Lack of product-market fit (PMF) is the #1 reason for startup failures. Marketplace startups, which have to balance the needs of both buyers and sellers, are faced with increased complexity when it comes to figuring out if they have actually reached product-market fit. We unravel some of that complexity with this overview of the key metrics, tools, and pitfalls of measuring product-market fit in marketplace startups.
It happens to approximately 9 out of 10 startup founders. They have a product or service that they believe will make a difference, that will provide a solution to a problem that their consumer base is actively grappling with. The market research looks promising. The solution is inspired. The funders are enthusiastic. And then … silence. The kind of silence every entrepreneur dreads.
This happened to Michal Bohanes with his first startup, Dinnr. The idea was clever: an ad-hoc, same day ingredient delivery service. All customers had to do was select a recipe on the Dinnr website, and they would get a delivery with everything they needed to cook it at home, all the items pre-measured with printed instructions. Michal envisioned and positioned this as a great solution for special occasions like birthdays or anniversaries, which could now be celebrated with a lovingly cooked meal at home, instead of in a restaurant.
Why didn’t it work? Because Michal’s target market actually liked going to restaurants. They liked the idea of cooking at home – which is why they skewed Michal’s market research in surveys – but when the time came to start chopping the onions and turn on the stove, it just seemed so much easier to pick up the phone and make a reservation.
After 18 months, Dinnr finally shut its doors, and Michal learned probably the most important lesson any startup founder can learn: not every problem needs a solution.
Product-market fit, but for marketplaces
For any startup, product-market fit is one of the most critical milestones. It’s the moment when a product or service proves to meet market demand, resonating strongly with users and generating consistent traction. But for marketplace startups, PMF isn’t just a milestone; it’s the core validation that the business has found a way to create, capture, and sustain value between two distinct groups, typically buyers and sellers.
While PMF is challenging to achieve across all sectors, it’s particularly nuanced in marketplace businesses, which have to master the complex balance of supply and demand and nurture both sides simultaneously. Achieving PMF signals a marketplace model is on a path to scalable, sustainable growth. It means that customers not only need but also want the marketplace’s unique solution, and they’re willing to return and pay for it.
According to research, 42% of startups fail because they never reach PMF, often jumping into growth stages without solid evidence of sustainable demand. Without PMF, scaling too early can lead to significant losses as the startup hasn’t yet nailed down what keeps customers coming back, or acquired the predictable growth patterns that investors and founders seek.
For marketplace startups, PMF validation means a scalable business model that won’t just grow, but has the potential to create a robust competitive moat. However, measuring PMF in marketplace models can be tricky; after all, these are businesses that require a unique balance of supply, demand, and engagement across diverse user segments.
Your first step will be to create a high-fidelity MVP with enough features and functionality to test your core assumptions about buyers and sellers. Once that is in place, you can define and track relevant PMF metrics.
How do you know that your marketplace has reached product-market fit?
You would think the obvious answer to this question would be “because things are working and people are interacting with my marketplace”. But there are reasons why your marketplace startup could see initial success, despite the fact that you haven’t really achieved product-market fit.
Perhaps you’ve lured in an influx of sellers because you spent half your runway on shotgun marketing. Or maybe you are baiting buyers to your marketplace with a limited-time-only promotional offer. There’s also novelty bias to consider – most people love trying something new simply because it’s new. Either way, after an initial flurry of activity, you might encounter doldrums and wonder why.
PMF is elusive. Instead of a single metric, it is a combination of several key indicators that prove users genuinely value and engage with the platform. Let’s dive into the specific PMF metrics and signals that help define marketplace product-market fit.
1. Viability metrics
Viability is at the heart of achieving product-market fit for any marketplace, though what defines viability can vary. In essence, it’s about proving that the marketplace can financially sustain itself, provide real value to both buyers and sellers, and grow without losing momentum or engagement.
For many marketplaces, simply hitting breakeven is a promising early milestone. A B2C retail marketplace like Etsy, for instance, started with a focus on handmade goods, honing in on highly engaged communities and tracking repeat purchases. This niche focus allowed Etsy to confirm strong demand, laying a foundation for broader growth.
In the public sector, government-to-business (G2B) platforms look at viability a bit differently, prioritising cost-efficiency and service utility. For example, the platform that the CobbleWeb team built for Atos measures viability by cost per unit served, emphasising efficiency over profit.
For marketplaces that connect customers with service providers – like Thumbtack – viability is measured through metrics like booking volume and provider retention. Thumbtack validated its PMF by focusing on reliable service providers and positive customer experiences, creating steady growth on both sides of the marketplace.
B2B marketplaces like Alibaba, on the other hand, often rely on transaction size, customer retention, and recurring business. Alibaba’s focus on connecting Chinese manufacturers with global buyers allowed it to establish a solid user base and scale effectively.
Projected viability can also play a role, especially for models that can scale. Amazon‘s early success with books demonstrated that growth could be sustained and expanded across categories, all thanks to a scalable logistics network. In contrast, social networks base their forecasts on user behaviour metrics and revenue per thousand users, since they usually monetize through advertising.
It’s essential to base projections on relevant markets. Many startups stumble by assuming that success in one area will automatically carry over to others. If a marketplace relies heavily on a specific market, expanding to a new segment with different expectations can bring unexpected challenges. Even a strong core model can struggle if the overall market isn’t large enough to support long-term growth.
2. Additional PMF metrics and signals to look out for
Beyond viability, there are additional metrics that can give a clearer view of product-market fit in marketplaces.
A helpful one is the “Rule of 40,” a measure from the world of SaaS that says a company’s revenue growth rate plus its profit margin should hit 40% or higher. This balance shows that growth and profitability are moving in sync – a good signal in a marketplace. For example, Airbnb expanded carefully into new cities with an eye on this metric to ensure its growth wouldn’t undercut profitability.
Another PMF indicator is the Lifetime Value (LTV) to Customer Acquisition Cost (CAC) ratio, which shows if revenue from a customer outweighs the cost to bring them in. A ratio of 3:1 or better is often a sweet spot. Uber applied this approach when entering new markets, tweaking strategies until this ratio proved the financial sustainability of each city launch.
Retention is also crucial, since it reveals customer satisfaction and loyalty. Uber’s high early retention suggested that frequent riders and drivers saw value in the platform. High retention often signals that users feel the marketplace is essential to their routine – and that’s an essential indicator.
Net Promoter Score (NPS) measures how likely users are to recommend a service to others. A high NPS means users are not only satisfied but also willing to spread the word. Airbnb achieved a high NPS by focusing on seamless experiences for hosts and guests, helping it grow through word-of-mouth and solidify PMF early on.
The “40% test” (not to be confused with the Rule of 40) is another great gauge: it asks how many users would be “very disappointed” if the service went away. If at least 40% would be disappointed, that’s a strong sign of PMF. Airbnb ran this test and found that a significant number of hosts and guests would indeed miss it, confirming the platform had become very important to them.
Finally, liquidity, or how well a marketplace matches supply and demand, often signals deepening PMF as a marketplace grows. Thumbtack measured this by tracking how quickly and accurately customers were matched with service providers. While liquidity might not be needed to hit early PMF, it’s critical as the marketplace scales, showing that the ecosystem is sustainable and self-sufficient.
3. Variation by segment or feature
Achieving PMF in a marketplace usually works best by starting small – focusing on a specific product, service, or customer segment – rather than trying to appeal to everyone right away. This lets startups fine-tune what they offer, build strong operations, and see if their service truly resonates in a manageable niche. Once PMF is solid in that first area, expansion becomes a much safer bet.
Jeff Bezos has emphasised the importance of starting narrow, saying that Amazon’s original business plan mentioned only books, with no immediate plans for other categories. This focus allowed Amazon to prove their model in a targeted segment and build a strong operational foundation. Only after achieving PMF in books did they expand into additional categories, gradually scaling their model in other areas.
PMF is often segment-specific, which means that what works in one area might not translate to another. For example, Thumbtack began by focusing on local service providers in a particular geographic area. As they expanded, they needed to check PMF all over again in new regions, since each market had its own quirks.
In some cases, PMF may even hinge on specific features. Success with one popular feature can reveal what users value, while lower engagement in other areas signals where adjustments are needed. Measuring PMF effectively in this instance means looking at feature adoption and revenue generated by each feature.
4. PMF is not static – it can be deepened or lost
To complicate matters even further, PMF also isn’t a one-time achievement; it’s something marketplaces need to actively maintain as customer expectations, competition, and market conditions shift. Keeping PMF strong means consistently tracking key metrics and staying responsive to changes in the landscape. Regularly measuring PMF is essential, as new competitors, shifting customer needs, or emerging user pain points can quickly impact relevance.
Take Groupon as an example. It hit early success with daily deals, but as similar platforms emerged and customer interest moved on, Groupon’s engagement dropped. While they tried to pivot into new areas, they couldn’t recapture that initial success, highlighting the importance of adapting to hold onto PMF.
Some marketplaces strengthen their PMF by enhancing their core platform, adding features that directly address user needs or pain points. Thumbtack, for instance, introduced stronger service provider verification, creating more trust and satisfaction, which reinforced customer loyalty and gave the platform a solid advantage over competitors.
Maintaining PMF is a balancing act. It involves growing while regularly checking that fit with the market is still intact. In the early stages, PMF may need constant fine-tuning; later on, as growth accelerates, it’s more about scaling – but a sudden increase in churn or drop in engagement can signal the need to re-evaluate.
Metrics like retention rates and the size of your addressable market are invaluable for tracking PMF. If churn starts climbing, for instance, it might mean customer needs have changed or that a new competitor is offering something more appealing.
Tools for measuring product-market fit in marketplaces
To measure product-market fit effectively, marketplace startups can implement tools that offer insights into user behaviour, satisfaction, and growth.
Snowplow Analytics, for instance, tracks user visits, transactions, and retention rates, providing valuable data on customer habits that can help predict PMF. Survey and voice-of-the-customer platforms like UserVoice or Qualaroo capture customer feedback and measure metrics like NPS that help gauge satisfaction and the marketplace’s overall value to its users.
Common pitfalls in measuring product-market fit in marketplaces
Reaching product-market fit is tough, and measuring it can be even tougher.
A common milestone for PMF is $1 million in annual recurring revenue (ARR), but hitting that number doesn’t guarantee true PMF. Sustainable PMF goes beyond revenue – it’s about ongoing customer engagement, loyalty, and profitability in each segment. Many startups reach $1M ARR in one niche but struggle to achieve the same success elsewhere if new segments have different demands or cost structures.
Another pitfall when assessing PMF in a marketplace – especially one with multiple product lines or services – is looking at things too broadly. While it might seem like the marketplace is thriving overall, PMF can vary a lot between different categories and user segments. For instance, a general goods marketplace might have great PMF for electronics with tech-savvy customers, but home goods or fashion might not be hitting the mark as well.
Instead of focusing on PMF at the company or regional level, it’s crucial to dig deeper and look at individual segments. This more targeted view helps highlight which areas are really resonating with users and which may need more work. By examining PMF for each category, a marketplace can avoid the trap of assuming broad appeal and can put resources where they’ll make the biggest impact, enhancing areas that have strong fit and rethinking the ones that don’t.
It’s important not to confuse a visibility problem for lack of PMF. OpenTable faced this initially – they had great PMF in some restaurant segments but struggled to grow because their marketing didn’t reach enough users.
Know when to pivot or throw in the towel
Sometimes, even with best efforts, a marketplace struggles to achieve product-market fit. Knowing when to pause, pivot, or even step back can prevent resource drain and open up new avenues.
If PMF remains elusive after several iterations, it may be time to reassess your approach. First, ensure you’ve achieved problem-solution fit: is your marketplace truly addressing the core needs of your users? If liquidity – your platform’s ability to facilitate transactions – is lacking, take a step back, connect with your users, and dig into any gaps in your value proposition or business model. Testing small adjustments here can often yield valuable insights before scaling efforts.
Groupon initially launched as The Point, a platform designed to mobilise collective action for social causes, but it struggled to gain traction. The founders noticed that a feature allowing users to pool resources for group discounts was much more popular. This realisation led them to pivot toward a daily deals marketplace, focusing on offering discounts for local goods and services. This pivot resonated with both consumers looking for deals and businesses aiming to attract new customers. As a result, Groupon scaled rapidly and became a household name in the daily deals industry, eventually reaching a valuation of over $16 billion at its peak
Pivoting doesn’t always mean a complete overhaul; it might involve experimenting with a new market or targeting a different audience. Groupon, for example, later on struggled to keep users engaged with its “daily deals” model, but instead of abandoning the market, they implemented a broader e-commerce focus.
In other cases, businesses may decide that a full exit is the best choice, as fashion marketplace, Zando, a Jumia subsidiary, did when competition and execution challenges proved too high. Although deciding to step back can feel like a setback, recognizing market limitations early can ultimately free resources to explore new, more promising opportunities.
The road is long, but the destination is worth it
Achieving and deepening product-market fit is an ongoing journey that takes careful planning, evaluation, and a steady focus on what makes your marketplace valuable. For marketplace startups, the challenge is twofold: they need to create PMF for both buyers and sellers. That means keeping an eye on overall viability as well as tracking granular metrics like user engagement, retention rates, or average order value at the category or product level.