Measure what Matters (Part II)
6.Churn
In any business that relies on a subscription-based income model, addressing customer attrition is crucial. Failing to address this issue promptly will result in working tirelessly just to maintain the status quo.
The churn rate is a measure that quantifies the proportion of customers who discontinue using a product during a specific timeframe, in comparison to the overall number of active customers.
The ultimate strategy for overcoming customer attrition is enhancing customer retention. It is essential to establish a robust retention system that ensures your customers remain engaged with and committed to your product.
Starting with 100 clients, if 5% leave monthly, your customer base will be reduced by 50% within one year.
A lower churn rate is ideal. In businesses with strong network effects, initial churn rates are typically near zero.
What constitutes 'bad' churn?
Bad' churn occurs when customers continually leave from a specific cohort, causing the retention line to gradually approach zero, resulting in all customers from that group eventually leaving the service.
What constitutes 'good' churn?
'Good' churn involves initial customer loss, but eventually, the remaining customers are satisfied, and the retention line stabilizes when no more customers are lost.
What is considered an acceptable churn rate?
Negative churn can be achieved by enhancing short-, mid-, and long-term churn and upselling existing customers.
Refer to this detailed guide for defining/calculating churn and exploring various additional churn types (e.g., MRR Churn & User Churn).
The secret to success in any industry is maintaining customer retention rates above the average. The average rates are as follows:
The revenue churn rate represents the percentage of income lost from current customers during a specified period. Revenue churn may occur due to order cancellations, plan downgrades, or terminated business relationships. For SaaS businesses in particular, the revenue churn rate is an essential measure of client satisfaction.
B2C digital enterprises, such as media companies, cater to individual customers who might leave when they discover a superior product, lose interest, or become unable to pay. There is a vast individual consumer market with intense competition from various companies.
The typical churn rate for subscription-based businesses ranges between 2% and 8%, which is a relatively broad spectrum. An "ideal" churn rate is subjective and depends on the company's size and maturity, but it remains true that lower rates are always preferable.
7. Net Revenue Retention Rate
The Net Revenue Retention Rate (NRR), also referred to as Net Dollar Retention (NDR), is the percentage of recurring income maintained from existing customers. In 2021, NRR is replacing churn as the primary SaaS metric.
Net Revenue Retention is calculated by dividing a company's monthly recurring revenue (MRR) from one year ago by the present month's MRR from that same customer cohort.
The typical annual NRR rate lies between 85% and 135%, with over 50% of SaaS companies surveyed by OpenView in 2020 reporting an NRR rate of 95% to 115%.
8. GMV
Gross Merchandise Value (GMV) or Gross Merchandise Volume quantifies the total sales volume over a specific time frame, such as a quarter or year.
GMV denotes overall sales before subtracting any fees and expenses related to sales, including delivery costs, discounts, marketing expenses, and returns.
In contrast, Net Merchandise Value reflects the sales amount after deductions and offers a more accurate figure of the dollar value of items sold.
GMV goals for seed funding rounds are diverse and lack a strict formula. Investors typically seek LTM GMV beginning at $100,000 to $200,000.
9. Paid vs. Organic Acquisition
Paid acquisition involves using funds to advertise your business.
Paid methods enable you to control the duration and placement of ads, targeting the most relevant users.
Paid campaigns only attract users while they are active and ongoing.
As the market becomes more saturated with competitors, paid acquisition costs may rise due to increased bidding on the same keywords.
A reciprocal relationship with other metrics exists: user clicks on paid links generate traffic that ultimately boosts your company's click-through rate.
Organic acquisition remains the primary source of user acquisition.
Organic marketing has a more enduring impact, without a fixed campaign lifespan.
Organic users typically continue using an app 4% more after 30 days compared to paid users.
Organic users also generally have 12% more active sessions after installation than paid users.
Although the ideal balance between organic and paid acquisition varies, the long-term strategy should prioritize investing in content marketing or organic efforts.
For instance, the ratio of organic to paid installations for games, lifestyle, and social networking on iOS is approximately 5:1.
Apple has stated that 65% of downloads originate directly from its App Store search.
10.K-Factor(Referral Rate)
K-Factor represents your company's growth, specifically the number of new customers you acquire without cost.
K-Factor is divided into two components and calculated by multiplying Invitations by Conversion.
Invitations: the count of users invited to your company.
Conversions: the number of invited users who sign up.
The objective is to attain a compounding effect through referrals, resulting in a K-Factor greater than 1.0.
A K-Factor of 1.0 indicates a steady state, with no growth or decline.
A K-Factor higher than 1.0 signifies exponential growth.
Although K-Factor is an excellent metric to determine if your company is going viral, it may be necessary to consider adjustments, such as market size and cycle time.
11. Product Market Fit
Founders should consider raising funds when they have identified the market opportunity and their target audience, and have developed a product that meets customer needs and is being adopted at a significantly rapid pace.
PMF occurs when a company offers a product that can satisfy a favorable market.
A good market is characterized by a large potential user base, high projected growth, and ease of user acquisition.
PMF in a small, declining market holds little value.
A good product possesses a strong value proposition, features, and a user experience that resonates with customers.
When PMF is achieved, customers purchase your product as quickly as you can produce it. Pivoting—modifying your offering or target audience—may be necessary to achieve PMF.
Although there are no precise measures for PMF, certain metrics can provide insight:
A high Net Promoter Score indicates the likelihood of customers recommending your company to others on a scale of 1 to 10.
While Growth Rate is crucial, Customer Churn Rate arguably offers more insight into your product's stickiness—aim for a low churn rate.
Establish PMF before investing heavily in growth. Seed-stage startups without PMF often experience high churn. Expanding is futile with a leaky bucket. A product must provide enough value to retain users before investing in customer acquisition makes sense.
Sources:
https://www.lennyrachitsky.com/p/what-is-good-retention-issue-29
https://www.littlestreamsoftware.com/articles/repeat-purchase-rate-calculate/
https://www.lennyrachitsky.com/p/what-is-good-retention-issue-29 https://medium.com/@matsutton/repurchase-rate-the-most-overlooked-ecommerce-kpi-337bccde184b
https://blog.goodaudience.com/lets-talk-repeat-purchase-1b9a2a77e1ff
https://blog.hubspot.com/service/customer-retention-metrics
https://www.lennyrachitsky.com/p/what-is-good-retention-issue-29
https://www.klipfolio.com/blog/2021-top-saas-metrics-benchmarks
[1] http://startuplifeblog.com/2010/03/08/the-importance-of-customer-acquisition-costs-for-startups/
https://leanstartup.co/a-playbook-for-achieving-product-market-fit/
https://www.lightercapital.com/blog/how-to-establish-product-market-fit/