Identifying Good Product-Market Fit and Recognizing Competitive Differentiation

By Eric Dickmann

April 9, 2019

40% rule, Product, Product / Market Fit

Who is your customer? Is there a market need? Does your product offer something unique? How much will people pay for it? These are the questions you should start asking yourself when you begin launching your product or service. It is very rare for a business to launch an original concept because, at most times, it has already been launched in the market. The best you could do as a business owner is to give your product an edge that would outplay the other competitors in quality, customer service, or overall customer experience. Before you launch your concept, you must first ensure that there is a product-market fit. Your product or service may be useful in its function and excellent in efficiency, but it will not sell if it doesn't fit in the market.

What is a Product-Market Fit?

Achieving a product-market fit is an important milestone for any company. To be successful in business, you must understand how your products fit into the market. Product-market fit has a product that can satisfy a market need at a price people are willing to pay. According to Marc Andresen, a product-market fit means being in a good market with a product that can satisfy the market. To identify whether your product fits in the market, you should do extensive research about your area's consumer behavior. Customers search for products that are of value to them; a common misconception that business people have is that their product or service will always bring good deal to all customers. You may have an excellent product or service, but it doesn't mean that all clients will purchase or consider patronizing your product because all customers have varying interests, needs, and point-of-views. For instance, you cannot engage someone who doesn't have a garden to avail your gardening services. According to Hotjar, you can measure product-market fit with surveys and feedback to identify what percentage of your users think that your new product is helpful and much needed by them.

However, product-market fit is less about hypothetical numbers and percentages. It is more about an in-depth and tangible understanding of who your customers are and what they feel about your business and your product or service.

Product Launch Map

Below are the pointers to look at to determine whether your product fits in the market or not:

There is Product-Market Fit if:

  • The customers are buying your product and responding to your marketing efforts
  • Usage is growing as customers find value in their purchase
  • Money is flowing, and you begin to see the results on your balance sheet
  • You're hiring sales and customer support staff to support demand
  • Word is spreading, and people are taking notice

There is No Product-Market Fit if:

  • The customers aren't seeing the value of your product
  • Usage isn't growing, and there's an increase in attrition
  • Many deals never close as prospects select a competitor's offering
  • The sales cycle takes too long, and the product isn't "selling itself."
  • Product reviews are mixed or negative
  • You're failing to develop customer advocates
Product-Market Fit

Why Do You Need a Product-Market Fit?

According to CB Insights, 70% of startups failed because there is no market need for their product. If you want to build a successful company, you have to consider building products that fulfill a market need and solve your customers' problems. Finding the right product-market fit builds market influence and brand power. The right product at the right price can quickly gain momentum. When done correctly, your business can gain a competitive advantage in the marketplace. The key is a product that delivers value and keeps users coming back. Eventually, it builds customer advocates that in turn help sell your products and grow your business.

AirFocus enumerates to us the Four Key Benefits of Having a Good Product-Market Fit:

  1. Having a product-market fit shows businesspeople the features or elements that your product or service should meet and satisfy the customers' expectations.
  2. It reveals the demographic information that people tend to care about
  3. This grabs the market's attention and attempts to persuade them to patronizing our goods or services.
  4. Information determines the steps that we need to take to drive growth and turn your customers into brand advocates.
HubSpot

Determining if You Have A Product-Market Fit

There are two general ways to know if your product has a product-market fit. First is DESIRABILITY. A product desired by the market is a solution to a problem. Remember, a solution without a problem doesn't meet a need in the market. The second is the FEASIBILITY. A company must have the capability to satisfy the need and uniquely deliver a product to the market while making a profit. The 40% rule is a great way to discover if your product is a fit for the market. It involves getting feedback from existing customers or prospects. Ask them how they would feel if they could no longer access your offering. When 40% reply they will be very disappointed, you have good product-market fit. If other solutions could fill the gap quickly, your product doesn't have the differentiators to be genuinely successful.

Online store vs In-Store Purchases

When you're experiencing an increasing percentage of repeat purchases, your customers understand your product's value. This builds word of mouth, which can be an extremely effective and efficient way of attracting more customers. If you get good reviews, coverage in publications, and positive feedback on social media, your product shows a strong fit in the market. Your sales cycle is also a good indicator. If the effort to sell your product is minimal, there is a market need to be addressed. This helps deals close quickly and often results in a shorter sales cycle. Lastly, a company with a good product-market fit can grow faster than other companies that don't have products that fit into the market. It becomes a real competitive advantage when you do your homework and design products to meet a market need.

Tools Businesses Can Use to Help Get a Product-Market Fit 

Aside from doing immense market research to determine whether your product is fit in the market or not, you need the aid of tools to determine aggregate usage data, segment customers into smaller groups, or analyze the customer's experience in your website and social media platforms. According to Segment, you can use these four software programs to help you get an excellent product-market fit:

Analytics Softwares to Help Your Product-Market Fit
  1. Google Analytics- This analytics tool assesses your web visitors' product usage, accuracy, and feedback counts.
  2. Intercom: This customer communication tool allows businesspeople to reach out to their target market and segment them according to their age, location, and product or service preference. With the aid of messaging apps and email, you can deliver updates to your customers about your latest product or service releases.
  3. FullStory- records, analyzes, searches, and replays your customers' digital experience with your website. This software allows you to determine which part of your website drives the most traffic and which needs further improvement.
  4. Inspectlet- Provides, similar service to FullStory, but provides "eye-tracking heat maps." This determines the website victor's visualization and mouse movements to understand if something within the page is malfunctioning or needs an upgrade. Inspectlet allows business people to give their clients a better web experience.

What Is Competitive Differentiation?

Even if you already have a good product-market fit, you do not stop in your market research. Once your product is fit in the market and already have identified the customers you will sell your product or service to, it is now essential to determine what differentiates your product or service from other competitors. Understanding your similarities and differences with your competitors will allow you to find the appropriate upgrades to your product and your service developments to be unique and competitive in the market.

HingeMarketing tells us that Competitive Differentiation Consists of Two Major Components:

  1. One or more characteristics that your key competitors lack or are not talking about
  2. A strategy to promote these characteristics that will entice prospective clients to purchase and patronize

We believe that starting a business should be about solving the customers' problems and giving them the best overall experience they could ask for. You cannot start a business alone; you need a team of consultants and experts to guide you along the way. We, at FiveEchelon can help your business design strategic marketing plans for growth and profitability without the burden of expense. Competitive differentiation is a cross-functional effort. Marketing is responsible for communicating the differentiators externally so customers can fully understand what makes your company, product, or service better than the other. You should ensure that you track the latest market trends and competitive intelligence to identify gaps and opportunities to differentiate from the competitors.

Lost Revenue lost every year because of poor customer service

Aha enumerates the Different Kinds of Differentiators:

  • Product Differentiators- encompasses the unique capabilities of your product or service in terms of design, quality, and performance
  • Brand Differentiators- this is how the target market and potential customers can relate, perceive, and interact with your brand
  • Price Differentiators- discusses the price that you charge to your customers and the frequency of your payment collection
  • Service Differentiators- the unique way that your company builds strong relationships with your customers and enhance overall experience- via chat support, email updates, phone calls
  • Channel Differentiators- the means and platforms where you sell and market your products and services and how these are distributed to the target market

The Upsides and Downsides of Product Differentiation 

The main goal of product differentiation is to create a competitive advantage that would make your company stand out from the rest of the market's brands. Suppose you are in a very crowded market of businesses selling almost the same product or service as you. In that case, you should develop a market strategy to amplify the value you can give to your customers. A product differentiation strategy is valuable to a startup business. If you are planning to startup a business, you can read our interview with Stephen Olmon about building a business. At this early stage, you still don't have the opportunity to establish emotional connections with your audience or earn your target market's loyalty. Finding ways to develop uniqueness and superiority compared to competitors can be the best way to have a great head start in the ever-growing competitive market.

What influences mobile purchasing decisions

OpenViewPartners lists the Upsides and Downsides of a Product Differentiation Strategy:

Upsides

  • Grabs your prospect's attention
  • Establishes your product's superior value
  • Take the focus off the price
  • Creates brand loyalty

Downsides

  • Copycats
  • Price undercutters
  • Customer demands and expectations

The Common Mistakes You Might Encounter 

Despite the many benefits that a well-executed product differentiation strategy can bring to your business, there are still major pitfalls that you should keep track of to avoid and counter the damages it can bring to your company. Quality, empty promises, price, and hyper-niche are the common risks that you should look out for. Customers expect products to be of high quality and lasting. If you tell your target market that you offer something that is one-of-a-kind or something "irresistible," your product should live up to your advertisement, or else you'll fall flat and be bombarded with bad reviews and ratings. The next thing you've got to keep in mind is that customers hate lying businesses. Don't promise something that you can't keep! A broken promise will kill your customer relations. Always resist the urge to make unrealistic and unprovable claims, and provide tangible and legitimate proof whenever possible.

Market Segmentation Map

Aside from customer service, price plays the biggest factor in the purchasing decision of the customer. There is a high chance that you'll make high sales if you sell excellent products or services at the lowest price available in the market. Though having a cheap price tag may attract the market in the long-run, ensure that the price you give to your product is consistent, reasonable, and profitable. Never come to a price that would cause your business to lose so much revenue. Lastly, it may be beneficial to get specific about your audience, but being too specific can restrict you to a very small market to support and grow your business. Be cautious enough not to alienate potential customers by appealing too exclusively to a narrowly-defined target market.

Conclusion

Product-Market Fit and competitive differentiation are the essential things you should focus on when starting your business. It doesn't matter how innovative your idea is or your personal feelings on your product's value. It's about whether anyone needs it and whether anyone is willing to pay for it. The business world is full of examples where innovative products failed in the market. Failure could result from external factors or poor execution, but often, it is because there was no product-market fit. Know your buyer and what they need. Understand the competition and how their products fit into the market. What are the limits of price, and how should you price your product to sell AND make a profit? When you understand all the product-market fit factors, only then are you ready to build your product and flourish in the market.

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About the author

Eric Dickmann is the founder of The Five Echelon Group, host of the weekly podcast - The Virtual CMO, and a CMO On Demand for a variety of small and midsize companies. An executive leader with over 30 years of experience in marketing, product development, and digital transformation, he has worked with large, global companies and small startups to develop and execute marketing strategies and bring innovative products to the market.

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