How to Measure Product-Market Fit Over Time

Have you ever launched a well-developed feature only to have it fall short of your sales or customer retention goals? If customer adoption is low or it doesn’t drive enough revenue, these could be signs that your feature doesn’t have a good product-market fit.

Measuring product-market fit with metrics like customer retention rate and addressable market at regular intervals can help you determine what you’re doing right while pinpointing areas where your product or features aren’t meeting customer needs.

When to Look at Product-Market Fit

Product-market fit isn’t a static state of being, and measuring it isn’t a one-time activity. After all, products change over time, and your customers’ pain points and the market change, too. A shift in any of those areas can affect your product-market fit.

When during the product development process should you measure product-market fit (other than before and after launching a brand-new product)? Look at fit before and after you launch a new feature, trim an unused one, or update the functionality of your product. Measuring before these steps gives you a chance to check your assumptions about your value proposition against real feedback before you devote product team bandwidth to development. Measure after those points in product development as well to see if you met or missed your mark.

Similarly, measure product-market fit before and after you expand into a new target market or try to reach a new customer persona. Measure before expansion to make sure you know your new target well—you know the size of the new market; you understand the needs of your new users—and measure after to check if your strategy was a success.

Finally, if you spot an anomaly or drastic change in otherwise stable product metrics, take another look at your product-market fit. A climbing customer churn rate, for instance, can point to a problem with fit: maybe a new competitor entered the market that better serves your target customer base, or perhaps there’s an issue with your product pricing. Spikes or drops in a number of different metrics can mean you need to find (or re-find) product-market fit.

Measure Addressable and Obtainable Market to Determine Market Size

Market size is a key component of product-market fit—if the market isn’t large enough, it won’t be able to sustain your business. If you know (or suspect) the market has changed, it’s worth it to conduct that research again.To calculate your market size, determine your:

• Total addressable market (TAM) by multiplying the total number of accounts in your market by their annual contract value
• Service addressable market (SAM) by multiplying the segment of your TAM you can service by their annual contract value
• Service obtainable market (SOM) by multiplying your market share from last year by your SAM for this year

The sign of a good market for your product is a SOM that’s large enough to be profitable for your company while remaining realistic for your business model.

Measure Growth Rate and Profit Margin for Company Performance

Taken together, your growth rate and profit margin can give you an idea of how well you’ve achieved product-market fit. This is based on the “Rule of 40” (or Rule of 40%), a common approach among SaaS companies to gauge their growth potential.

To calculate this metric, add your growth rate and profit margin together. If they equal 40 or more, that’s a sign your company has achieved sustainable, profitable growth—and that’s an indicator of product-market fit.

Note that this metric is more of a rule of thumb. It’s a quick way to gauge growth, but it shouldn’t necessarily form the basis of your product management strategy.

Measure Customer Acquisition and Lifetime Value to Calculate Company Health

Your customer acquisition cost (CAC) should be lower than your customer lifetime value (CLV)—otherwise, your company won’t be able to grow profitably. Your CAC equals the cost associated with sales and marketing for your product divided by the number of new customers you’ve acquired. Your CLV equals your customer value multiplied by your average customer lifespan.

You can look at these two metrics together as a ratio:

LTV / CAC = Your ratio

A ratio of at least 3 is a good sign you’re acquiring enough long-term customers to offset your costs and sustain growth for your product, which suggests you’ve found a comfortable product-market fit.

Measure Customer Retention to Check for Product Stickiness

A high customer retention rate goes along with high customer lifetime value. A sticky feature set is a sign of value: you’re serving your customers’ needs well enough they keep coming back to your product.

The benchmarks for customer retention rate vary depending on your industry and goals. That said, the average monthly rate for B2B SaaS companies is between 92 and 97% (that’s a churn rate between 3 and 8%).

To measure your customer retention rate, follow this formula:

(Total number of customers at the end of a given time period - Number of new customers acquired during that time) / Number of existing customers at the start of your time period x 100

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