In his confessional expose, Ramit Sethi (@ramit) publically admitted and explained why he killed a $2mln product.
It seemed to be doing well on the surface. There were hundreds of meetups around the world. People were getting value from the product.
But the product’s churn hovered around 10%. Which meant that they would lose all of their customers within 10 months, if they stopped acquiring new customers.
Ramit summarizes:
Imagine your job is to fill up a large bucket with water. You spend thousands of dollars choosing a clean well, testing the water quality, and painstakingly ladling each cup of water… only to discover you’ve got a massive hole in your bucket!
They poured another $100k into the product and tried a number of changes, ultimately the churn wouldn’t budge. Because his best customers consistently outgrew the program. And their friends left. Consistently.
So even though the product was earning $2mln/year, the profit margins were thin, and most importantly, the churn was a sign that something was broken.
Pirate Metrics to the Rescue
500 Startups (@500Startups) came up with the idea of Pirate Metrics, as the key high-level numbers that are related to rapid growth:
- Acquisition
- Activation
- Retention
- Referral
- Revenue
Startups that figure out how these numbers interact and clear all bottlenecks start experiencing explosive growth. Because most of these numbers have exponential effects, if under the right conditions. It is a really useful troubleshooting framework for businesses that want to achieve high growth.
Looking at Ramit’s numbers, it seems to imply that retention was so low, that the lifetime value of a customer didn’t really justify the acquisition cost. So the core tension in his case was between acquisition and retention.
Turns out overmarketing is a very common problem…
If customers don’t stay with you for very long and don’t refer your product, that implies your product doesn’t quite work for your market. Most new ventures overspend on marketing and underspend on product validation and development. Product. Operations. Support. Full alignment across the company is critical, to get retention and referrals. It doesn’t make much sense to spend a lot on marketing if you don’t have retention. A product your customers care about. This is why design matters a lot.
There are examples of this in lots of different industries: mobile, SaaS, hardware, biotech, etc. The list goes on. Anecdotally, this rings true. Here’s an example from mobile:
The average cost to a brand for every app install has reached $2.51 on Android and $1.78 on iOS [in 2016]. But 70% of those new users may be lost just one day after install, and retention rates drop to 4% by the third month. That high churn rate means that the cost of acquiring users that are still engaged with your app three months after install is 25 times higher than just acquiring new users.
In this case, increasing your marketing budget only gets the word out about a product that doesn’t satisfy customers. Which is counterproductive.
A much better use of your budget is to double down on the product. Improve your customer and user experience. Make sure that you are helping a small pool of customers achieve their goals, before you go out and trumpet your product to the world at large. And a great product will retain happy customers who want you to produce more for them. It will also generate word of mouth, lowering your average customer acquisition costs and increasing your referral rates.
Beyond initial market tests, with landing pages for example, there comes a point where you really do need to invest your resources into your product or service. It’s in your best interest.
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