How Do You Measure Product/Market Fit For Marketplaces?

How do marketplace operators determine if they have product/market fit?

The first thing to realize is that product/market fit is not an exact measure; it’s more of a general benchmark for marketplace operators (and software entrepreneurs in general) to determine where to focus their early-stage product and customer development efforts and when to transition to more significantly growing their marketplace business.

At a gut level, marketplace operators who start to achieve product/market fit will “know it when they see it.” When a marketplace starts to gain traction, buyer satisfaction increases given a healthy selection of supply, sellers become more committed to the service given steady sales, growth starts to gain momentum, revenue increases with less push-back from customers, and so on. It’s a feeling that the proverbial “flywheel of growth” is starting to spin, increasingly faster, in a positive direction and that the marketplace is gaining a foothold in the market it serves.

For those who want greater specificity in determining whether they have product/market fit or, more practically, would like to come to their next prospective investor meeting armed with solid metrics to close the next round of funding, below are a number of metrics that marketplace operators can measure to assess its product/market fit. Which metric is best varies by marketplace, particularly as it relates to the type of products or services being offered on the marketplace (e.g, B2B or B2C), data availability, maturity level, etc. In general, these metrics provide insights into the relative level positive customer sentiment or growth efficiency.

Measuring customer satisfaction — Customer satisfaction is one of the more well understood and commonly measured customer sentiment metrics and is a good place to start to get a general pulse of marketplace participants’ overall experience. There are several ways to measure this, but the Net Promoter Score (NPS) is a popular measure of customer satisfaction, measuring how willing a user is to recommend the product or service to a friend or colleague, and compares the number of customers who will strongly recommend the product or service versus those who weakly recommend the product or service. It is not uncommon to have very different NPS scores for one side of the marketplace versus the other, which underscores the importance of measuring customer satisfaction on both sides of the marketplace.

Another way to look at customer satisfaction is assess Customer Passion. A good way to measure this is to see (almost counterintuitively) how strongly a customer would dislike not having the product — in essence measuring their passion for the product. Sean Ellis, author of Growth Hacking, developed a metric that looks to measure this by asking the question, “How disappointed would you be without the product?” This question puts the value proposition of the product front-and-center and is a good way to gauge how willing customers would be to consider alternatives to using a marketplace, such as traditional channels, manual interactions, other marketplaces, etc.

Measuring customer behavior — Measuring preferred customer behavior is another important approach in determining the maturity of a marketplace, which sometimes can be a more accurate measure of which direction a customer’s compass is pointing than survey-based metrics. Customer Retention Rates are particularly insightful in that they evaluate customers who have experienced using the product over some period of time and look at how many customers who started using and/or paying for the service at some point in time X are still using and / or paying for the service at some future time Y, often using a technique called cohort analysis. Having low customer retention rates can be a significant headwind for revenue growth and will require additional investments in acquiring new customers to make up for the lost revenue from existing customers.

Measuring organic growth — A valuable insight into the how well a marketplace is turning “the flywheel of growth” is look at how well does the marketplace in essence “grow itself,” unaided by traditional marketing and/or sales efforts. Word-of-Mouth measurements, such as surveying what percentage of new customers joined directly from a referral from other customers, is one way to measure this. This assess the strength of the reputation of the service in the market and how willing customers are actually recommending the marketplace to others (buyers or sellers), generally through vehicles outside the marketplace itself (such as email, social media, etc.).

An equally valuable way to look at this is to measure how effectively do customers attract other customers (generally counterparties, i.e., buyers inviting their sellers and visa-versa) to the marketplace through using the product itself — the essence of network effects. This can be a powerful growth mechanism for a marketplace in that it leverages existing buyer-seller relationships that may be transacting somewhere else (or stimulating new ones) and brings them onto the marketplace. This can be measured by looking at the marketplaces’ Viral Coefficient, which measures for each new customer how many counterparties join the service directly because of the new customer.

Measuring financial performance — Financial metrics can also be a good way to relate how the marketplace’s growth trajectory maps to its bottom line, or stated another way, how does the marketplace’s growth rate compare to the resources deployed to generate that growth. A common metric analysts use to measure the relationship between growth and profitability is called the “Rule of 40,” which is measured by adding the company growth rate + profit (with the benchmark of above 40 generally considered being good). The nice thing about this measure is that is it holistic — incorporating the costs operating the marketplace and customer growth efforts (buy-side and sell-side) along with the revenues those efforts generate — all in one metric.

Dig deeper into markets or overall product offering if necessary.

Tracking one or a few of these metrics can help marketplace operators determine whether (or not) product/market fit has likely been achieved. If after measurements have been taken the results suggest not, then the marketplace operator will need to dig further to determine the root cause(s) of the misalignment. Does a customer group not experience enough pain to join or stay on the service? Is the marketplace losing users at key conversion points? Is there insufficient demand to keep sellers engaged? Are there policies that negatively affect behavior? These are a sampling of the areas that may need to be assessed to uncover impediments to attaining product/market fit.

Navigating the journey to product/market fit for marketplaces.

After examining the considerations for determining product/market fit for marketplaces in this series of articles, we can see that it is a fairly complex undertaking. Early-stage marketplace entrepreneurs would be well served to clearly understand the market problems they are addressing and assess the level of pain and/or missed opportunities that exist in the markets (both buyer and seller) they are looking to serve. Marketplace operators need to continually tune the six elements of the overall marketplace product offering to meet the unique needs of its customer groups. Devoting time and resources to measuring the maturity of both sidesof the marketplace can also be a prudent investment to determine when it is the best time to turn the corner to invest in accelerating growth.

I have often called this process outlined above for determining product/market fit for marketplaces, “Markets/PRODUCT Fit,” to underscore the two key points to successfully achieve this level of maturity for marketplace businesses: (1) start with identifying two (or more) markets who need each other commercially but are not well served and then (2) develop the six elements of the overall marketplace offering (hence all caps) to solve the unmet needs of those markets.

This is admittedly a meaty topic, with many nuances across the wide variety of marketplace types. I encourage others to comment on their own journeys to achieving product/market fit for marketplaces.

[PREVIOUS: How Do You Align The Overall Product Offeing To Its Markets for Marketplaces?]

[BEGINNING: Product/Market Fit for Marketplaces]

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Rob Mihalko

Rob Mihalko

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Tech executive, advisor and instructor at Stanford, focusing on digital marketplaces. Outdoor enthusiast and occasional triathlon competitor.