Growth vs. Retention

This is an important topic, especially when there are broader economic concerns, regardless of the legitimacy of those concerns, that we see companies scaling back costs to only the necessary services needed to operate their businesses. Essentially, growth without retention is not growth. Everyone wants hockey-stick growth which is based on acquiring new users, but you can’t reach sustainable virality with a high, positive churn; you’d ideally want negative net churn through upselling existing users. High churn has implications for unit economic ratios like LTV:CAC. These are the metrics that VCs and the market are counting on.

Growth

Growth hacking isn’t about a specific tactic, but rather it’s about a process of discovering and validating which tactics will be effective for growing your business. This discovery happens through testing potential growth drivers ranging from new channels to new sharing and engagement features deep within a product. The more tests you run, the more you learn about how to grow your business. So it’s only natural to want to run as many tests per period of time as possible.

When Airbnb first started out, they implemented their integration on Craigslist because Craigslist had one thing that Airbnb did not—a massive user base. It was the place where people who wanted something other than the standard hotel experience looked for listings—in other words, Airbnb’s target market. The benefits of the Airbnb/Craigslist integration were numerous. Not only was it the sheer volume of potential users accessible via Craigslist, but the fact that Airbnb listings were far superior to the other properties available—more personal, with better descriptions and nicer photos—made them more appealing to Craigslist users looking for vacation properties. Once those Craigslist users made the switch, they were more likely to ignore Craigslist and book through Airbnb in the future. Not only that, but those with properties listed on Airbnb ended up making more money on their listings, which kept them using the service as well.

Casper, the innovative mattress company, spends a lot of resources and energy pushing potential customers down the conversion funnel. We’ve all seen their amazingly relatable ads, but how often do we buy mattresses? Mattresses are a ‘buy it and forget it’ item. Don’t get me wrong, Casper is certainly doing an amazing job addressing a huge market, but what about retention? If we assume that mattress sales are cyclical on the order of 5 years, how do we get that customer to buy another Casper mattress? Superior quality of product? absolutely – but there has to be something more. Casper mattresses cost just under $1k, quite a bit more than alternatives with similar delivery options, so they are innately cost prohibitive. I imagine Casper will soon release a suite of complementary products such as pillows, blankets and other sleep accessories to offer a more approachable price point for acquiring new customers and introducing the entire suite of Casper products and shortening the sales cycle from 5 years to about 1.

Retention

I’m not as interested in how many people convert but how many of those users are actually interacting with the product. If they find that they are locked into an annual contract but don’t use the product much or don’t find 10x value in it, consider that user churned. To discover why the user churned, you need to deeply understand your customer, more on that in the ‘Feedback’ section.

Measuring retention comes down to your industry and how you measure your acquisition cycle. If you’re an enterprise platform whose contracts are annual, you’ll want to measure your retention on an annual basis. If you’re a consumer technology company, you’ll want to measure retention on a rolling 90-day basis for your acquisition cohorts.

Fred Wilson said it best:

This all comes back to stepping on the gas before finding product market fit. You might think you have product market fit and so you scale up your hiring, your marketing, your sales, and your capital raising and spending.

But if you can’t retain a healthy percentage of your users past ninety days, you don’t have product market fit yet and all the investment you make in your business is just money down the drain.

Magic Numbers

Once you figure out your retention numbers, you can start to form an idea of the usage threshold by which a customer becomes a predictably retained customer. For Twitter, that magic number was 30—users who followed 30 others were much more likely to remain engaged with the service over time. For Facebook, that number was 10—users who added 10 friends within a week were likely to stay active on Facebook. Slack’s magic number is 2,000—that is, users who send 2,000 messages are much more likely to keep using and eventually paying for the service.

Hooks

Ideally, you want customer loyalty and engagement to form organically from the habit-forming nature of the app. The 4 steps of the hook are: trigger, action, reward, and investment, and through successive passes through these hooks, the new habit is formed. Presenting an entirely foreign trigger is going to be a friction point, so you want to provide them with triggers that actually matter and making it easier to take action with various entry points on different devices. FOMO is at the heart of all triggers, which is an organic call to action. Once action is taken, focus on delivering immediate social and information rewards, true with Twitter, Slack, Facebook, etc. The final part is getting users to invest, which comes in a few forms. Users can invest by adding integrations, sharing the app with their network and ultimately having the intention of paying for the service. You want to make the path from new to habitual user as seamless as possible – a large part of this is in the onboarding phase; simplicity wins.

I think 14-day trials are a common hook, but the key is not limiting the functionality. Let the user see the green grass. Freemium models are also a great way to fuel bottom-up word of mouth growth.

Feedback

Many companies listen to and respond to customer feedback from a customer satisfaction perspective, but far too few actually interview and learn from their customers and allow those learnings to drive their product development. Sometimes that means starting with the perfect experience and working backwards.

As you gain users, you’re also going to gain a better understanding of what those users want and need. This should lead to subsequent product launches and integrations, that will fuel growth in customer acquisition, activation and retention.

Once you gain data on your target market, you need to segment out your userbase and identify each persona and clearly articulate which pain points you are solving for each. One of the most important nuggets I’ve learned is that if you are solving a customer’s pain points #2, 3, 4 or 5, you’re never going to keep them coming back – the holy grail is solving pain point #1 for a massive userbase.

Whatever you do, define your market space, identify the user’s #1 pain and nailing the product experience by focusing on doing a few things exceptionally well.

Cheers!

M

 

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