Yesterday I wrote on Phil Libin’s thoughts on the freemium business model. After writing it I was reviewing some old saved articles and came across one written a year ago by Jason Cohen, founder of WP Engine and writer of A Smart Bear. His argument, or rather an argument placed before him, is that there is only one important metric and picking it is critical [emphasis his].
I was listening to Noah Kagan (founder of AppSumo and the marketing mind behind Mint, and the author of this great guest post) talk to the current crop of Capital Factory companies, when he said something so simple, so obviously correct, and yet it completely changed how I thought about my approach to WP Engine.
He said: “A startup can focus on only one metric. So you have to decide what that is and ignore everything else.”
Okay, I thought. Makes sense. And after reading all that stuff on Evernote the answer was pretty clear to me: get more customers. Apparently for once I was ahead of the curve as the very smart Mr. Cohen was focused on a different metric. I hate to reproduce this much of someone else’s article but I hope Jason will forgive me this once [emphasis his]:
NOAH: So if you could change just one thing at WP Engine, what would it be?
(Yes, I proceeded to lecture Noah about SaaS business models, as if he didn’t already understand, probably to prove that I did know, or to finally work out for myself what I believe. If this isn’t enough for you, here’s my expanded brain dump on cancellation rate.)
See cancellation rate is indicative of several important things. First, whether we’re providing a genuinely valuable and desirable service. After all, I can bludgeon a person into signing up with us through marketing and salesmanship, but if they don’t stick around it proves we’re not really providing something they need, at least not at this price. So it’s an important measure of the service itself.
Second, and more “metrics-y,” cancellation rate is one of the keys to computing customer LTV (lifetime value). If we know a typical customer pays us $50/mo and stays with us for 30 months, that’s $1500 in “lifetime” revenue. That helps us answer questions like: How much can we spend to acquire a customer? Or: How many customers do we need to produce $10m in revenue?
But the key to computing LTV is “how many months will a customer stay with us,” and the key to that is cancellation rate — the higher the rate, the fewer the months, and LTV plummets. High LTVs are nice because it means the business has good cash flow, and means we can spend more on things like marketing and advertising.
So yeah, I want cancellation rate to go down!
(That’s how Noah says, “I heard everything you said. I’ve heard it before. It’s technically accurate, but you’re a dumbass and you’re missing the whole point. But you won’t listen to the truth until you get this bile out of your system.” Noah is a man of few words. Unlike me.)
NOAH: So do you think you could get your cancellation rate from 3% to 2.5%?
ME: Yeah I think probably we could, and that could increase our LTV by 15%.
NOAH: Let’s say you did that. Congratulations. What would be different?
ME: Oh, we’d have more revenue and we could spend more on ads.
NOAH: That’s it? All that would change is you’d spend more on ads? That’s important? That makes the business fantastic?
ME: Well no, I guess things wouldn’t change that much.
NOAH: You should only be doing things that can be “that much.” If you increased signups by 2x would you say that would make a big difference?
ME: Heck yes, that would be huge!
NOAH: So do that and ignore the cancellation rate.
ME: But I can’t just ignore it because: I could easily get sign-ups to double if I just spent 5 times as much on AdWords, but then the lead quality would suck and cancellation rates would skyrocket and in the end I haven’t done anything meaningful, and I probably made things worse because now we’re sifting through all these crazy people who won’t even stick around and it just doesn’t seem strategic.
NOAH: I stopped listening after you said “I could easily get sign-ups to double.” Go do that.
ME: But what’s the good of a “sign-up” if most of them cancel?
NOAH: You don’t know they’ll cancel. What if you got sign-ups to triple? And cancellation rate doubled, from 3% to 6%. You’d still be growing almost three times faster.
ME: Oh yeah. Shit. Oh yeah.
It worked. His subscriptions went way up and his cancellation rate didn’t change noticeably.
As Jason noted, at a little company there is no time for little changes. A/B Testing, tweaking AdWords copy, landing page optimizations, cancellation rates – all little stuff. Engineer the costs right and focus on moving the big dial. Incredible advice I hope I will always remember.