How can you measure product/market fit?

“Startups occasionally ask me to help them evaluate whether they have achieved product/market fit. It’s easy to answer: if you are asking, you’re not there yet.” —Eric Ries, The Lean Startup

You can always “feel” when product/market fit isn’t happening. But companies should usually try and quantify if they’re within reach of it or desperately far away.

Before you can answer if you have found product/market fit, it is essential to understand the common components of product/market fit.

In his book The Entrepreneur’s Guide to Customer Development, Vlaskovits states that product/market fit requires three criteria to be satisfied:

  1. The customer is willing to pay for the product.
  2. The cost of acquiring the customer is less than what they pay for the product.
  3. There’s sufficient evidence indicating the market is large enough to support the business.

In other words, you haven’t reached product/market fit if:

  • You have a product that nobody is willing to pay for.
  • Your costs of acquiring a customer (CAC) are way higher than the lifetime value (LTV) of the customer.
  • Your market is so tiny that it can’t sustain the business.

To help you determine product/market fit, we’ll share two data-driven methods used by some of the most respected figures in the startup world.

Use Engines of Growth to quantify product/market fit

According to Eric Ries, growth in startups comes from “engines of growth.” The engines of growth are mechanisms or sources of sustainable, long-term growth.

There are three main engines of growth:

  • The Sticky Engine of Growth
  • The Viral Engine of Growth
  • The Paid Engine of Growth

Each engine has a small, specific set of metrics that teams should focus on to determine how fast the startup can grow when using that engine. Tracking these metrics can also help you in determining your product/market fit!

1. The Sticky Engine of Growth

The Sticky Engine of Growth is used by startups that are designed and built to acquire and retain customers for the long term. These startups create a sticky user experience or “lock” customers by making it difficult for them to switch to another vendor.

The metrics to focus on when using this engine of growth are retention rate and rate of compounding.

“The rules that govern the sticky engine of growth are pretty simple: if the rate of new customer acquisition exceeds the churn rate, the product will grow. The speed of growth is determined by what I call the rate of compounding, which is simply the natural growth rate minus the churn rate.”
—Eric Ries

To calculate the rate of compounding, you subtract your growth rate from your churn rate. For example: 7% Growth Rate – 3% Churn rate = 4% rate of compounding.

2. The Viral Engine of Growth

Products that grow with this engine rely on a rapid expansion of awareness for the product through viral loops built in the user experience. Growth happens as a side effect of customers using the product.

“Awareness of the product spreads rapidly from person to person, similar to the way a virus becomes an epidemic. This is distinct from the simple word-of-mouth growth discussed above. Instead, products that exhibit viral growth depend on person-to-person transmission as a necessary consequence of normal product use.”
—Eric Ries

The metric to track for the Viral Engine of Growth is the viral coefficient.

Simply put, the viral coefficient is the number of new users an existing user generates.

Let’s say you get 100 new people to sign up for your product:

  • If your viral coefficient is 0.1, this batch of signups will attract 10 new users. Those 10 users will attract just 1 more person. With a coefficient of 0.1, the viral loop is not sustainable.
  • On the other hand, if your viral coefficient is 1.0 or higher, this means that every new signup will bring at least 1 more person with him or her.

The chart below illustrates three viral coefficients (0.9, 1, and 1.1) and their long-term growth effect.

product market fit example

To calculate your viral coefficient, use the following formula:

(#) Invitations sent per user X (%) conversion rate = (#) Viral Coefficient

3. The Paid Engine of Growth

Startups that use the Paid Engine of Growth rely on paid advertising or other paid channels to grow.

To calculate how fast the paid engine of growth will turn, companies need to track three metrics:

  • Customer Lifetime Value (CLTV) – How much revenue the customer brings throughout their life. You can reinvest this revenue in paid acquisition channels.
  • Cost Per Acquisition (CPA) – How much it costs to acquire a single customer using the paid acquisition channel.
  • Marginal Profit – The margin between the CLTV and the CPA determines how fast the company grows.

Use the following formula to calculate Marginal profit:

CLTV – CPA = Marginal profit

Measure product/market using the metrics of your engine of growth

Once you establish your primary engine and your desired set of metrics, you can quantify how close you are to product/market fit.

“Since each engine of growth can be defined quantitatively, each has a unique set of metrics that can be used to evaluate whether a startup is on the verge of achieving product/market fit. A startup with a viral coefficient of 0.9 or more is on the verge of success.”
—Eric Ries

When determining your product/market, you want your startup to satisfy the following criteria:

  • For the Sticky Growth Engine, your Compounding Rate is higher than 0%.
  • For the Viral Growth Engine, your Viral Coefficient is higher than 1.
  • For the Paid Growth Engine, your Marginal Profit is positive.

The higher these metrics are, the closer you are to product/market fit and vice-versa.

Run the Product/Market Fit Survey by Sean Ellis

The product/market fit survey, also known as the ‘Sean Ellis test’ (its creator), has helped unicorns like Dropbox and Eventbrite scale. The primary goal of the survey is to help you understand if your early customers consider your product a must-have.

In 2008, Ellis specialized in helping startups during their growth transition stage. To qualify clients, he conducted a qualitative survey across a sample of the company’s users to evaluate if their product had achieved Product/Market Fit.

“Navigating this important decision around product/market fit is the reason why I created the product/market fit survey 10 years ago. Without the survey, I would either have to rely on gut feeling or wait for retention cohorts to mature to see if we had sufficient customer retention to support sustainable growth. This could delay aggressive growth acceleration execution for several months.”
—Sean Ellis

Today you can access the survey on SurveyMonkey.

The goal of the survey is to get feedback from people who have experienced “real usage” of the product. In other words, customers who have been through your whole lifecycle funnel.

The whole survey contains eight questions, but the critical question is:

“How would you feel if you could no longer use [ProductName]?”

  1. a) Very disappointed
  2. b) Somewhat disappointed
  3. c) Not disappointed
  4. d) N/A I no longer use [ProductName]

For the survey to be statistically viable, Sean Ellis recommends that you collect a minimum of 30 responses (perfectly 100+). It’s also important that you also limit your sampling size to people who have used your product at least once in the last couple of weeks.

To validate product/market fit, you need to measure the percentage of people who would be “a) Very disappointed” if they could no longer use your product. 

If you receive 40% or more respondents answering with “Very disappointed” it’s safe to assume that you’ve reached product/market fit.

Inspired by these kinds of results, Rahul Vohra and the Superhuman team set out to quantify their product/market fit by asking 200 users to complete a four-question poll:

  1. How would you feel if you could no longer use Superhuman (Very disappointed, Somewhat disappointed, Not disappointed)?
  2. What type of people do you think would most benefit from Superhuman?
  3. What is the main benefit you receive from Superhuman?
  4. How can we improve Superhuman for you?

With 22% of respondents answering “A) Very disappointed” to the first question, it was clear that Superhuman had not found product/market fit for their groundbreaking email client. Or at least not yet.

While tools like the Engines of Growth and the Product/market fit survey can help you determine if you’ve reached product/market fit and make the concept less abstract, they don’t help you achieve product/market fit.

Next, we’ll explore two frameworks to help you steer your product towards product/market fit. Starting with the four-step process that Rahul and team used to double the product/market fit score of Superhuman.