13:43By the way, talking about somebody being able to operate in India, the single best dronepilot in the world today– any idea?MICHAEL GREEN: Well, I’m guessing India.JOSH WOLFE: 12-year-old girl in Thailand.MICHAEL GREEN: Really?JOSH WOLFE: 12-year-old girl.And she started playing when she was 8.And she is better on every metric.In speed, accuracy, she beats everybody.Her name is Milk.And that’s, you know, her call sign.But a 12-year-old girl in Thailand is the best drone pilot in the world.MICHAEL GREEN: So it truly is actually Ender’s Game, which is the book by Orson Scott Cardwhere we rely on children to fight the intergalactic battle.Fascinating.That’s absolutely amazing.Let’s think about the nonlinearity for a second.And one of the topics you wanted to bring up was this idea of liquidity as a nonlinearity.JOSH WOLFE: Yes.MICHAEL GREEN: And so one of the things that we see within venture capitals is that there’sbeen this explosion of liquidity, particularly exceptionally well-funded growth equity.So not the true VC stage one, Series A-type round, although that obviously has benefitedfrom this dynamic, but the Series E pre-public here’s $1 billion, here’s a $20 billion valuation,here’s a $100 billion valuation.Talk to me about how you think about this liquidity switch and the impact that thathas on your industry and the impact that has on innovation?JOSH WOLFE: Well, it ultimately is going to define all the returns.And if you go back a little bit and say, well, why are we in this situation, where we’vecalled this in the past, the minnows and the megas?You have lots of these small firms that are starting up that are doing the seed checks,and then you have these large players that are writing these $100 million plus checks.Going back 7 years or so, Andreessen— who I think is a brilliant investor, a brillianttechnologist– basically said, there’s only 10 companies that matter in a given year.And statically, that’s probably true.Now knowing which 10 is very hard, but he said, you just basically want to be in thosecompanies.And I that was a meme that really went very wide.And people said, OK, well, it doesn’t matter if you invest in Facebook at $1 billion, or$5 billion, or $10 billion because we’re going to be hundreds of billions.And so does it really matter if we’re negotiating here and quibbling over $1 billion or $2 billion.Well, of course, it does, but that I think induced a lot of growth investors to15:53let’s just try to speculate on some of these big unicorns.And you’ve got this phenomenon of companies that were pining to signal that they weregoing to be that next Facebook by attaining a billion-dollar valuation.And then you got a positive feedback effect where people were funding these things, andto get access, would write an $100 million check at a $900 million pre.And they would own 10% in a billion-dollar valuation.And the problem for the early-stage investors and their limited partners is they were gettingthese huge markups.
Forget about Growth. Here’s the Metric that Really Matters.
The growth vs. churn quadrant
Let’s start by looking at when each of these metrics matters more during a product’s lifecycle
1. Low growth, high churn
Whatever you’re doing, it’s not working. You’re hemorrhaging users while failing to add more, so it’s pivot time. Given the goal of righting the ship, growth is a better metric to focus on to see if you’re effectively changing the dynamic by offering and promoting new features and functionality.
2. High growth, high churn
You’re onto something, but execution is the issue. New users signing on means your messaging and value propositions are cutting it, but users aren’t sticking with the solution. The company can’t afford to keep spending money on user acquisition if those people don’t last for long as paying customers. It’s time to take a deep dive into user behavior analytics, surveys and interviews to uncover what’s leaving them cold and causing them to abandon ship, so churn takes priority.
3. Low growth, low churn
With a loyal customer base, there’s a strong foundation to build on strategically. Product development efforts can be selectively chosen to experiment with growing the appeal to new pools of users. Marketing activities should also be reevaluated, and the spotlight can shift to growth.
4. High growth, low churn
The holy grail is in your grasp! New users coming in, old users staying put, revenue solely headed in a good direction. Assured that you’ve got a winning combination, do you double-down on growth or try and squeeze that churn rate even lower?
When it’s churn’s turn
Once a product and its growth campaigns have reached maturity and are both performing well, product management can be more strategic and less reactionary in its prioritization. Product market fit has been achieved and glaring problems or shortcomings in the product have been addressed. This is the time to focus on churn.
Let’s look at the numbers. If a company charges $10 per month, each new user means an extra $10 in revenue, and every lost customer means a loss of $10 in revenue. If it was just as easy to add one new customer as it was to retain an existing customer, then it wouldn’t really matter whether a company focused more on growth or reducing churn.
However, there is usually a cost to acquiring each of those new customers. If it costs $100 on average for each new customer, the company doesn’t even break even until month 11. So now the goal is not only to add new customers, but to keep them around for at least 11 months to even consider that customer profitable—and that assumes there is zero incremental operating cost to adding and maintaining each customer.
This illustrates why it is so important to reduce churn, and why each saved user is more valuable than each new one. Even when the acquisition cost is only $20, it’s still not until at least Month 3 for them to become profitable, and every customer who doesn’t last represents not only a $10 per month loss in revenue but also any unrecouped money spent on acquiring them.
“Focusing on just one year, if you have a churn of 5% of customers a month, you need to grow a staggering 45% in a year just to remain stable,” says Dave Martin of Tes. “In absolute numbers, starting in January with 2,000 customers suffering a monthly 5% churn and acquiring no new customers, results at the end of December in only 1,080 customers… But with a 1% monthly churn this product can celebrate annual growth of 715 customers, or 36% growth. ”
Churn means more than lost revenue
Aside from the purely financial impact of a customer unsubscribing, shedding customers has other negative repercussions. If a customer quits—particularly when it’s due to a negative experience—they are potentially a negative growth agent if they share their unsatisfactory experience with other potential buyers.
This can manifest itself in negative online reviews, poor recommendations, or even industry headlines in an enterprise setting. Definitely not helping your Net Promoter Score.
Additionally, as internal executives and outside investors evaluate the company, higher churn rates can raise a red flag about long term viability. There’s always a ceiling for growth, so stakeholders want to see that even when growth plateaus the business is truly sustainable. If users are consistently canceling their subscriptions, slowed growth can lead to a net negative in monthly revenue over time.
A lost customer is worth more than a new one
The older a customer, the more their departure hurts. New customers are less likely to be a good fit for your product, as the earlier someone adopts the more pressing their need for your solution. Plus that old customer had already paid off their acquisition cost and was a true profit center, while new customers need time to pay that off, plus the amount to acquire them likely was higher as it was more recent.
But you can also learn something from that lost customer, namely why they left. Were they drawn to a competitor? Did the value your solution offered fade over time? Was a missing key feature causing them to bail out? Answering these questions can inform what should be done to retain your current stable of paying customers and attract new ones.
Pay attention to pre-churn indicators
Many people don’t cancel subscriptions the second they stop using them; they might be lazy, want to avoid confrontation, not realize immediately that they’re definitely not using a product anymore, or simply aren’t sure if they’re really going to give it up forever.
Regardless of their reason for putting off cancellation, eventually those people will pull the trigger after seeing a credit card statement or being asked by their boss why they’re still paying for something they never use. So even if customers aren’t immediately heading for the exits, there’s a chunk of users (or potentially non-users at this point) that represent an imminent cancelation.
There are three reasons to pay attention to this cohort. The first is that if you can recognize the tell-tale signs of a user in wind-down mode they could be eligible for revitalization from customer success or account management. Knowing the indicative metric in this case can prioritize those customers for follow-up.
Is churn ever a good thing?
There are cases where losing a customer is a win in the end. They typically come in three flavors:
- Too high maintenance—SaaS businesses succeed with scale, so when a customer needs constant hand-holding and special treatment or customizations, they may not be worth their monthly or annual fee.
- Clinging to the past—When a customer leaves because you no longer support an outdated technology they still want to use, it’s the price of progress, but generally one worth paying.
- Relics of a previous era—Businesses evolve and their new strategies and models may not work for early adopters who signed up for a markedly different service. While you don’t want to leave loyal customers hanging, if it’s a small enough cohort it’s probably best to say goodbye.
Shedding a few old-timers and getting a fresh start with only customers interested in the current offering can avoid distractions and help cull your backlog of irrelevant items.
Reflecting on My Failure to Build a Billion-Dollar Company
It took years for me to realize my pursuit of growth was misguided from the start
Google Cloud for Startups program
Startups in our program have access to:
- Google Cloud credits, free users on G Suite, Hire by Google (US only), Qwiklabs, and more
- Special events, mentorship, and technical training
- News and product updates
- Have received no more than a Series A funding round
- Are less than five years old
- Are based in an approved territory
- Have not previously received Cloud credits outside of the free-tier offering
Startups who are part of an incubator or accelerator program, or have received VC funding, should check with that organization before applying here as they may be eligible for larger credit levels.