5 KPIs to measure your product market fit

Product Market Fit is the stage for a start-up to hit to ensure continued survival, growth and success. Before that fit, chances are you are doing one or more of the following:

• Wasting time and capital by prematurely investing in sales and marketing.
• Solving the wrong problem.
• Working on the wrong solution to the right problem.
• Offering a solution that is ahead of its time to a market that hasn’t quite embraced the problem as a must-solve yet.
• Focusing on a very small market.
• Targeting the wrong segment.

Once you have the fit, everything becomes easier — generating that three-digit growth, getting recurring sales, expanding product usage, securing renewals, raising capital, getting press, hiring employees.

Traction is often confused with product market fit. A lot of products get traction, very few get to product market fit. Traction can lead to product market fit, but can often just be temporal, circumstantial success, boosted by factors that are neither repeatable nor representative of the broader market. Maybe your founder has strong industry connections and can get 10 friend-customers to buy the product. Maybe you hired a star sales maverick who can sell the intent of the product ahead of the real deal. Maybe you got the market excited about the problem and attracted experimental budgets.

That early traction should give you confidence, but not take away from the maniacal focus you need to inch your solution towards becoming an obvious-buy.

Marc Andreeson defines product market fit as the stage when:

The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can…

It’s one of those things that you know when you have it. It’s also easy to know when you clearly don’t have it — your sales win rates are super low; customers conduct trials of the product, but don’t buy; you have a hard time getting prospect meetings; people are niceto you and say your product has a lot of potential; you hear the statement, “We have other priorities at the moment,” etc. But it’s almost prescient to know whether you have the potential to hit product market fit and you are on the right track to converge on it or, really, if you are simply going through the motions, yo-yoing between metrics, confusing motion with progress and caught between traction and product market fit.

Despite how nebulous it can be to not know traction from product market fit, there are a set of leading indicators, which when monitored in a cohorted fashion, can demonstrate progress toward the fit or lack thereof. They are:

• Meeting win rate: Ratio of prospects who agreed to take a meeting to prospects touched.
• Sales cycle: Time elapsed from the first sales meeting to contract signed.
• Product engagement: How frequently and intensely do users engage with the core actions of your product?
• Customer churn not MRR churn: What percent of customers end up renewing their subscriptions?
• NPS: How willing are your customers to recommend you to others

1. Meeting win rate

Meeting win rate is a critical indicator of whether your solution or pitch can break through the noise and pass the test of, “Is this worth 30 minutes of my time.” Prospects are busy people. They are likely adopting and implementing solutions in one of the established mature categories. If your meeting win rate is not increasing month over month, your service likely doesn’t make the cut and comes across as nice-to-have. You could also be talking to the wrong segment of prospects or using wrong channels to reach them. Control for those factors but move the meeting win rate up and to the right.

2. Sales cycle

Nothing shows product market fit like a sales cycle that is shortening month over month. Shrinking sales cycle implies that prospects want to buy your solution faster. It means that you have struck a chord with the market and prospects are eager to take meetings, make buying decisions in fewer meetings with fewer internal stakeholders, create or approve budget fast, yield more ground on redlines and pull resources from other projects to implement your service. When the sales cycle gets shorter, it also indicates price acceptability with the cost of customer acquisition trending downward, faster quota attainment by sales reps, and flywheel effects starting to take place.

3. Product engagement

While product usage, in the form of weekly or monthly active users, is a well known metric, a much better leading indicator of product market fit is growth in product engagement of user cohorts. Facebook used the ratio of WAU/MAU as the metric to gauge if merely active users were turning into really active users over time. Identify the core actions of your product and measure interaction with that. For analytics solutions, product engagement could be how frequently are users accessing and downloading reports. For content management solutions, engagement is the frequency and volume of content published through the system. When product engagement grows, your customers have re-configured their business workflow to incorporate your solution and are finding increasing business success and outcomes. It means you have become sticky.

4. Customer churn or renewal rate

Massive customer churn indicates that while your product is exciting enough to attract initial adoption, it is failing to drive meaningful customer success and ongoing product usage, and is not sticky enough. It is incredibly hard to grow against churn, and while churn can be high for evangelical categories as compared to mature markets, figuring out the root cause of churn is the first step towards diagnosing product market fit. Additionally, increasing or uncontained churn implies that you have fewer customers to upsell and cross-sell to and challenged margins and profitability.

5. And finally, NPS (Net Promoter Score)

Low or declining NPS is a leading indicator of churn, which is an indicator that you either don’t have or are losing product market fit. High or growing NPS implies that you have gone beyond product adoption success to securing advocacy from your customers.

That’s it. Product market fit is the beginning of a beautiful stage for any startup. It’s vital to mark your progress as you strive for it. Keep in mind the five KPIs — meeting win rate, sales cycle, product engagement, customer churn and NPS. They are the gauge to help you decide if you are trending towards that elusive product market fit.