Product-market fit is essential for building a successful SaaS company. But discovering that fit can be really expensive without the right processes to guide you. With the global SaaS market predicted to reach $623 billion by 2023, there’s plenty of money on the table. Unless you find product-market fit, you’ll end up wasting your own money and you won’t reap millions (or billions) in profit.
Whether or not you’re bootstrapping or seeking funding, fast product-market fit is critical. For bootstrapping founders, it means you can pull in revenue quickly and continue to fund development. For funded founders, product-market fit results in more trust from investors, less stress, and the potential for meteoric growth.
In this guide, we show you exactly how to fit the right product to the right market.
What is product-market fit?
Product-market fit refers to when a product is being sold to a target market that demands this product and is willing to pay a sufficient price for the product so that the company can be profitable.
While the term “product-market fit” can be used in any industry, it’s most frequently used in the SaaS and tech world. SaaS products are notoriously expensive to build, and because they help users achieve something, the target audience definitions can be more complex. For example, many SaaS companies sell to a certain role (such as the person in charge of accounting), rather than to a particular demographic (like middle-aged men).
How to find product-market fit when outsourcing development
Many non-technical founders will get an idea for a SaaS product, assume that the market will respond will to this idea, and then search for a software development agency to build it. Unless that agency takes a product-based approach and offers services for prototype creation, user testing, and prototype validation, then hiring them will backfire.
It is possible to find product-market fit when you outsource development, but you need to look for these key elements in the outsourcing partner you choose:
- Offers a Design Sprint or similar service
- Builds MVPs in 2 – 6 months
- Includes a product manager trained in business strategy (not just a project manager)
Top methods for finding product-market fit
So how do you find product-market fit, exactly? Whether you code an app from scratch, work with a technical co-founder, or hire an agency, it’s important to understand the methods available to you.
The 40% rule
Sean Ellis, a growth leader during the early stages of Dropbox, Eventbrite, and LogMeIn, has a simple test for finding product-market fit. He says that if 40% of your users say that if your software was to disappear, they would be “very disappointed.” When you ask this question to your users, you’re supposed to offer three possible answers:
- Very disappointed
- Somewhat disappointed
- Not disappointed
Hiten Shah conducted a product-market fit survey for Slack in 2015, and included 6 questions. These are the questions that he asked a small subset of users:
- How did you first use Slack?
- How did you first discover Slack?
- How would you feel if you could no longer use Slack?
- What would you likely use as an alternative if Slack no longer available?
- Have you recommended Slack to anyone?
- Are you receiving less email because of Slack?
When asked how they would feel if they could no longer use Slack, 50% of users said they’d feel “very disappointed.” Slack passed the 40% test with flying colors. Considering that Salesforce bought Slack for $27.7 billion, we shouldn’t be surprised that such a small number of users said the software wasn’t useful.
Google’s Design Sprint process
The Design Sprint Methodology breaks product strategy into unique phases:
- Understand – Research the target audience and their problems by talking to them and conducting social listening.
- Define – Clarify the biggest problem that needs to be solved.
- Sketch – Map out different ways to solve this big problem.
- Decide – As a team, choose which solution is the most viable (attacks the problem most directly, or is the easiest to build).
- Prototype – Create a prototype of the chosen solution.
- Validate – Show it to target users and get their feedback before deciding to move forward.
We’ll discuss some of these elements further in our other ideas below, but it’s worth noting that the Design Sprint Methodology is an end-to-end process for concept validation. However, the point is not just to create the right product, but find the right market too, so it’s important to note that if your product fails validation, it might be a market problem, not a product problem.
Prototype creation and testing
Regardless of whether you follow Google’s Design Sprint process exactly or not, you absolutely need to create and test a prototype of your product. Otherwise, you’ll have to build the actual software product before you get user feedback. Cost-wise, this represents a difference of tens of thousands of dollars.
At DevSquad, our Design Sprint service includes two iterations of a prototype. We create a high-fidelity prototype that looks and feels like the real final product, and users can click around on it (although the back end won’t be built out). You can conduct user testing, or we can run it for you.
Talking with potential customers about their important problems
When you’re talking with potential customers, you need to discover their biggest problems. You might start with one problem, but then realize that it’s not as important as you assumed.
Sometimes it’s smart to start with an audience, not a problem. Then you can discover the problem.
For example, business travel platform TravelPerk was founded by Avi Meir, a developer who previously worked at Booking.com. He knew that most business travel software was outdated, and decided to talk with travel managers and office managers at local startups in Barcelona about how they book travel.
He assumed that they would be interested in his concept of solving over-budget transactions by incentivizing travelers to stay within policy. But after talking with target customers in person, he found that the office managers were actually struggling with wrangling invoices. Employees were booking travel all over the place, and the office staff had to deal with the expense management, invoice collection, and reimbursement processing.
So instead of building a solution to incentivize business travelers to stay under budget, he and his team instead built a platform where business travelers can book travel for themselves, and the managers can control, pay for, and review everything.
Comparing feedback from different customer personas
If you have a product idea that could work for different personas, you should collect feedback from each group and analyze it separately. You might find that one segment is much more likely to pay a premium price for your product. If so, you should prioritize their feedback as you build, so you make sure to cater your product to the right market from the very beginning.
This can be true for not only different roles and industries, but company sizes as well. Let’s consider the TravelPerk example above. Had the co-founders spoken to very small businesses of 20 or fewer employees, they would not have found a problem worth solving. Those businesses can manage travel the manual way just fine. But by speaking with office managers of fast-growing startups, they were able to find a market that needed a solution before they even started building a product.
Balancing product tweaks and market pivots
Product-market fit isn’t just about building an amazing product, but getting it into the hands of the right people. As you go along, it’s important to balance the adjustments you make to your product and the adjustments you make to your market. There’s no general advice that can help you determine this balance. Just make sure that you keep an eye on both elements, and maintain a clear head. Don’t get fixated on either your product or your market. Instead, allow flexibility with both.
Building something that you personally need
Is there a SaaS product that you need? Are you 100% certain that other people like you need it too? One of our recent clients built BoosterHub to help school sports coaches and volunteers to manage every aspect of running a booster club, from contacts, to calendar, to collecting donations, to communication, to creating a website.
After volunteering for multiple clubs with her 3 kids, our client knew that running a booster club had not been digitized well, and knew that other parents at other schools struggled with it too.
Pitfalls on the way to finding product-market fit
There are lots of mistakes that founds can make along the way. And all of them have the chance to sink your business.
Outsourcing to a dev shop without a product-based approach
Never choose a software development agency that will treat your product like a project. How can you tell? Here’s the difference:
- A project-focused agency will listen to what you want to build and then they will give you a quote.
- A product-focused agency will take you through a prototype and user validation process before determining the backlog and quoting accordingly.
In other words, developers who complete projects are “yes men.” Agencies that employ business strategies and product managers are partners in helping you achieve product-market fit.
Not understanding when a technical co-founder is the right move
For founders who want to fully bootstrap their business or only sell a small amount of equity, working with a development agency instead of finding a technical co-founder is the best choice. That’s because you can spend a low amount of money on getting an MVP built, sell it, and keep all of the profit for yourself. No need to share it with a co-founder.
But for founders with a multi-billion dollar vision, you’re better off finding a technical co-founder to approach VCs with. That’s because big VC firms would rather see all development happening in-house. If you plan on selling most of your equity in exchange for venture capital (and dealing with the nightmarish stress of investor overlords), then find a co-founder.
At DevSquad, our clients are executives building new products within their company, or entrepreneurs who want to build a new business and own it exclusively.
Here’s more insight into why hiring an agency isn’t the best fit for founders looking for major VC money:
You go from nothing being built before you’re working with the dev shop to things happening once you have the dev shop. So you feel like you’re making all this progress. Until the first version is released, you’ve spent all that money, and you find that the first version doesn’t solve the problem, because it’s rare that an MVP does. And you need to start iterating, and you need to spend more time and more money with the dev shop. And this is when your funds run low. And you can’t raise more money or do more iterations. The vast majority of good early stage investors care more about whether you can build something than what you’ve built. They understand that at the point that they’re investing, there’s very little proof that you’re going to be successful. The thing that they’re more interested in is can you iterate through multiple versions of your product until you find the version that solves the problem that you want to solve. Unfortunately, doing that with a dev shop is more expensive than doing that with a technical co-founder. – Michael Seibel, partner at Y Combinator
Not building a true MVP
Building a large MVP is probably the most common pitfall. This is closely related to what type of agency you hire. If you work with an agency of yes men, you’re in greater of danger of building a large MVP than if you hire a company that specializes in Design Sprints, business strategy, and product management—not just technical software development.
How to maintain product-market fit over time
Product-market fit is a journey that never stops. Even when you have a successful product and the right audience, your product team will still need to keep a watchful eye on market changes and expectations.
If you don’t continue to use customer feedback to guide your product roadmap, you’ll create opportunities for your competitors and brand new startups looking to satisfy those market needs.
Here’s how to ensure that you always have product-market fit.
Having a product manager on board
As a CEO of a SaaS company, you need a product manager on board, whether that person is in-house or part of the development agency you’re working with. At DevSquad, we include a product manager for every product we take on.
Product analytics tools
Product analytics software is essential for finding top features, unpopular features, abandoned funnels and workflows, etc. Here at DevSquad, Mixpanel is our personal favorite. Check out this example of a Mixpanel dashboard:
You should use this data in combination with qualitative research to discover how to improve your product.
A UX researcher will talk with current customers about existing features and ask them what they think. The UX researcher might have the user screenshare as they use the product, or the researcher might just ask the customer questions and listen to their responses. For example, they might ask about an appointment booking feature and discover that the user is confused about how to book appointments for 3 or more people in one meeting. By discovering sources of friction and confusion, the UX researcher can discover room for improvement.
On small teams, product managers handle UX research.
User testing is also important to vet new possible features and products. Continue to create prototypes and get feedback, especially for features and products that are costly and time-consuming.
Testing new audiences
You’ll also want to make sure that your marketing team and sales team are working together to update your ideal customer profile (ICP). Your marketing team might find a lot of inbound interest from a user segment that sales wasn’t aware of. Meanwhile, sales can offer insights into which user segments are the most ready to buy.
How to test different market segments
How do you find product-market fit when you’ve already built your product? You need to test out different markets.
Here are ideas for different segments to try:
- Upmarket – Test out your product or prototype with companies that have larger budgets, revenues, and employee headcounts.
- Downmarket – Try approaching smaller businesses, particularly if large, complex sales cycles are a concern, or if your product might be better suited to small teams.
- Different job role – Test out your product with people in a different job role. For example, if you’ve been contacting accountants and finance managers, try CFOs instead.
- Different industry – Maybe a different industry has a greater need for your product, or a greater willingness to pay for it? For example, if you’re creating a productivity tool, other SaaS companies might be your best target audience, as they’re likely to use software to solve productivity problems.
Product-market fit trends and examples
Let’s take a look at some product-market fit success stories. Many viable products have used one of these popular ways of innovating.
Here are different ways that other companies have found product-market fit:
1. Make an existing activity easier
You can make an existing task easier to do. For example, Synup makes it easier for multi-location businesses to manage online profiles and directory listings, while Calendly makes it easier to schedule meetings without back-and-forth emails about availability.
2. Make an existing activity better
Another way to find product-market is to make life better for your customer base. For example, with TravelPerk, employees can book the travel they want within policy, while finance managers are automatically collecting the data on company spending habits. Gong is another example of this. Salespeople are already doing calls every day—why not track and analyze these calls to provide data-driven coaching?
3. Help generate new inventory
Many popular tech companies have risen to success by helping create new inventory for the market. For example, Upwork has yielded a rise in freelancers and Poshmark helps people sell their old clothes. All of a sudden, things hanging in the closet unused can become inventory to sell.
4. Improve transparency
Transparency is a big value among knowledge workers today. Is there an element or work or business that is still hidden? For example, Terzo is solving the problem of transparency when it comes to managing vendor contracts. Today, vendor managers in big companies don’t often know who originated a contract or why. The platform tracks and reveals information that was previously hidden or hard to find.
5. Digitize offline processes
MyCase is a popular SaaS platform for lawyers. It was one of the first to help lawyers digitize their offline processes. It can be used to collect information about a case, structure collaboration workflows, and securely store case documents.
6. Create something similar for the next generation
Each generation wants something fresh. It’s why TikTok and Snapchat are more popular than Facebook among Generation Z. And why they like Tinder over Match.com But this phenomenon doesn’t just apply to social media and dating apps. It’s true in the B2B software world too. For example, CRMs have been around for decades, but Pipedrive rose to prominence among millennials because of its attractive and simple UX and more intuitive features.
7. Disrupt the disruptors
With Asana and Trello and Basecamp being so popular, who would’ve thought there was still room in the project management space? Enter ClickUp and Monday.com. Both gained rapid market share and notoriety by innovating on top of those early disruptors. They added to the kanban board functionality with improved resource management planning, project visibility, and multi-format collaboration.
8. Solve governmental compliance requirements
Rules and policies change. With that change, come problems for affected businesses. What compliance nightmares can you help solve? Flowhub helps marijuana dispensaries with its compliance-boosting POS. Meanwhile, SaaS ticketing platform Secutix helps European events companies to collect and scan vaccine passports before an event—as easily as checking in for a flight at home before heading to the airport.
Product-market fit quotes
What do product leaders have to say? Here are some of the most insightful quotes.
Product/market fit is to exist within a good market with a product that can satisfy the market itself. – Marc Andreessen, co-founder of the VC firm Andreessen Horowitz
You want some good marketing advice, make stuff that people want. – Paul Graham, co-founder of Y Combinator
Founders are often misled by good acquisition numbers into thinking they’ve found product-market fit. Engagement and retention numbers will tell the real story. – Gigi Levy-Weiss, general partner at NFX
Before product-market fit, your only job that matters is to build a great product. – Sam Altman, former president of Y Combinator and current CEO of OpenAI
If you screw almost everything else up, you can still succeed. How else would you explain the success of a 25 year old running a billion dollar company. If the market demands your product and pulls it out of your hand. – Andy Rachleff, CEO of Wealthfront
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