How to measure product market fit

Product-market fit describes the stage in the journey of a startup where the target customers have been successfully identified and they are being served with a product that meets their needs.

A major challenge for early-stage startups is needing to measure product market fit for their product, but having no clear path of measurement for all their products. 

Today we’ll explore a few ways you can measure Product-Market Fit (PMF) and ensure you’re heading in the right direction.

Methods To Measure Product Market Fit

1. The Sean Ellis Survey Method 

    One of the most effective and straightforward ways to measure PMF is through the Sean Ellis Survey Method. 

    Developed by Sean Ellis, a renowned entrepreneur and growth expert, this method provides direct insights into how well a product resonates with its users, centering around a single, pivotal question: "How would you feel if you could no longer use this product?"

    Respondents can choose from the following options:

    • Very disappointed
    • Somewhat disappointed
    • Not disappointed (it isn’t really that useful)
    • N/A (I no longer use the product)

    The premise is that if a significant portion of your users would be "very disappointed" if they could no longer use your product, you have likely achieved product-market fit.

    2. Net Promoter Score

      Net Promoter Score (NPS) is one of the metrics that is widely used to assess PMF. It measures customer loyalty and satisfaction by providing insights into how well your product meets market needs.

      Understanding Net Promoter Score (NPS)

      NPS is based on one simple question:

      "How likely are you to recommend our product to a friend or colleague?"

      Respondents rate their likelihood on a scale of 0 to 10. Based on their responses, customers are categorized into 3 groups:

      • Promoters (9-10): Loyal enthusiasts who will keep buying and refers others to your product.
      • Passives (7-8): Satisfied but unenthusiastic customers who are vulnerable to leaving your product for a new competitor with a better offering. 
      • Detractors (0-6): Unhappy customers who can damage your brand through negative comments, reviews or word-of-mouth.

      The NPS is calculated by subtracting the percentage of detractors from the percentage of promoters: NPS = % of promoters – % of detractors

      3. Cohort Retention Rate

        Cohort Retention Rate is one of the most insightful methods for assessing PMF. It provides a detailed view of customer retention patterns over time, offering valuable insights into how well a product meets user expectations and needs.

        Understanding Cohort Retention Rate

        Cohort retention rate involves grouping users based on a common characteristic or behavior, such as the month they signed up, and tracking their engagement and retention over time.

        This method allows businesses to observe how different cohorts interact with the product and how retention rates evolve over a chosen time frame.

        4. Customer Lifetime Value (LTV/CAC Ratio)

          This is the most revenue-driven metric. It measures how much you make from customers relative to how much you spend to get them.

          Understanding LTV/CAC Ratio

          Customer Lifetime Value (LTV): LTV is the total revenue a business expects to earn from a customer throughout their relationship with the company.

          It considers factors such as:

          • customer average purchase value,
          • purchase frequency, and the  
          • customer lifespan.

          Customer Acquisition Cost (CAC) is the total cost of acquiring a new customer, it includes marketing and sales expenses.

          The LTV/CAC ratio is calculated by dividing the LTV by the CAC.

          This metric can be efficient only when you can determine your marketing acquisition costs and define what it means to be an acquired customer.

          Finding product market fit is the first step to building a successful startup. If you haven’t yet found product-market fit, your first step should be to identify what’s causing the issue.  

          It could be because you are missing some vital information about your customers. 

          If you are struggling to identify what the issues are, in our last article, we discussed extensively how to achieve product-market fit for your product.
          Finally, if you would prefer a tailored solution for your startup, you can book a free 30-minute discovery session with any of your experienced startup growth experts.

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