Defining the market should come before the product.

When developing new product concepts or considering strategic changes, it’s crucial to evaluate product-market fit effectively. Often, the process starts with the product definition, followed by an evaluation of its market potential. The typical steps include:

1. Articulating the product hypothesis
2. Determining the feature set
3. Creating the product
4. Launching the product
5. Hoping for success

This method has significant flaws. In reality, it should begin with the market, providing a clearer and more rational framework for crafting a successful product strategy.

Here’s why this matters.

What Constitutes Product-Market Fit?

The concept of product-market fit (PMF) was introduced by Andy Rachleff, the CEO and co-founder of Wealthfront and a co-founder of Benchmark Capital. Rachleff’s perspective on PMF stemmed from his insights into the investment strategies of Don Valentine, founder of Sequoia Capital.

As Andy Rachleff states:

“A value hypothesis tries to clarify the main assumption behind why a customer might use your product. Discovering a compelling value hypothesis is what I refer to as achieving product/market fit. A value hypothesis outlines the features to develop, the audience likely to be interested, and the business model necessary to encourage a customer to purchase your product. Companies frequently undergo numerous iterations before securing product/market fit, if they achieve it at all. A strong team in a weak market will struggle; a weak team in a strong market will also struggle. However, when a strong team meets a strong market, remarkable outcomes can occur. If you target a market that genuinely desires your product—if the dogs are consuming the dog food—then you can make many mistakes and still succeed. Conversely, if your execution is exceptional but the dogs refuse to eat the dog food, success is unlikely.”

The Importance of Starting with the Market

A central takeaway from Rachleff’s observations is that the market is paramount. You can create an outstanding product, but if it doesn’t address a critical, must-have need for customers or users, the effort is futile.

How to Find Product-Market Fit

A prevalent misconception about product-market fit is that rapid iterations of product features will lead to success. While luck may sometimes play a role, making informed decisions based on evidence significantly enhances the chances of success.

Before defining the product, it's important to create and test various value hypotheses across different market scenarios. Once your value hypothesis is validated or you have substantial evidence backing it, you can proceed to formulate a growth hypothesis.

Identifying Unmet or Hidden Customer Needs

After defining your target users, it’s essential to understand and list their specific needs. To deliver value, you must pinpoint the distinct needs that align with market opportunities.

Recognizing these hidden market needs is a fundamental goal shared by all successful tech companies.

When developing a new product, ensure one of two scenarios is present:

1. Address customer needs that existing solutions fail to meet adequately. These are termed “underserved” needs. Customers will evaluate your product against a wide array of alternatives, so how well your product addresses their needs will depend on the competitive landscape. For instance, in the email client market, numerous "game-changing" applications aim to alleviate email overload, all attempting to resolve users' frustrations. Competing in this crowded space requires your solution to meet the unfulfilled needs of the entire market; capturing only a small segment is not a viable business strategy.
2. Identify a “latent” customer need. These typically innovative products strive to create new categories that users didn’t know they desired. Finding these hidden needs can be challenging, but using a discovery methodology that approaches problems with a fresh, often technology-driven perspective can help. For example, in event ticketing, one might create a straightforward product that is little different from competitors or transform existing business models and user behaviors by addressing the core issues faced by event organizers and attendees, thereby generating new value for both parties.

Establishing Your Value Proposition

Your value proposition is a commitment to your users that demonstrates how your product will meet their needs more effectively than any alternatives. Out of all the potential customer needs your product could satisfy, which ones are most critical? Which will yield the greatest impact with the least effort?

The value hypothesis outlines the what, who, and how:

• What: The product you plan to create
• Who: The user who has a significant need for this product
• How: The business model and marketing strategy utilized to deliver and promote the product

Defining Your Minimum Viable Product (MVP)

Once you’ve clarified the value you aim to provide, the next step is to determine how to deliver that value as swiftly and simply as possible. This often entails rejecting numerous appealing ideas, backed by evidence to ensure that what you choose to pursue has a high likelihood of delivering significant user value.

It’s crucial to avoid spending months developing extensive features only to find that your foundational hypothesis fails to resonate in the market. By then, you could have exhausted your resources and be forced to abandon the project.

The MVP approach focuses on creating only what is essential to deliver enough value to your target customers to confirm you’re on the right path.

While it’s easy to list numerous customer needs, narrowing that list down to just one or two priorities is a challenging task.

As Steve Jobs once remarked:

“People think focus means saying yes to what you need to concentrate on. But that’s not what it means at all. It means saying no to the hundreds of other good ideas. You have to choose wisely. I take just as much pride in what we haven’t done as in what we have accomplished. Innovation is about saying no to a thousand things.”

You must determine how your product will stand out from the competition. What will make it evidently excellent to users? What unique features will earn their praise? This is the core of product strategy.

Customers, colleagues, management, media, and investors may express that your MVP is lacking in certain areas, and they might be correct. These gaps can be addressed over time. However, it’s essential to remind stakeholders that your primary questions are: a) does our value proposition resonate in the market?; and b) is our hypothesis valid, and are our core features instilling trust and confidence in users?

Creating a Prototype

Many companies overlook this step, which can be both costly and unwise. No matter how extensive your research, you won’t know how your product will be received until users engage with it.

To reduce risk, develop a functional but not production-ready prototype, allowing you to quickly present a version of the product to real users. Focus on user experience and functional capabilities rather than scalability or architecture.

Today, several excellent tools make creating usable prototypes easier than ever. Companies like InVision are innovating in this field, eliminating excuses for skipping this vital step.

Launch It

If you’ve gathered valuable insights from your prototype testing and have confidence in your MVP, it’s time to build the actual product. At this point, don’t overly concern yourself with scalability or design elegance. You haven’t yet validated that you have something users want, so focusing on scale is premature.

Consider granting pre-release access to a select group of qualified users, and, similar to the prototype phase, ensure you gather qualitative feedback. Continue iterating with this group until you feel prepared to launch the product widely, backed by robust marketing and communication strategies to spread the word.

Maintain Honesty

Approximately 30 days post-launch of your MVP, conduct a thorough and objective assessment of its impact. What’s working well? What isn’t? Which features should be added or removed? The answers to these inquiries will shape your future roadmap and iterations.

Upon reviewing customer feedback, you might find it necessary to revise your hypothesis based on new insights and revert to an earlier stage in the process. The feedback will guide you on which step to revisit. If only UX design improvements are needed, focus on that. However, if your hypothesis is fundamentally flawed or if customer needs have shifted, acknowledge these shortcomings and return to step one.

You may find that to achieve a stronger product-market fit, a pivot—changing one or more major hypotheses—is essential.

Ideally, customers will love your product, find it user-friendly, and see great value in it. Congratulations, you now have a viable business. You’ve validated your key hypothesis and created a product with strong product-market fit. With this understanding, you should feel confident seeking and investing the resources needed to scale your product to meet demand in other regions or in related industries facing similar challenges.