Validating B2B product market fit is a common problem and the bad news is that there's no universal standard for validating product market fit.
But there are some great heuristics you can use to understand whether you’re on the right track - and this article explains a little of how we use them when thinking about product market fit at PostHog.
Contents:
- Defining the market
- Measuring product market fit
- Pitfalls to avoid
- How to grow after achieving B2B product market fit
- Further reading
This article is part of our PostHog Academy series where we explain the fundamentals of product analytics. Marcus Hyett is VP of Product at PostHog. Prior to PostHog, he was a Senior Product Manager at Meta working on ecommerce experiences across Instagram and its family of apps.
The first step in validating product market fit is to define your market. When starting with a new product, it’s not realistic to say “this is mass market” or “our audience is everyone.” The more focused you are, the better your product will fit your target market.
When defining a potential market, break down the audience by common dimensions (e.g. location, industry, size, etc). Use your company's goals or mission to identify the most valuable and feasible market segment that supports long-term user and revenue growth.
At PostHog, we segment our target audience according to the following criteria:
Needs:
- Need to control their user data
- Need to excel at product led growth to remain competitive
Haves:
- Have budget and savvy engineers are the decision makers
- Have achieved product market fit
- Have an unsuccessful central analytics function
- Have deployed our open source product successfully
How you measure product market fit will differ based on whether your product is aimed at consumers or businesses. We’re focusing on business-facing products because that's what we know best and focus on ourselves.
There is one key question common to both audiences that must be answered first:
Does your product generate significantly more value for the audience than it costs?
This question revolves around value and cost, but how do we measure these? Look for customers giving the following indicators:
Paying: They’re willing to pay in full. If you’re retaining >80% of your customers month-on-month, that's a strong indicator that your product is generating more value than cost.
References: They’re willing to put their reputation on the line to recommend your product to their peers.
Super-engaged: They love your product, give you regular feedback, and tell the world how great it is without prompting.
If your focus segment has a large number of small clients, you’ll want survey responses or data from at least 50 unbiased customers. There are a few options for common surveys used to validate product market fit:
Net Promoter Survey(NPS): If you ask your customers whether they would recommend your product, you want a higher ratio of people recommending than not-recommending.
Disappointment: If you ask your customers how disappointed they would be if they couldn’t use your product any more, you want >40% to suggest they would be very disappointed.
Retention: Are your customers continuing to use your product month over month? Retaining over 60% of users of a free version of your product is generally a strong indicator of value generation.
The following pitfalls can lull you into thinking you have product market fit when you don’t:
Product customization: It’s essential to validate your “vanilla” product. Any customizations or bespoke work you do to please individual customers will dent confidence in whether you have product market fit or just a great relationship with your customers.
Wrong market: Great fit within a highly niche market or one with limited spending power may hamper your company’s growth.
Discounts: It can be tempting to discount your product for your first few customers, but this harms any product validation tests. Good-fit customers should be willing to pay full price for your product - although getting pricing right can be hard.
Novelty effects: People using a new product or seeing a new feature for the first time might react differently than people who've been using the product for a long time. It’s important to give users time to get used to these new features (and perhaps stop deriving value from them) before calling product market fit.
Friends and family: Although these two groups can be a great way to kick-start adoption and get early feedback on your product, it’s important to determine whether their success with the product is due to knowing you or because the product actually solves their needs. Ensure your product passes the Mom Test before calling product-market fit.
From the reviews...
The Mom Test tells you:
- How to avoid biased feedback
- How to write an email that makes people want to talk to you
- How to figure out whether someone is really going to buy
Get the book on Amazon today.
After you’ve reached product market fit in one market, here are some growth plans to consider:
Saturate the market: Invest heavily in marketing and growth activities to drive adoption from new customers.
Increase value within the market: Increase the price and value of your product by enhancing it to solve more user needs effectively.
Reach product-market fit within a different market: Expand to new markets and adapt your product or messaging until you achieve product-market fit there, too.
What is user segmentation?: A quick guide to user segmentation and how to apply it to your business
How to measure product engagement: How to define engagement for your platform, and how to use analytics tools to measure and build on the results
The most useful B2B product metrics: A guide to common SaaS product metrics and which ones you should use
PostHog is an open source analytics platform you can host yourself. We help you build better products faster, without user data ever leaving your infrastructure.
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