If you are building an online marketplace, you probably know that one of the most important goals is to achieve product-market fit. This means that your product meets the needs and expectations of your target market, and that you have a viable and scalable business model. But how do you know if you have achieved product-market fit? And how do you get there?
In this blog post, we will explain what product-market fit is, why it is important, and how you can use a high-fidelity minimum viable product (MVP) to test and validate your assumptions and hypotheses. We will also share some examples of successful marketplaces that used high-fidelity MVPs to establish product-market fit.
What is Product-Market Fit?
Product-market fit is the degree to which a product satisfies a strong market demand. It is often considered as the first step towards building a successful and sustainable business. According to Marc Andreessen, the co-founder of Netscape and Andreessen Horowitz, product-market fit is “the only thing that matters” for startups.
Product-market fit can be measured by various indicators, such as customer satisfaction, retention, referrals, revenue, growth, and profitability. However, there is no one-size-fits-all formula or metric to determine product-market fit. It depends on your specific product, market, and goals.
At what stage of the business cycle should you start looking for product-market fit?
One common question that entrepreneurs face is when to start looking for product-market fit. Should they do it before launching the product, after launching the product, or somewhere in between? The answer depends on the stage of the business cycle that the startup is in.
During the discovery phase the entrepreneur identifies a problem that needs to be solved, and comes up with a hypothesis for a possible solution. The goal of this phase is to find the problem-solution fit, which means that the proposed solution actually solves the problem for a specific target market. We have explained how to do this in our article: Why marketplace startups should test problem-solution fit with a low-fidelity MVP
The validation phase is where the entrepreneur tests the hypothesis with real customers, and collects data on their behavior and feedback. The goal of this phase is to validate the product-market fit, which means that the product satisfies a strong market demand, and that customers are willing to pay for it.
Usually, at the beginning of the product-market validation phase, there is an existing platform with some user acquisition and engagement, but low conversion rates. This MVP may have started to generate some turnover, but does not yet have a viable business model.
Based on this framework, it is clear that looking for product-market fit should start in the validation phase, after finding the problem-solution fit in the discovery phase.
However, this does not mean that product-market fit is a one-time event that happens once and for all. Rather, it is an ongoing process that requires constant monitoring and adjustment, as customer needs and preferences may change over time, or as new competitors may enter the market.
Why is Product-Market Fit Important?
Product-market fit is important because it validates that you are solving a real problem for a large enough market, and that you have a competitive advantage over other solutions. It also helps you optimise your product development, marketing, and sales strategies, and allocate your resources more efficiently.
Without product-market fit, you will likely struggle to acquire and retain customers, generate revenue, and grow your business. You may end up wasting time and money on building features or functionality that nobody wants or needs, or chasing after the wrong market segment or channel.
Common product-market fit questions
To achieve product-market fit, online marketplace entrepreneurs and product managers need to ask and answer some common questions, such as:
- How much are users willing to pay?
- Are there enough users willing to pay?
- How do users find and engage with your platform?
- How do users transact on your platform?
- How do you retain users?
These questions help to define the value proposition, the competitive advantage, the marketing strategy, and the product development process of a marketplace project.
How to Achieve Product-Market Fit with a High-Fidelity MVP?
A high-fidelity MVP is a version of your marketplace concept that has enough features and functionality to deliver value to your early adopters and test your core assumptions and hypotheses. It is not a fully-fledged product, but it is not a prototype or a mockup either. It is somewhere in between.
A high-fidelity MVP can help you achieve product-market fit by allowing you to:
You can evaluate how your UX/UI design impacts your user flow and engagement, and how well your core functionality works. For example, how easy is it for users to search, find, select, compare, checkout, and fulfil their transactions on your platform? You can use metrics such as drop-off points, user feedback, sign-ups, ratings, and reviews to measure usability.
Test and refine the business model
You can experiment with different aspects of your business model, such as user segmentation, product segmentation, geographic focus, pricing strategy, etc. You can use metrics such as customer acquisition cost (CAC), customer lifetime value (LTV), gross margin, etc. to measure the viability and scalability of your business model.
Test and refine the revenue model
You can test different ways of generating revenue from your platform, such as commissions, fees, subscriptions, advertising, etc. Use the AARRR framework to define, track and analyse appropriate metrics. These include average order value (AOV), conversion rate, cart abandonment rate, retention rate, churn rate, etc. to measure the effectiveness and sustainability of your revenue model.
You can add, adjust, and test features and functionality in an incremental manner based on user feedback and data analysis. You can also identify which features or functionality contribute to product-market fit and which ones do not.
What is the best technology approach for high-fidelity MVPs?
Since product-market fit validation, especially for online marketplaces, puts a big emphasis on optimal user flows and the user experience, as well as a process of incremental iteration, custom marketplace development, which can accommodate unique user flows and features, will always deliver superior outcomes.
Unfortunately, taking shortcuts with an inflexible, unscalable one-size-fits-all turnkey solution will usually postpone, if not permanently block, your quest for product-market fit. We explain why in more detail in our article: 6 ways turnkey software solutions can kill your marketplace startup
Examples of Successful Marketplaces that Used High-Fidelity MVPs to Establish Product-Market Fit
Airbnb started as a simple website that allowed people to rent out their spare rooms or couches to travellers. They focused on testing their value proposition (affordable accommodation with local experiences) and their revenue model (charging a commission from both hosts and guests). They also iterated on their UX/UI design and functionality based on user feedback and data analysis. They eventually added features such as reviews, verification, insurance, etc. to increase trust and safety on their platform.
Uber launched as a mobile app that connected riders with drivers who had black cars or SUVs. They focused on testing their value proposition (convenient transportation with premium service) and their revenue model (charging a dynamic fare based on supply and demand). They only added additional features such as surge pricing and ratings after iterating on their UX/UI design and functionality based on user feedback and data analysis.
FanPass – a fast-growing event-ticketing marketplace – used detailed analysis of user behaviour and traffic acquisition to create special features for specific buyer and seller segments. The improved product-market fit resulted in a threefold increase in conversion rates.