What is Product-Market Fit? (+Why It Matters to Small Busineses)

Product-market fit is a marketing concept that's easy to define but harder to achieve.

It describes how well your product or service fits within your industry and factors in customer demand, word-of-mouth marketing, and more. Small business owners use it to assess the quality of their products and measure their business's standing within their industry.

In this post, we'll explain everything you need to know about product-market fit, including what it is, why it matters, and how to measure it in your business. We'll also review a few examples of product-market fit so you can see what a good product looks like in action.

What is product-market fit, and why is it important?

Let's start with the basics and define product-market fit.

Product-market fit simply means your offers satisfy your customers. Your products and services create good customer experiences that make people happy and leave them wanting to buy from you again. This demand for your business drives growth, keeps customers engaged, and creates timely marketing opportunities with your target audience.

Here's an example. Below is an image of Haystack Dryers, full-body drying systems you can walk through after getting your clothing wet. I've noticed these pop up at water parks, and they're a great example of product-market fit. When people get their clothes wet, they want to be dry. This demand (and convenient product placement) makes the Haystack Dryer a great fit for its market.

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Why is product-market fit important?

Product-market fit is crucial when starting a new business or launching a new product or service. It determines where this offer will fit within its marketplace and how successful your business will be. In other words, it validates your business plan by predicting if people will actually buy your product. That way, you can make smart investments that grow your business over time, especially in marketing, sales, and customer service campaigns.

Here are a few other reasons why product-market fit is important:

• Market Need:42% of startups fail because the market they're entering lack a need for what they're offering. It's important to determine if your industry needs your product and if customers will be willing to buy from you.
• Business Efficiency: Product-market fit helps you determine where to allocate resources to get the most from your marketing, sales, and service campaigns.

• Customer Advocacy: If your product-market fit is strong, you'll increase word-of-mouth marketing and referrals for your business.
• Pricing Optimization: It's easier to figure out how much to charge for your products and services when you know how much customers are willing to pay.

But, how do you know if you have a good product-market fit? Let's talk about how you can measure it in the next section.

How to Measure Product-Market Fit

Unfortunately, there's no metric or stat to measure product-market fit. You have to compare business performance (products sold, services booked, revenue generated) with what you know about your customers. This combination of quantitative and qualitative data allows you to predict how well your product or service will be received.

Survey your customers.

One of the most direct ways to determine product-market fit is to survey your customers. Surveys come in many forms, but in this case, you should consider using Net Promoter Score®. Net Promoter Score is a survey that asks customers if they would recommend your business or not. Participants rank their answers on a scale of one to ten and can explain why they chose these scores in a comment box.

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Scores between zero and six are considered negative; people giving those scores would not recommend your business to others. Seven and eight are passive; these customers enjoyed but didn't love their experience. Finally, nine and ten are "promoters" who would actively recommend your brand to others.

NPS is great for measuring product-market fit. It shows what people think about your business and helps you quantify customer satisfaction. You can see how happy people are with your products and services, and the comments help you pinpoint specific areas for improvement.

Review customer service metrics.

Metrics measure business performance, and customer service metrics determine how happy people are with your products and services. These are great indicators for product-market fit because they represent real interactions with your customer base.

Here are a few customer service metrics that can help you measure product-market fit:

• Customer Satisfaction Score (CSAT): Customer Satisfaction Score or CSAT measures how happy people are with your brand.
• Customer Lifetime Value (CLV): Customer Lifetime Value measures how valuable a customer is to your business and how often they buy from you.
• Customer Retention Rate: Customer Retention Rate measures how long people use your product or how often they shop at your business.

To learn how to calculate these metrics, read our guide here.

Measure customer engagement.

Sometimes, the best way to determine product-market fit is to go to market. "Going to market" means you are making your product or service available to your customers. You might do this if you're launching a never-before-seen product or pioneering a brand-new industry. You can't predict product-market fit in these cases because you're creating an entirely new marketplace.

Take Uber, for example. The market existed, but no one knew that until Uber launched its services.

The company did plenty of research, but there was no way to predict if the product would succeed until they sold it.

Customer engagement software can help you hedge your bets here. By examining the content that your customers engage with, you can anticipate how well a product or service will be received.

For example, let's say we have a dog grooming business, but now we also want to get into daycare and boarding. We'll send our customers an email newsletter with a discount so they can sign up for our new services. We'll also promote our new service on our social media accounts and pay for a Google Ads campaign.

Let's say that after all this work, no one showed any interest in our new services. We didn't see much engagement on the email, nor did we drum up any attention on social media. We might want to reassess these services because they may not fit our market well.

That's a scary reality for small business owners. You invest time and resources into your business only to see your efforts fall flat. So, how can we avoid disaster and achieve a strong product-market fit?

How to Achieve Product-Market Fit

Here are five steps to achieve a good product-market fit in your industry.

1. Research your target audience.

It's hard to sell something when you don't know who you're selling to. Customer data, like the information in your CRM, provides insights about your target audience. It tells you who your ideal customers are, where they're located, and what communication channels you should use to contact them.

Understanding this information will help you position your products in a way that resonates with your customer base. That can be the difference between customers falling in love with your business or ignoring you because they don't relate to your marketing campaigns.

2. Interview your customer base.

Great products are born from customer pain points. If your business can alleviate stressful moments in your customers' lives, you're more likely to develop a stronger product-market fit.

The best way to do this is to interview your customer base. Ask them about your products and your competitors. Try to narrow down what your product does well and where your customers feel it falls short.

You should also see if there are other products that customers like more. If so, ask them what specifically they like about those businesses and look for ways to create similar offers at your company. Once you can pinpoint what your customers are looking for, you can craft marketing messages promoting that offer and differentiate your business from others in your industry.

3. Determine your value proposition.

Your value proposition is what makes your product or service unique. It's the main characteristic of your business that helps you stand out from your competition.

For example, MB Tractor & Equipment rents and sells construction vehicles. Its value proposition is quality. According to its website, it sells "the best tractors and equipment on Earth." Its social media accounts back this up by showcasing its products and highlighting its advantages over competitors.

Your value proposition chould be similar. Think about what makes your business unique, and ensure that theme is present in your advertising efforts.

4. Test your products and services.

Testing with potential customers is one way to determine if your product is a good fit. Like giving out free samples, it shows what people think and how they react to your business. If you can't sample your product for free, you might not have much luck selling it.

If you're starting a new business or launching a new product, try to engage potential customers where they shop. They'll be ready to purchase, and you can capitalize on a timely opportunity to close a sale.

For example, breweries and wineries will give out free samples in liquor stores. That gives potential customers a chance to try their product right before purchasing, which builds brand awareness and increases their chance of making a sale.

5. Measure, analyze, and improve.

To improve product-market fit, you should measure it over time. Surveying customers and reviewing data will help you identify opportunities to grow your business. It will also illuminate weak points in your sales plan and make crafting marketing messages that resonate with your audience easier. The more you can fine-tune your business to meet customer needs, the stronger your product-market fit will be.

Before we wrap it, let's look at some companies with a good product-market fit.

Product-Market Fit Examples

Here are three companies that have done an excellent job with product-market fit.

1. Downeast Cider

Downeast Cider is a hard cider company that started in Maine. When it moved its headquarters to Boston, it wanted to grow the brand and encourage more people to try hard cider. The goal was to convince potential customers that Downeast wasn't like the other brands; for instance, it wasn't packed with sugar like many of its competitors. People could enjoy the cider's natural flavors because it was pressed from real apples.

Downeast is now one of the biggest names in the hard cider industry. It's sold in bars and supermarkets nationwide and generates millions in revenue each year. Its unique brand positioning and understanding of its target audience are why it has become a staple in its marketplace.

2. Peloton

Peloton is a fitness brand that lets you stream live and recorded workouts within the comfort of your home. You don't need a gym membership when you can take kickboxing, yoga, and pilates classes in your living room. These sessions are led by fitness professionals who have become minor celebrities as a result.

Peloton has a great product-market fit because it solves a major inconvenience for its customers: going to the gym. A lot of people want to stay in shape, but getting up and going somewhere takes effort - not to mention the often exorbitant fees that gyms charge for memberships. Peloton removes these obstacles and makes it easy for people to do weekly workouts at home.

3. Boston Landscaping Services

Some of the best product-market fit examples are from seasonal marketing campaigns like this one. Boston Landscaping Services offers snow removal for residential and commercial properties during the winter.

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This offer is a good example of product-market fit because it takes advantage of a timely need. No one likes shoveling snow, and if you live in a region that gets a lot of it, you can get stuck at home if you don't have a snow removal service. It's a great way for landscaping businesses to expand their services during winter months when there are fewer outdoor projects to work on.

Product-Market Fit for Small Businesses

Product-market fit is critical for small business owners. Your audience is smaller, and you might have fewer resources, so you have to ensure that your business resonates with your customers and generates demand. While you may think your product or service is great (and it probably is), your customers have to think so, too. Follow these tips to learn how to measure product-market fit at your company and improve it over time.

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