The single most important factor to the success of your business
Do you have product-market fit?
Imagine launching your product or service after months of hard work, excitement high, only to realise the market doesn't want what you offer. Unfortunately, this scenario isn't uncommon. According to Harvard Business Review, 42% of startups fail simply because there's no market need for their products or services.
Product-market fit (or service-market fit if you're a service based business - I will use product-market fit to reference both) refers to being in a good market with a product or service that can satisfy that market's needs.
Marc Andreessen, a prominent investor and entrepreneur, describes achieving product-market fit as the moment when customers become advocates, growth accelerates, and demand starts to outpace supply.
It isn't just important for a business —it's critical.
Why Is Product-Market Fit So Crucial?
Without it, you are stuck in Existence stage and eventually your capital will run out.
Because, achieving product-market fit means you have validated your assumptions and reduced the significant risk associated with launching your business or new offering.
MIT Sloan Management Review emphasizes that businesses that prioritize market fit conserve resources and accelerate their growth trajectory by clearly meeting customer demands from the start.
Stanford’s Steve Blank advocates the lean startup methodology precisely because it prioritizes product-market fit through rapid iterations and customer feedback loops. This reduces wasted time, money, and effort on features and products customers don't want.
Forbes highlights that strong product-market fit significantly increases customer retention, repeat purchases, and lifetime value, directly translating into higher revenue and profitability.
It all comes down to product-market fit
In Australia, it is estimated that one in three new small businesses fail in their first year of operation, two out of four by the end of the second year, and three out of four by the fifth year. Research by the University of Technology in Sydney estimates that only 3-5% of businesses prepare a business plan before launching, that is they have worked out if their business is feasible and have a plan to operate it.
Commonly cited reasons for business failure in the research are, in order of frequency: financial mismanagement, bad management, poor record-keeping, sales and marketing problems, staffing problems, failure to seek external advice, general economic conditions and personal factors. A closer look at these findings is instructive. The single largest contributor to business failure is financial mismanagement, responsible for 32 per cent of all business failures.
The range of problems that combine to make up financial mismanagement are lack of business experience, cash flow problems, being undercapitalised at the start, excessive private drawings, overuse of credit, no budgets and inadequate provision for tax payments.
Aside from an inability to understand the cash in versus cash out management issue, a lot of those problems can be attributed to insufficient sales, lack of customers, lack of market, customer or industry knowledge, or poor marketing.
Which (for me), can all come down to product-market fit.
We can’t get complacent
Unfortunately, this doesn’t just apply to early stage businesses. And highlights that product market fit isn’t static and we need to review it at all stages of our business.
The "exit rate" for businesses in the 2022/23 financial year was 15 per cent — the highest it's been since the 2008 GFC. It’s a tough market out there with reduced spending and supply chain costs impacting some businesses. Reviewing your product/market fit in difficult times, helps you understand whether you need to adapt your offering to ensure you’re meeting the demands of the market.
Because markets can change quickly, right. We can’t get complacent.
Famous Examples of Getting It Right and Wrong:
Right:
Slack was originally a gaming company called Tiny Speck. They developed a multi-player game called Glitch which struggled. They then achieved extraordinary product-market fit when it pivoted and focused on internal team communications. They realised that the communication tool they had developed for the game solved a critical pain point in the workplace —efficient, transparent, enjoyable communication at work.
Airbnb aimed to solve a problem the founders had in finding accommodation during a busy conference event. , Airbnb found fit by targeting oversold events where traditional hotels failed to meet demand. Their deep understanding and responsiveness to market demand led to exponential global growth.
Wrong:
Quibi: Despite a $2 billion investment and Hollywood backing, Quibi, a mobile-only streaming service with a focus on short-form, mobile-only content, while initially innovative, proved unsustainable in a market already saturated with free, similar services like YouTube and TikTok. Their expensive marketing campaigns, including a Super Bowl ad that failed to effectively communicate the platform's value proposition, were largely unsuccessful in driving user acquisition. Quibi's leadership, despite initial flexibility, failed to adapt to changing market conditions or make necessary pivots to address the challenges it faced.
Applies to all stages of business
Whether you’re launching a startup, growing a small business, or expanding into new markets, product-market fit remains paramount:
As a startup, your focus must be on rapidly validating your product assumptions. You should prioritize speaking with potential customers, understanding their pain points, and iterating swiftly.
For companies in the growth stage, maintaining product-market fit means constant vigilance and adaptation. Netflix regularly adjusts its offering based on evolving viewer preferences, ensuring sustained market fit.
Even established businesses must revisit product-market fit when entering new markets. Starbucks faced initial challenges in Australia due to poor alignment with local tastes and competition, highlighting the importance of adjusting products and services for new customer segments.
At 25eight, we always start by assessing your product/market fit regardless of your stage of business growth.
Depending on the program you complete with us, you’ll either learn the concepts or be supported to determine all aspects of product/market fit.
I can’t emphasise how important it is before you start any activities in your business. If you haven’t determined it, understand your positioning, it makes your marketing messages less effective, your sales pitches have lower conversions and the time it takes you to get ROI for new launches, longer.
Three things you can do today to Prioritise Product-Market Fit:
Talk to Your Customers: Consistent customer interaction, feedback collection, and swift adaptation based on their input helps you understand and meet their needs.
Make sure to measure: Utilize metrics and customer satisfaction indicators to continually assess product-market fit.
Stay Flexible and Agile: Prioritize consistent market understanding/continuous learning and willingness to pivot as needed based on market feedback.