A lot of analysts, investors and commentators will look at a business or industry with massive churn rates and run for their lives.
And they’re right too.
It’s incredibly difficult to build a sustainable business when you keep losing customers!
But there are some industries where massive churn is inevitable. Sometimes, perversely, massive churn is even a sign of success.
Look at match.com, the dating website, for example. The better it does at helping its users find a match, the less likely they are to continue needing a dating service.
If you’re on the growth team at Match.com this simple fact probably haunts your dreams:
More Success = More Churn
I don’t know what the opposite of compound growth is, but that feels like it. It’s pretty much the opposite of a growth engine.
The Opportunity in the Chaos
It’s incredibly challenging, but it’s a baseline in many industries; a fact of life.
But in every challenge lies an opportunity. If you can learn to deal with it, or better yet thrive in it, there’s big market opportunities in industries where high churn is unavoidable.
This post attempts to explore that idea and look at the companies who not only “survive” high churn, but actually thrive because they can adapt to it and take advantage of it in ways that their competitors couldn’t.
To paraphrase Game of Thrones, “Churn isn’t a pit, churn is a ladder.”
With that in mind, here’s a few ideas and concepts we see the best players in high churn markets employ, which might help you thrive in the chaos.
1. Separating Headline Churn from Core Churn
You probably know the basic business model of a freemium product: use the free version as a marketing tool, then upsell a small percentage of users to a premium offering, which is where you make all your money.
To be great at freemium means getting lots of free users on board and converting a high percentage to premium. Spotify, for example, have converted a massive 25% of their free accounts to premium.
But there’s not always a huge rush to convert. Evernote, for example, convert just 0.5% of free users to premium in their first month. They convert 7% after 1 year and 25% after 5.
In high churn businesses, you have to play things a bit differently. The winners here don’t have the luxury of taking 3 years to convert free users to paid.
The best high churn businesses often look at a small group of high-quality users and invest a disproportionate amount of focus into retaining and upselling them.
In gaming, they look at the concept of “whales” – the very small number of users who pay way, way more than average.
A recent report from an analytics company found that just 0.23% of free-to-play users contributed to over 60% of in-app purchase revenue.
Imagine that – 60% of your revenue from less than half a percent of your users!
The lesson here is clear – when everyone in your industry is looking at total or topline churn figures, you should be the ones looking at core churn.
99% of our users churn within 30 days? Doesn’t matter, because we focus on, monetize and retain our whales better. The industry average of 0.23% is 0.6% for us and we retain them for years, so our revenues are triple the competitors.
Big businesses can be built if you focus on the core user base that delivers a disproportionate amount of the value.
2. Get Lasting Benefit from Users Before They Churn
Even if you start heavily investing in your core user base, what do you do with the 90-99% who join and leave in a matter of days, weeks or months? Is there value to be had, even if they never pay?
The best high churn businesses get at least some value from the transient users before they leave.
The most obvious example is a referral. If you can get a user to invite friends before they leave, they can be of great value. If you can get each one to successfully invite more than one friend (on average) then the transient users can be of great value because they ultimately lead to more core users.
But there’s also other, less obvious examples of value you can capture too.
Look at discussion forums, for example. They get a lot of users signing up, leaving one or two comments or asking one or two questions and then never returning. No chance of ever monetizing those users, but over time their posts can have huge SEO value, driving large volumes of search traffic to their sites.
Or think about algorithms and machine learning. If a user signs up to Netflix and watches and rates a few shows during their 30 day trial, but never converts, it’s not a complete loss. Their ratings help Netflix make better recommendations, which improves the product for their paid users.
Think about a dating site like Match.com. They have plenty of users who create profiles, swipe around for a few months, maybe go on a few dates, get into a relationship and leave.
It’s obvious how they’re valuable though, they are the product that Match is selling to their premium customers. If someone is paying for a premium account with them, that user is doing so to get better connected with other (most likely non-paying) users on the service.
Many businesses look at users as potential revenue sources (i.e. freemium) or as products whose attention can be sold to businesses (i.e. advertising, marketplaces), but often overlooked is the option to sell the attention of many free users to a small number of premium users.
Dating, social gaming and free classifieds with paid placements are all examples of high-churn industries that employ this type of business model.
3. Your Cost of Acquisition Needs to Be Lower Than Low
With subscription consumer products, like Netflix, Spotify or Evernote, knowing they have 12-24 months to earn back a customer’s cost of acquisition, they can afford to spend a bit more on acquiring that customer.
But with a high churn product you’re going to lose most of your users before you can recoup any significant investment in acquiring them, so you need to make acquisitions super, super cheap.
This usually means you have to do two things:
a) Make it free
b) Make it viral
Free so that it’s a frictionless acquisition. That’s why, if you look at the “top grossing” apps you’ll see the list full of free apps.
If you’re paying a cost-per-click to get users to your app or website, you need to get as high a percentage of those paid clicks turned into users and the best way to do that is to start with free.
Netflix’s no-free-tier model probably hurts their initial conversion rate, from trial to premium. This increases their pay-per-click to active user conversion ratio, meaning they pay more per eventual active user.
But that’s okay for them, they can afford to pay more per user because each active user sticks around for a long time and pays good money every month along the way.
Tinder can’t afford this, they need everyone who comes to their app store listing to convert.
Because you can’t invest in a high cost per acquisition, you’re unlikely to be able to pay to acquire new users, at least not for sustainable growth, so you need to engineer in social spreading, either virally or through word of mouth.
If you want your business to thrive in an environment of high churn this is the key nut to crack – how are you going to get users for free in a scalable way?
Farmville built invites into the game mechanic. Tinder was a remarkable take on dating and got huge amounts of press and word of mouth because of it.
You’ll have to spend money to get your initial seed group of users, of course, but it needs to self propagate from there. Users must beget users!
4. Act More Like eCommerce Than SaaS – Don’t Limit the Upside
When you’re building a long term subscription model there’s a sweet spot you need to find in your monthly pricing.
“As high as people are willing to pay” isn’t always the best strategy. Squeezing a few extra bucks out of a user each month might make sense in the short run, but might make them overall more likely to churn in the long run.
This is less of a concern if you’re expecting them to churn anyway. In this case you want to allow for the maximum level of monetization early on.
I’ll use OkCupid for example. They start with 3 price plans – $19.95 for 1 month, $44.85 for 3 months and $59.70 for 6 months.
They then vary this pricing depending on the age (i.e. willingness to pay) of the user, displaying these tiers at cheaper price points for younger users.
And compare that to Evernote:
As you can see, OkCupid know you’re not going to be around for the long haul, so their pricing feels much more like an eCommerce purchase than a recurring-revenue SaaS subscription.
Sure, they use the language of “monthly subscriptions”, but the strategy is much more akin to retail discounts and bundling aimed at maximizing the basket size of a once off purchase.
Great companies often combine and balance this with the first point one, the focus on getting long lasting value from their core users.
A simplistic breakdown might look something like this:
- 90% of your users are there for growth. Get them in, encourage them to invite 3 friends, leave a comment or review, and don’t invest too much time and resources trying to stop them from churning.
- 9% of casual users will monetize before churn. Work to maximise this value, the transaction size, as it may be the only transaction they make.
- 1% will be your core business. Throw in the kitchen sink and keeping these guys around for as long as possible.
And that, in a nutshell, is how you need to start thinking to thrive in the chaos of a high churn market.