The Market
Given the pyramid's hierarchy, let's start with the bottom section, which is the market. A market consists of all the existing and potential customers that share a particular customer need or set of related needs. For example, all the people in the United States who need to prepare their income taxes are in the U.S. tax preparation market. You can describe the size of a market by the total number of customers in the market or the total revenue generated by those customers. For either of those two measures, you can refer to the current size or the potential future size of the market.
Different customers within a market choose different solutions to meet their needs. For example, some customers in the tax preparation market may use a professional service such as H&R Block. Others may choose to prepare their taxes themselves, either by hand or by using software such as TurboTax.
Within a given market, you can analyze the market share of each competing product – that is, what percentage of the market each product has. For example, you could compare the smartphone market share of Apple versus Samsung. Or you could segment the smartphone market by operating system (iOS, Android, and so forth). Browsers are another example where the market shares of each different product are closely watched.
As you walk down the aisles of a supermarket, you see products in many different market categories: toothpaste, shampoo, laundry detergent, cereal, yogurt, and beer, to name a few. The life cycle stage of a market can vary. Many of the products you see – such as milk, eggs, and bread – are in relatively mature markets, with little innovation or change. That being said, new markets do emerge. For example, Febreze basically created its own market with a new product that eliminates odors from fabrics without washing them. Prior to its launch, that market didn't exist. You also see active competition in many markets, with companies trying to gain market share through product innovation.
The Product-Market Fit Pyramid separates the market into its two distinct components: the target customers and their needs. The needs layer is above the target customers layer in the model because it's their needs that are relevant to achieving product-market fit.
As you try to create value for customers, you want to identify the specific needs that correspond to a good market opportunity. For example, you probably don't want to enter a market where customers are extremely happy with how the existing solutions meet their needs. When you develop a new product or improve an existing product, you want to address customer needs that aren't adequately met. That's why I use “underserved needs” as the label for this layer. Customers are going to judge your product in relation to the alternatives. So the relative degree to which your product meets their needs depends on the competitive landscape. Let's move now to the product section of the pyramid.
Your Product
A product is a specific offering intended to meet a set of customer needs. From this definition, it's clear that the concept of product-market fit applies to services as well as products. The typical distinction between a product and service is that a product is a physical good while a service is intangible. However, with products delivered via the web and mobile devices, the distinction between product and service has been blurred, as indicated by the popular term software as a service (SaaS).
For software, the product itself is intangible code, often running on servers that the customer never sees. The real-world manifestation of software products that customers see and use is the user experience (UX), which is the top layer of the Product-Market Fit Pyramid. Beyond software, this is also true for any product with which the customer interacts. The UX is what brings a product's functionality to life for the user.
The functionality that a product provides consists of multiple features, each built to meet a customer need. Taken together, they form the product's feature set, which is the layer just below the UX layer.
To decide which features to build, you need to identify the specific customer needs your product should address. In doing so, you want to determine how your product will be better than the others in the market. This is the essence of product strategy. The set of needs that you aspire to meet with your product forms your value proposition, which is the layer just below “feature set” in the Product-Market Fit Pyramid. Your value proposition is also the layer just above customer needs, and fundamentally determines how well the needs addressed by your product match up with the customer's.
Taken together, the three layers of value proposition, feature set, and UX define your product. As shown in Figure 1.1, your product and the market are separate sections of the Product-Market Fit Pyramid. Your goal in creating customer value is to make them fit nicely together.
Product-Market Fit
Viewing product-market fit in light of this model, it is the measure of how well your product (the top three layers of the pyramid) satisfies the market (the bottom two layers of the pyramid). Your target customers determine how well your product fits their needs. Again, customers will judge your product's fit in relation to the other products in the market. To achieve product-market fit, your product should meet underserved needs better than the competition. Let's discuss a product that managed to do that.
Quicken: from #47 to #1
A great example of a product that achieved product-market fit while entering an already crowded market is Intuit's Quicken personal finance software. Scott Cook and Tom Proulx practiced Lean principles even though they founded Intuit years before Lean Startup ideas were put forth. When they launched Quicken, there were already 46 personal finance products in the market. However, after conducting customer research, the cofounders concluded that none of the existing products had achieved product-market fit. The products didn't meet customer needs and were difficult to use. The cofounders had a hypothesis that a checkbook-based design would do well, since everyone at the time was familiar with writing checks. Their hypothesis proved right: the UX they built using the checkbook conceptual design resonated with customers and Quicken rapidly became the leading personal finance software.
A large part of Quicken's success was the fact that Intuit adopted principles that would be called Lean today. The company pioneered the use of customer research and user testing to inform software development. They routinely conducted usability testing of each version before launching it and organized public betas years before those ideas became mainstream. They invented the “follow me home” concept, where Intuit employees would go to retail stores, wait for customers to buy a copy of Quicken, and then ask to follow them home to see how they used the software. This helped immensely in understanding the customer's initial impressions of the product.
Let's assess Quicken using the Product-Market Fit Pyramid. There were many customers in its market, and the product definitely addressed real customer needs: People needed help balancing their checkbook, tracking their balances, and seeing where their money was going. Computer software was well suited to help on that front, but despite 46 products in the market, customer needs were still underserved. By talking with customers, the cofounders ensured Quicken's feature set addressed those needs. Their design insights led to an innovative UX that customers found much easier to use. This dramatic improvement in ease of use was, in fact, the main differentiator in Quicken's value proposition. By achieving product-market fit, Quicken succeeded in the face of stiff competition, which led the founders to joke about having “47th mover advantage.”
The Lean Product Process
Now that we have a detailed model for product-market fit, how do we go about achieving it? Based on my experience using the Product-Market Fit Pyramid with many teams on numerous products, I designed a simple, iterative process for achieving product-market fit. The Lean Product Process, shown in Figure 1.2, guides you through each layer of the pyramid from the bottom up. It helps you articulate and test your key hypotheses for each of the five components of product-market fit.
Figure 1.2 The Lean Product Process
I describe the six steps of the Lean Product Process