What Is Product-Market Fit? (Definition with Tips)

By Indeed Editorial Team

Published 10 May 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

New businesses can be volatile and their rates of growth and development can change rapidly depending on different circumstances. When a business stabilises and can sustain its growth because of reliable consumer activity, this phenomenon is called product-market fit (PMF). If you're interested in business and finance-related concepts, understanding what a PMF is can help you analyse business growth and behaviour. In this article, we define what a PMF is, go over related concepts and explain how to assess the product-market fit of a business.

What is product-market fit?

Product-market fit occurs when a business can sustain its development and profitability long term because its customer base is behaving consistently. PMF mainly refers to when your customer base is buying your products, but also applies to businesses based on consumers selling or sharing products. Stable customer activity usually occurs when a business reaches its projected value proposition, organises all of its distribution channels and fulfils customer expectations. Businesses can usually achieve PMF through extensively testing different business models, pricing policies and customer service procedures.

Related: What Is a Supply Chain? (With FAQs and Examples)

Example of a business achieving PMF

Here's an example of a pop-up restaurant achieving PMF:

A pop-up restaurant travelling and selling food in different locations experiences irregular sales because they consistently move locations. Customers start sharing images and stories about the restaurant on social media and in reviews, driving demand that results in more consistent consumer activity. The restaurant can now gauge demand more accurately and produce appropriate supplies to meet it. Using this data, the restaurant can better model sustainable growth and adapt its strategies accordingly over time, resulting in the restaurant achieving PMF.

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Business strategies to achieve PMF

Many business strategies can contribute to a business achieving PMF. Here are some business strategies that a company can implement to achieve PMF:

  • Market research: Gathering information about customer preferences and expectations to better fulfil them can help a company achieve PMF.

  • Product design: Product designers target market gaps by creating more products that more effectively fulfil customer needs than the market currently offers. This helps a company's products better meet demand, helping a company achieve PMF.

  • Customer outreach: Building strong communication with customers can help a company identify and target market needs and expectations more effectively. Routinely asking for feedback and encouraging user reviews can help companies identify product strengths and weaknesses.

What factors contribute to PMF

Achieving PMF can be a complex process involving several contributory factors that can alter the sustainable growth of a business. Here are some factors that most commonly affect a company's market fit:

Market

It's important for businesses to be aware of their competitors and the products or services they offer when aiming for a PMF. Comparing different offerings in the market helps businesses identify what makes their product unique and how to emphasise it in promotional material. Creating innovative products or services and marketing their unique features is often how businesses can reach sustainable growth. Companies struggling to reach a PMF can assess what their competitors are doing and see if they can improve upon their products or strategies.

Product

The quality of a product and the unique features it offers can have a great effect on sales volume and customer interest. Trial and error are often necessary to establish the right balance of functionality and affordability to develop a loyal customer base. It's also important to design a product that caters to new and existing customers. It's essential for companies to research potential product upgrades that better meet the needs of consumers regularly, as the needs of customers often evolve with changes in other aspects of a market.

For example, if a competing company creates and implements a better material into their products with minimal changes in price point, target consumers may start expecting this material or similar quality in other products.

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Team

A reliable team to execute a company's mission and achieve long-term objectives is essential for reaching a sustainable growth rate and consumer pattern. A work environment that emphasises collaboration and trust can also result in increased productivity and company loyalty to help a team stay motivated to reach organisational goals. Having dedicated team members for different tasks like marketing and outreach can encourage fresh ideas and creativity. Having a diverse team can also help garner different perspectives when analysing operations and strategies.

Value proposition

The value proposition of a business refers to the value of its products relative to what its competitors offer to consumers. This may include exclusive services, unique features and benefits that consumers can take advantage of by being a company's customer. Some companies offer discounts and promotions to supplement their value to customers and as an opportunity to engage with consumers. Increases in customer interest usually signify that a company's value proposition is effective and that customers are actively choosing their products over competing options.

Related: Adding Value to a Company: Definition and 10 Ways to Do It

How to assess PMF of a business

Assessing a company's market fit involves identifying how much consumer interest there is for a product and how well consumers are promoting it to others. Here are some steps to assessing a company's PMF:

1. Measure customer interest

Comparing overall product sales over a timeframe is the standard way to measure whether customers are interested in a product. It's essential for companies to conduct thorough market research of their own and competing products to establish what decisions target customers are making. For example, you can identify what features, price ranges and aesthetics target customers prefer. This can involve using surveys, interviews and online lists to establish if consumers have a good opinion of a product. It's important to identify situations of customers switching brands to establish their reasons for doing so.

2. Read reviews and recommendations

Reviews can help you identify whether consumers are actively recommending a company's products to other people and what reasons they may have for doing so. You can also directly engage with consumers on social media to get more personalised and direct feedback. Companies can incentivise customers to rate products and refer their friends and families through promotions, such as providing referrers and their referred customers discounts or store credit. If people are recommending a product to others, it's likely that a company is approaching a market fit and sustainable model for growth.

3. Calculate churn and growth rate

A company's churn rate is a useful statistic that tells you how often customers stop purchasing a product or using a service. A churn rate is a calculation of the percentage of customers lost each month. You can compare this statistic to a company's growth rate, which is the number of customers gained each month. A company with a high growth rate and low churn rate indicates a business is likely to grow sustainably and has achieved PMF.

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Tips for achieving PMF

Here are some tips for achieving PMF sustainably and rapidly:

  • Define target customers: Trying to appeal to too broad an audience with no sense of expectations can make for inconsistent products and less effective decisions. It's essential for companies to define their target customers and their needs clearly to understand why they buy a product and what marketing methods can target them more effectively.

  • Find market gaps: Find a gap in the market to target with a product, such as customer needs, that existing businesses are not meeting. Common examples include missing functionality, price ranges other businesses neglect or added convenience in a service.

  • Gauge expectations: Examine what the market currently offers and determine what existing customers expect of a company's products. If a product is innovative but doesn't fulfil some expectations that a target customer base already has for similar products, it may be difficult to convert them into purchasing customers.

  • Monitor the market: Achieving PMF doesn't guarantee that a company can maintain it. Monitoring and comparing the growth of competitors can ensure a company is retaining its market share.

  • Test ideas thoroughly: Creating prototypes of products and business models can help a company establish what's workable before investing resources. Businesses often create a minimum viable product to test functionality and convenience with real customers before fully launching a product line.

  • Use feedback cautiously: It's important to identify relevant and useful feedback. For example, feedback from people who've reviewed multiple similar products can provide more practical information that a company can act upon.

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