product and what are his or her character traits or personality traits and even demographics.
When talking in terms of B2B businesses you need to define the customer persona and relevance to their industry, business category, organization size, and sometimes even in relevance to their annual turnover.
This of course requires a lot of customer market research and analysis that needs to be done through surveys and with the help of professionals such as those offering their positioning and strategic segmentation services.
Check Out: How you can create an ideal customer profile using this free ICP template.
Being Aware of Their Unfulfilled Needs
Sometimes the customer is not aware of their unfulfilled needs or their pain points. It’s your job as a SaaS business owner or tech entrepreneur that when developing your product-market fit framework, you tap into the uncatered needs of your target market and tweak your product’s fit accordingly so that your value proposition not only delivers satisfaction and solves their problem but also helps them in realizing and identifying an inherent pain point of which they were not aware.
Developing Your Value Proposition
Here you must define how is your solution or value proposition better at meeting a customer’s need than the options already available in the market. Are you competing on quality or price or is your product a different niche of a solution when it comes to a particular issue? This is the step where you define your competitive advantage as well.
Identifying Your Minimum Viable Product (MVP)
Here in this step, she will identify the least number of features or minimum number of offerings that you will make a part of your product for it to be functional and of course be feasible for you to execute as well.
Creating Your MVP
In this step, you will use the framework that you have developed for your MVP or minimal viable product and give it a tangible form. At this step, you do not need to worry about it being perfect because you will take in customer feedback at later stages and use it to further develop and enhance your product or service.
Testing Your MVP
Show your product to a certain segment of your target market. Take their feedback and how especially if it’s a SaaS product, can you improve its pricing models, user interface, and ease of usability.
Use this feedback to further optimize and improve on your final product before taking it to the market. At this stage, you should be able to understand how well your product fits with the target market and whether your product-market fit checklist is completed or not.
Based on the feedback you have received you might want to re-develop your MVP altogether or even reidentify your target market segment and develop a new customer persona from scratch.
How Can You Measure Product Market Fit?
There is no fixed set of metrics to measure product-market fit or deliver the good news that you have achieved product-market fit for your SaaS business offerings.
But experts from the industry state that we can use a combination of both quantitative and qualitative metrics to measure and develop an understanding of the effectiveness offer the product-market fit.
Quantitative measuring metrics that you can deploy to measure product-market fit are:
- Net Promoter Score (NPS)
- Churn Rate
- Growth Rate
- Market Share
- Customer Retention Rate
Qualitative metrics that can be deployed to understand the effectiveness of your product-market fit is as under:
- Word of Mouth
- Positive Media Exposure
- Increase in Brand Awareness
- Mentions and Reviews
Product Market Fit Goals for Startups
Let us now look at some goals and objectives that startups especially those about SaaS should set for themselves in relevance to developing their product-market fit.
Determining Your Target Segment
Of course, the first and first foremost goal when developing a product-market fit framework should be defining your target segment in the market which you want to enter.
Gathering Market Intelligence
You must want to know anything and everything about the market in which you are operating or aspiring to operate. No information or piece of evidence is less important or more important. You should make well-informed decisions based on market information and data collected via extensive customer research.
Specifying Your Focus
Being a startup of course you are strapped for cash in the majority of the cases, therefore you should define your focus to a particular vertical or niche within the market instead of trying to capture the whole market at one point in time. Not only do you have a deficiency of resources to do so but it is also not feasible in terms of an appropriate product-market fit approach.
Defining Your Value Proposition
Determine that which customer need can you fulfill with your product’s value proposition. Find out how you can outperform your competitors and offer such features in your service product that not only delight the customers but also help you learn more about the customer persona in the process.
Measuring Your Product Market Fit
Use different product-market fit metrics to measure the effectiveness of your product-market fit strategy. You can deploy services, conduct surveys and even use quantitative metrics such as growth rate or your penetration in the total addressable market(TAM).
Transforming with Times
Once you have achieved the ideal product-market fit for your product or service, do not become complacent. As seen in the tech industry, the product-market fit keeps on evolving with time.
Therefore, if you want to sustain your profitability and grow along with the industry instead of just fizzling out you need to keep on optimizing and improving your product-market fit approach.
Can A Team Be Responsible for Product-Market Fit?
Generally, in the industry, developing and achieving a product-market fit is assumed to be the responsibility of the product development and marketing team. But with evolving times and extensive research, it has been observed that the development of a product-market fit is not a single individual’s or team’s responsibility or effort.
Different functions across the organization such as finance, supply chain, customer services, etc. all need to work in cohesion to determine and execute the most appropriate product-market fit framework for the business.
How Can You Tell Whether You Do (or Don’t) Have Product-Market Fit?
There are no rules set in stone to analyze and identify whether you as a SaaS or tech-based business owner have been able to achieve a product-market fit for your product or service. But of course, there are some generally accepted benchmarks in the industry that you can use to analyze the degree to which you have been able to achieve a product-market match.
Signs that Product-Market Fit Has Been Established
- Customer acquisition cost reduces.
- User Engagement and Customer Dependency
- Revenue Growth
Signs that Product-Market Fit Has Not Been Established
- The increasing cost of customer acquisition
- Negative Cash Flows
- The Conversion Rate is decreasing
Frequently Asked Questions
What Is the Product-Market Fit Phase?
The product-market fit phase refers to the stage in which you are developing a market for your product or service and creating brand awareness. It involves defining how and why your product addresses customer needs, determining the launch date, and shaping to work with your MVP.
Why is Product-Market Fit Is So Important When Developing a Product?
Product market fit is important when developing a product because without its presence you cannot determine the effectiveness of the value proposition of your product or service in solving your market’s problem and whether the market is big enough for the product itself. After all, if you cannot establish the commercial viability of your service via product-market fit then injecting money into its development is a lose-lose situation.
When talking about product-market fit always remember that it is not a one-time or discrete event or effort and it needs to keep evolving as you grow within the industry.
We also need to highlight that no fixed product-market fit framework or checklist is the key to success because going through the different dynamics of businesses, the industry they are operating in, the customers that they are targeting, and especially the pricing of the product or service itself, the product-market fit is highly subjective and needs to be developed individually and crafted especially for every service or product belonging to a particular business.