The basic ingredients
How do you know if you’ve made something people actually use? The short answer is: check your retention. Different products measure retention using different metrics– if you can, it’s best to use a metric that implies regular use of your core product. For Facebook this is Weekly Active Use, or Daily Active Use. If some proportion of your users keep coming back to use your product every day/week/month, then you have created something they actually use! Congrats. For Wren, since we aren’t an engagement based product, we just measure churn, which is the percentage of people who stop paying for our product every month. For paid consumer SaaS a churn of below 3% is good. A churn of below 2% is very good. A churn close to 1% is outstanding.
Your total user growth rate in a given time period is your new user growth rate– the percentage of people who started using your product for the first time in this time period, plus your reactivation rate– the percentage of people who restarted using your product during this time period, minus your rate of churn. If this is greater than 0, then congratulations, you are growing. If it’s greater than 10% per month, then congratulations, if you keep this up you’ll double in size every year.
Pretty much all of Consumer SaaS at a really high level is working out how to profitably and sustainably increase new user growth and reactivation, while decreasing churn.
Cooking with gas
Ok, so we’ve started cooking with product-led viral growth. Now we can use paid acquisition channels to pour fuel on the fire.
LTV is the lifetime value of your customer. It’s the total revenue you can expect to recoup from a given customer. CAC is your cost to acquire a customer. It’s sometimes called “cost of revenue”.
For a SaaS product with a monthly subscription, you can measure LTV based on the revenue a customer generates in a given month, times the probability they are still an active customer. Eg: If your customer pays you $10 per month, and monthly churn for similar customers is 1%, then you know everything you need to calculate lifetime value. In month zero your customer will pay you $10. In month one, they have a 99% chance of paying you $10. In month two, they have a (0.99)^2 chance of paying you $10. And so on. In theory you could sum this series to infinity (the answer is $10(100) = $1,000). In practice, it is highly unlikely your business itself will last forever. So you truncate your sum after N months or so. At Wren we currently use a 12-month LTV, even though we’ve been around for about 2 years.
CAC is how much you pay to acquire a given customer. You can set your target CAC– the ideal amount of money you’d like to acquire a customer for, to whatever you like. But be warned. Set it too low, and you won’t be able to acquire any customers. Set it too high, and you won’t even break even on each customer. The ideal target CAC is an equilibrium point that perfectly balances out your internal unit economics per customer, with your external demand in the marketplace. A low target CAC might lead to great unit economics, but it probably also means there is a narrow market of only a few customers who you can reach at that price. A high target CAC will lead to poorer unit ecnomics, however it means you have much more room to grow into a larger market, with many more distribution channels available.
The ratio at which you set your CAC to LTV is very important.
- CAC:LTV = 1 growth focused
- CAC:LTV < 1 profitable growth
- CAC:LTV > 1 hypergrowth / land grab