Today, we’re taking a software-specific look at one of the most essential KPIs your SaaS solution needs to understand – and discovering four reasons your success depends on the near-mythical concept known as Product/Market Fit.

There are dozens of competing interpretations around, but for a good starting point, we can’t beat the original definition:

Product/Market Fit means being in a good market with a product that can satisfy that market.

Marc Andreesen, Andreesen Horowitz

In other words, Product/Market Fit (PMF) is a way of assessing:

  • The ability of a market to sustain your business.
  • The ability of your product to meet the needs of that market.

In simple terms, a good market is an expanding market, capable of supporting your business now and into the future; a bad market is contracting.

We’re also talking about the specific market for your solution (say, the market for CRM solutions) – not the sector/industry that market resides in (the software or technology sectors).

Why does product-market fit matter for a SaaS company?

1) PRODUCT/MARKET FIT CHANGES YOUR PRIORITIES

Prior to PMF, your priority needs to be product development.

You’ll be operating on a lot of assumptions, and as you learn more about the market for your SaaS solution, you’ll need the flexibility to reshape (and even pivot) your product appropriately.

Investments into sales, marketing and customer success should be used to test those assumptions, and experiment – not to actively scale-up your business.

After achieving PMF, your priorities will change.

You’ll have solid indicators that the market can support your business, and that your product effectively solves an important problem.

You can begin to think about securing growth capital, and ramping up your growth investments:

2) PMF MEANS IT’S SAFE TO SCALE

If you decide to scale-up a SaaS company without proven Product/Market Fit, you’re taking a huge risk. There’s no guarantee that a market for your product exists. Even if it does, it might not be able to sustain your business.

Icon-Scale.pngWithout PMF, major investments into marketing, sales and customer success are premature.

No amount of sales & marketing savvy can sell a product that nobody needs or wants, and when problems appear, it’ll be impossible to determine whether your business is stagnating because of inefficient growth strategies, or because you’ve developed a product that solves a nonexistent problem.

3) POOR PMF CALCULATIONS KILL SAAS COMPANIES

Without a good understanding of Product/Market Fit, many SaaS businesses prematurely shift capital away from engineering and development, and into growth.

Icon-Kill.pngEven if they’re able to secure customers, those customers will be paying for a solution that doesn’t meet their needs, and in many cases, having to battle with systems that don’t scale properly.

Instead of being a boon to growth and profitability, the decision to scale can cripple a SaaS business. This can serve to damage its reputation – even burdening it with an influx of customer complaints and generating tons of refund requests.

4) MARKETS CHANGE, AND YOU NEED TO CHANGE WITH THEM

Remember the Innovator’s Dilemma?

A new solution achieves PMF, and manages to capture the lion’s share of the market.

They become the dominant player, and stay that way, until new technology appears and supersedes their solution.

By failing to stay ahead of changing technology, the incumbent company loses marketshare to a smaller, disruptive business, who in turn, go on to dominate the market.

Rinse and repeat.

In this narrative, the market for a product evolved over time, and the definition of Product/Market Fit changed with it. As a result of developing technology, a solution that fits the market in the here-and-now might not fit the same market in the future.

PMF is like an ongoing health check for your business, allowing you to periodically test the key assumptions that underpin your business:

  • Does the problem we solve still exist?
  • Is the problem important enough?
  • Is the market for our product still a ‘good’ market?

Understanding PMF helps us allocate resources in the short- and medium-term, but it also provides visibility into the future.

Instead of resting on our laurels, we can use Product/Market Fit surveys to provide the impetus we need to continually develop and grow – no matter how the market develops.