How to understand your product-market fit data

TLDR

If you've done all the work to gather data about your product-market fit, don't let it go to waste! Use this guide to get the most out of your hard work.
How do you really know if you have product-market fit? Eric Ries, author of The Lean Startup, said, “If you have to ask whether you have product-market fit, the answer is simple: you don’t.”

But is it really that simple? In our article on product-market fit, we covered some qualitative signs to watch out for as indicators that you’re on the right track. Let’s learn how to analyze data to help you determine whether or not you have product-market fit. Today, we'll cover:
  • Quantitative methods for assessing product-market fit
  • Indicators of good product-market fit
  • Pitfalls to avoid when assessing your product-market fit

Quantitative methods to assess product-market fit


Net Promoter Score (NPS)

The NPS stands for Net Promoter Score, and is used as a worldwide standard by all kinds of companies, big and small, to measure customer experience. It’s simple and asks just one thing: for respondents to rate the likelihood that they would recommend a company, product, or service to a friend or colleague. You’ve probably seen these surveys and maybe even filled a few out yourself. 

NPS survey responses range from 0-10 (with 0 representing “not at all likely” and 10 representing “extremely likely”). 0-6 ratings are categorized as detractors, 7-8 ratings as passives, and 9-10 ratings as promoters. The final score is calculated by taking the percentage of people who are Promoters (9 and 10 ratings), and subtracting that from the percentage of people who are Detractors (0-6 ratings). The final rating can range anywhere from -100 to 100. 
 
While simple, many consider a Net Promoter Score to give a good sense of general customer satisfaction, with a score above 50 indicating that you may be close to product-market fit. 

The NPS can be implemented as early as an MVP and it’s most effective when there’s a way to follow-up to gather more insight. For example, if you’re at a 40, that’s fairly close to 50 but you’re not quite there. Why? Having a way to dig in for qualitative insights may be more valuable than the metric itself when you’re aiming to get to product-market fit. And if you’re at -40, it may not necessarily be for lack of product-market fit, and could be an issue with your product experience—which is why you need to be conducting usability tests.

Pirate Metric Framework 

Dave McClure is a venture capitalist, angel investor, and the creator of the Pirate Metric Framework, a popular model for startups to measure growth based on user behavior metrics. It’s named for the acronym that each of the five steps spells out: AARRR. 

  1. Acquisition - how effectively are you getting customers to use your product?
  2. Activation - how good is the onboarding process?
  3. Retention - how often are people coming back?
  4. Referral - are your customers referring others?
  5. Revenue - are you making money?

You can develop KPIs (key performance indicators) for each of these steps based on industry benchmarks, as well as look at trends over time within your own business to determine product-market fit. For example, is your referral rate increasing over time as you improve your product? 

These five steps are considered to be the most important metrics for any startup to focus on in order to drive growth, although the emphasis on specific steps could vary depending on your product and industry. You’ll also need to look at external factors as well as all steps together. 

For example, two subscription software companies may both have high acquisition and activation metrics, but if one has a much higher retention rate than the other, then that’s the one that has product-market fit. The other? You’ll need to do some customer research and testing and look at other data points to determine where you’re losing customers. 

Revenue may not be an important factor in early stages for some businesses where the goal is to acquire customers in a growing market before deciding how to monetize, as many startups have such as Twitter or Instagram (Instagram didn’t “monetize” until it was purchased by Facebook in 2012, two years after launching with zero revenue). This, however, is a risky strategy that usually requires a lot of funding, and it tends to happen for “unicorn” startups in high-growth, high-value markets. Many startups end up failing this way, when they haven’t effectively monetized and run out of money before achieving product-market fit. So in that sense, true product-market fit hasn’t ever been achieved, even when it may look like it has.

Signs of product-market fit

Here are some generally accepted metric indicators that you’ve achieved product-market fit:

  • Acquisition rate is trending down while retention rate is trending up
  • Customer acquisition cost is lower than lifetime value of customer (3:1 return)
  • SaaS Rule of 40: growth rate plus profit margin should equal or exceed 40%
  • Exponential organic growth (sales, conversion, engagement)
  • Very high user retention (at least 40%)
  • Sean Ellis rule: at least 40 percent of customers would be “very disappointed” if your product no longer existed

Beware of vanity metrics 

Looking at singular metrics alone may not be indicative of product-market fit. For example, a high NPS rating points to high customer satisfaction and the likelihood that a customer would recommend your product. But, what if your actual referral rate is low? If there’s a lack of motivation to refer other customers, you may find it hard to grow organically, and since one key aspect of product-market fit is that the market grows itself, then even with a “perfect” product you may not have product-market fit. 

You may also be exhilarated when your acquisition rate starts to grow exponentially, but do you know why? And if you have one million sign ups because a celebrity tweeted about your product, but all four other steps in the Pirate Framework are lacking, you don’t have product-market fit either. 

Vanity metrics are metrics that look and sound good, but ultimately mean nothing. They’re commonly metrics like social media followers, pageviews, signups, press mentions, investment dollars and funding rounds, and even revenue if revenue is driven by advertising dollars or comes at a high CAC (customer acquisition cost). They can even lead companies, investors, employees, and customers astray in contributing to the illusion that a company is successful when it’s not. 

Always keep your eye on true signs of product-market fit, and put this above all else, before scaling and before you hire for growth.

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