How do you measure product market fit?
There is an agreement in the startup world about the critical importance of product market fit for every new business. That is not up for debate. Also everyone agrees with the general definition that it is the moment when it can be confidently said that the product is the right fit for a good-sized market.
There is *always* an argument about how to measure and therefore determine when PMF has been achieved for any specific product, market and business in general.
This post is NOT going to resolve that disagreement once and for all, but I thought it useful to lay out the SaaS businesses metrics that are an appropriate basis for the discussion on whether PMF has been achieved.
New Customers – What percentage of your unique traffic is converting into new customers either on a free trial or a paid subscription? How is this changing?
Conversion Rates – How many of your customers are converting from a free trial to a paid subscription option. A strong PMF will have a conversion rate of 5% or greater.
Organic Growth – What percentage of your new customers are coming from organic sources as opposed to paid sources? This volume should be growing in size each month. Knowing this is where tracking your marketing channels is critically important.
Average Contract Value – What is the average contract value and how does this relate to the size of the company? This is particularly important for SaaS products targeting a smaller number of larger customers.
Customer Turnover – After a minimum of 2-3 months what percentage of your customers are choosing to not renew their subscriptions? This crucial churn metric should have a target beneath 1.5% (people argue over this target!)
Usage – This one is pretty simple but specific to your product. You want your customers to be using your product as often as your use cases suggest they should. Having a large but disengaged customer base might work short term, but often indicates more fundamental PMF challenges.
Customer satisfaction – There are plenty of well-established methods for measuring customer satisfaction (NPS is the best standard imho). You need to be receiving strong positive customer feedback before you declare that you have PMF. And that isn’t just nice soundbites… it’s active referral behaviors.
These are not the only metrics that you could use nor do you have to use these. They are just a guide as to how you could measure PMF. The important thing is that you have decided how you are going to measure it and have an agreement on that with your leadership team and board.