How to Determine Product-Market Fit [Complete Guide]

Lea LeBlanc on June 20, 2023

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For SaaS startups, product-market fit is critical. It’s so important that lacking it is the number one reason why many SaaS startups fail.

We don’t want you to be one of the many SaaS founders who’ve invested time, money, and heart into starting a SaaS company that doesn’t succeed. So, we’ve created this comprehensive guide on how to determine product-market fit. 

But before delving into how to achieve product-market fit and position your SaaS company for success, let’s clarify what product-market fit means.

What Is Product-Market Fit?

Put simply, product-market fit means you have a product that fits and satisfies the needs of your target market. The more your product fits your target market, the more likely your SaaS startup will succeed.

A strong product-market fit will contribute to your SaaS startup’s success by ensuring the following:

  • Increased customer satisfaction: Customers will happily embrace a product that solves existing problems and has desired features. Satisfied customers are typically more loyal and willing to provide positive reviews.
  • Revenue growth: A product that fits its market will sell faster, leading to quick revenue generation and growth.
  • Competitive advantage: A product with a strong market fit will simplify breaking into the market and competing with existing businesses. You can even surpass competing businesses that pre-exist yours if your product has a stronger market fit.
  • Reduced marketing costs: A SaaS product with a strong market fit will likely sell itself. Once a few users try the product, they will sing its praises to other potential users, generating buzz and traffic for your brand. It’s free word-of-mouth marketing on your behalf, which is far more effective than any paid ad you could run.

However, SaaS startup product-market fit does not always happen overnight. Frequently testing your product with real users and measuring their satisfaction will provide valuable insights regarding your market fit. 

You can use the insights to continue improving your product to strengthen its position, attractiveness, and acceptance within your target market. 

The Consequences of Not Finding Product-Market Fit

You now know the benefits of having a strong product-market fit, but what happens if your market fit is weak or non-existent?

In summary, a poor product-market fit can lead to business failure triggered by issues like:

  • Slow growth
  • Low user engagement
  • Negative feedback 
  • Excessive churn (because users are not experiencing value)
  • High marketing costs

How to Determine Product-Market Fit as a Startup

You’ve seen the benefits of having product-market fit and the dangers of not having it. Now, you’re probably wondering how to achieve product-market fit. We’ve got you covered. 

Below is our comprehensive product-market fit checklist with steps for building a SaaS product that aligns with your target market’s needs and preferences.

Understand Your Target Market’s Needs

You can’t satisfy your customers if you don’t know what they want or need. So, if you want a strong product-market fit, you must first define your target market. After pinpointing the type of people who make up your target market, research them to understand their pain points and how to solve them.

There are several ways to research your target market to understand the needs of your target users. The most effective research methods use surveys, focus groups, or interviews to gather information. 

For example, use surveys to ask target users relevant questions to understand their needs, pain points, and preferences.

You can then use insights from your research to tailor your SaaS product to appeal to your target market and solve their pain points. Insights from your research can also provide ideas on how you can differentiate your product from competitors. 

If you skip trying to understand your target market, you risk building a product that users find valueless.

Determine How Your Product Delivers Value

How will my product deliver value? Every SaaS founder should ask this question before product development. A product delivers value by giving users benefits that outweigh its cost. The product must also meet or exceed user expectations regarding its ability to solve their problems or fulfill specific needs.

The faster users can use your product to solve a problem, the more valuable they’ll consider it. Also, the more valuable a product is, the more willing users will be to pay for it.

However, just because you think your product is valuable doesn’t mean it is. Verify your product’s value by looking at competitors offering something similar. If these competitors are doing well, you can assume consumers will consider your product equally valuable. You can make your SaaS product even more valuable by offering features your competitors don’t have.

Alternatively, get a more precise evaluation of your product by asking your target users. Do this by interacting with target users via social media or other platforms. Tell them about your product and how it will improve their lives, and see if they show interest. Get even more accurate feedback by giving target users access to your minimum viable product (MVP).

Design Your Product

SaaS product development is a multi-step process, and you can confirm product-market fit at different stages of the process. In the first stage, the product ideation stage, you can share your product idea with potential users via social media and other forums. Alternatively, use surveys to ask target members how they feel about your product idea.

If potential users show interest in your product idea, that’s the first sign of positive product-market fit. You can then move on to fleshing out your product concept with a rough sketch of your SaaS product’s design and interface. 

After using this sketch to form your product’s look and user flow, you can move on to building your prototype.

Prototyping involves building an MVP. The prototype will simulate how your final product will look and work. It will also have features that users can interact with and test. MVPs are excellent for getting user feedback regarding your product’s value.

Also, building an MVP costs less than developing a fully working version of your product, making it a cost-effective tactic for confirming product-market fit. If users don’t like your MVP, use their feedback to improve the design and create an MVP iteration that better fits your market. 

On the other hand, your MVP getting overwhelmingly positive feedback is your green light to build more full-featured iterations of your product.

Test, Test, Test

Secure and strengthen your product-market fit by conducting user tests and iterating your product based on user feedback. Each iteration can have new features, aesthetics, and other ideas. 

User feedback for each iteration will let you know what works and what doesn’t. Keep what works and remove or improve what doesn’t work to boost user satisfaction and secure your market fit.

You can get feedback through surveys, interviews, and beta testing. You can also test your product by analyzing relevant usage metrics.

Examples of relevant metrics include active users, churn rate, conversion rate, feature adoption rate, session length, and Net Promoter Score (NPS). For instance, if a new iteration has fewer active users or session lengths drop, it implies users don’t like the changes and prefer the previous iteration.

How to Measure Product-Market Fit

Your product-market fit being strong at the start does not guarantee it’ll keep its momentum. That’s because customers and their needs and preferences constantly evolve. As such, you shouldn’t stop measuring your product-market fit.

Instead, measure your product-market fit at regular intervals, either annually or bi-annually. Doing so will help your SaaS company track customer needs and preferences as they change. You can then determine if your product still fits your evolving target market. 

Regularly measuring your product-market fit will also provide insights into how to improve your product to fit changes in customer demands and preferences. 

With this approach, your SaaS company and product can remain relevant to customers and well-positioned to deliver value. It will also keep you competitive in the ever-evolving SaaS industry.

Monitoring User Retention & Other Key Metrics

Monitoring specific metrics can provide accurate insights into your SaaS startup’s performance and product-market fit success. For example, monitoring your user retention rate will reveal the percentage of customers that stayed with your brand within a specific period. 

If you retained most of your old customers, it means existing users find your product valuable, which is a strong indicator of product-market fit.

Other relevant and valuable metrics you can track to measure SaaS product-market fit are:

  • Churn Rate: Your churn rate reveals the percentage of users who abandoned your SaaS product within a specific period. If you lost more users than you retained, it could mean users stopped experiencing value with your product. Such an occurrence would indicate a weakening product-market fit.
  • Monthly Recurring Revenue (MRR): refers to how much you expect to earn from users per month. The amount typically varies monthly, and MRR increases are usually strong indicators of a healthy and growing business. If MRR falls, it could be due to a waning product-market fit.
  • Customer Lifetime Value (CLV): CLV is how much you expect to earn from each user over the lifetime of their relationship with your business. The longer a customer stays with your business and keeps using your product, the more you can expect to earn. A lower-than-average CLV implies low customer retention, which indicates poor product-market fit.
  • Cancellation Reason: This is the reason a user provides for abandoning your product. Such feedback can provide insights into how well your product fits your market. For instance, if most user cancellation reasons are along the lines of not experiencing value, then your product-market fit could be poor.
  • Trial Conversion Rate: This metric tracks the percentage of free trial users that upgraded to a paid plan. More users converting indicate a healthier product-market fit.
  • Active Users: This metric reveals how many paid users actively use your product within a specific period. A high number of active users means people are experiencing value using your product, implying a strong product-market fit.

Several other SaaS startup metrics are available, but the ones mentioned above are the most relevant to track to determine product-market fit. Tracking irrelevant metrics will expose you to pointless data that may mislead you and lead to poor decision-making.

With a SaaS reporting tool like Baremetrics, you can view and analyze your most relevant metrics in one location. For instance, you can view cancellation insights that reveal reasons users quit your product and metrics like MRR and churn rate. 

View these metrics and more on the Baremetrics Smart Dashboard, which shows your most relevant SaaS metrics in easy-to-understand formats.

You can also take advantage of the Benchmark tool, which compares your metrics to that of similar companies. Comparing your metrics to that of successful competitors can help you understand your product-market fit status with less effort.

Surveying Your Target Customers

As we’ve pointed out, product-market fit refers to how well your SaaS product meets the needs and expectations of your target market. The fastest and most accurate way to determine your product-market fit is to directly ask users how well your product meets their needs and expectations. You can do this with periodic customer surveys.

Perform a product-market fit survey by first building a list of current users who’ve been with your company for at least two to three months. You should have at least a hundred users on your list, but more is better. Next, create your survey with questions like:

  • How did you discover our product?
  • How would you feel if you could no longer use our product?
  • What product would you switch to if you could no longer use our product? 
  • What is the important benefit our product gives you?
  • Have you recommended our product to anyone?

The answers to these questions will give you a clear picture of your product-market fit. It will also reveal what your customers find most valuable about your product and who your competitors are.

Alternatively, survey customers with a conjoint analysis, which is a market research technique for identifying the version of your product that will sell the best. Perform a conjoint analysis by creating a customer survey with “would you rather” questions.

For instance, would you rather pay $8 per month or $80 per year for our product? Would you rather have auto-save or the option to save your progress manually? Would you rather have a blue or black background on our app?

With this type of survey, you can accurately identify how well your product fits your market. The survey can also reveal ways to improve your product to achieve optimal product-market fit.

In summary, periodically survey users to stay abreast of your current product-market fit. Surveys can also provide insights into customer preferences that you can incorporate into your product to strengthen your product-market fit.

Access the Data You Need for SaaS Success With Baremetrics

Hopefully, you now understand how to determine product-market fit for your SaaS product. Don’t forget that making decisions in a vacuum is the enemy of achieving product-market fit. Make data-driven product development decisions by researching and understanding your target market’s needs and preferences.

With Baremetrics, you can easily access all the customer insights you need to get your SaaS startup on the right track to success. Try Baremetrics free today to get deep insights into your company’s MRR, churn, and other vital metrics to measure your product-market fit.

Lea LeBlanc

Lea is passionate about impactful businesses, good writing, and the stories founders have to tell. When she’s not writing about SaaS topics, you can find her trying new recipes in her tiny Tokyo kitchen.