Why Product-Market Fit Needs a New Definition
It’s been said that the only thing that matters is product-market fit. However, I’m not sure if the definition of product-market fit many product designers use today is sufficient.
Perhaps one reason is that we’re working with a definition that’s a decade old. Marc Andreessen, in his 2009 blog post, coined product-market fit, defining it as “being in a good market with a product that can satisfy that market.” But much has changed since then.
Instead, companies should focus on a more modern definition. Dan Olsen, author of The Lean Product Playbook, defines product-market fit as meeting the underserved needs of target customers better than the competition (or the alternative).
Here’s why Olsen’s definition is more useful than the original and how business-to-business (B2B) software-as-a-service (SaaS) companies can better measure product-market fit.
Why Is Product-Market Fit Important?
First, let’s examine why product-market fit matters. Two words sum up the importance of product-market fit: efficient growth. Growth in a B2B SaaS company is made up of two components, sales and retention. A company’s ability to grow at sustainable levels of marketing, sales, and customer success investment is largely determined by the level of product-market fit the company’s products have achieved. The ability to grow quickly and efficiently really is the only thing that matters — and product-market fit is the main driving force behind efficient growth.
A More Modern Definition
The older definition of product-market fit is insufficient for today’s B2B SaaS companies because the greater business environment has changed. Barriers to entry, especially in the broader technology industry, are lower than ever before, which means there’s more competition as customers have more choices. And, more than ever before, software companies are acknowledging retention as the key driver of growth. But the classical definition of product-market fit doesn’t take into account competition or retention.
Returning to Dan Olsen’s definition of meeting the underserved needs of your target customers better than the alternative creates a more useful definition for product teams. First, it simplifies the notion of a market — a market is simply a collection of target customers. Simple. Next, it clearly states that the objective of building products is not only to meet underserved needs, but also do so in a way that is unique and differentiated from market alternatives or other substitutes.
Olsen’s definition is succinct and actionable in a modern and highly competitive business environment, but it also stops short. It leaves out two important principles of product-market fit that are crucial to understand.
From my experience as a product leader, I believe there are two immutable laws of product-market fit: It’s not binary and it’s not persistent.
- Product-market fit is not binary. A company doesn’t have product-market fit or not; there’s a spectrum of product-market fit. Companies that have a high degree of product-market fit can grow more efficiently than companies that have less of it.
- Product-market fit is not persistent. Once a company achieves a high degree of product-market fit, it doesn’t mean the market will unanimously cease to stop looking at newer and better alternatives. Again, the business environment for software companies is intensely competitive and companies must perpetually defend their product-market fit through continuous innovation.
By now you’ve probably figured out that for any of what I’ve talked about to be useful, you’ve got to know how to measure product-market fit.
How to Measure Product-Market Fit
The goal of a company is to obtain, improve, and defend product-market fit. Just knowing how many people logged in, came back to the site, or used a feature, for example, isn’t enough in a B2B SaaS context. Those metrics must be combined with business data, such as company revenue growth and customer retention targets.
Measuring product-market fit is the key to maintaining it and understanding where along the spectrum a company is. Which leaves us with a question: Is there an ultimate measure of product-market fit for B2B SaaS companies? Yes, there are two measures:
- Retention: By retention, I mean revenue retention, not user retention. There really isn’t any better or higher bar that I can think of to measure if your product is better than the alternative than when a customer uses your product for a month, a year, or more and still decides to buy it again.
- End-User Satisfaction: Product leaders need to measure the attitudes of those actually using their product using metrics such as net promoter score or the Sean Ellis test. Keep in mind that simply measuring adoption can lead to a false positive because most B2B end users don’t have a choice to use the product or not. Usage may be high but users might hate your product. Make no mistake, even if the buyer of the software loves the benefits, end users have a powerful voice and will ultimately out vote the buyer over time. I have a guiding principle for my product managers: “Buyers hire and users fire.” It’s a reminder that end-user attitudes are a crucial component of retention and product-market fit.
Achieving Modern Product-Market fit Is a Competitive Advantage
The 2009 definition of product-market fit isn’t wrong. It just doesn’t quite capture the current business environment in which most companies operate today. The modern B2B SaaS company runs on customer retention and software subscription renewals — targets businesses can only achieve by understanding their market better than the competition. Product leaders who understand and measure product-market fit are more likely to build defensible and compelling products that drive efficient growth. And, ultimately, efficient growth is the only thing that matters.