For SaaS founders whose growth has slowed or stalled: a data-driven talk that shows exactly what’s capping you and what to actually do about it.
Hitting a ceiling isn’t failure, it’s normal. Facebook’s growth has been largely linear for almost 20 years. With the right mindset, tactics, and structure, founders can turn asymptotes into launchpads for their next phase of growth.
Jason shows why your growth slows and share proven approaches to consider when growth tapers including:
- A conscious shift in focus from explore to execute
- Ruthless Prioritization
- Multi-channel risk mitigation
- Customer concentration control
- Expand into adjacencies
Jason celebrates with you as you shift from hero-driven scrappy beginnings to a disciplined, process-oriented scale machine.
Slides
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Transcript
Jason Cohen: if you’re not growing, you’re dying. So we’ve been told it sounds true. Oh, there’s my music. Maybe it’s true, maybe it’s just something that sounds smart and isn’t true. I don’t know. I’ll come back to this, but for the next, let’s say 45 minutes, I’m going to assume it is true, and that you are interested in growing, and that’s hard sometimes.
Growth is just comes out of nowhere. This is Lenny Rachitsky’s newsletter. He’s got a lot of subscribers. He put this on Twitter, and people said, “Holy moly, what happened there?” And he said, “I don’t know. That often happens.” There’s probably some people here where that happened, but sometimes it’s not as mysterious. This is a this is the growth curve of a company called Projection Lab. Also, on Twitter, people said, “Hey, what happened there?” And he said, “John started.” Who’s John? John’s a marketer. Oh, so it turns out if you make something and don’t tell anyone, it doesn’t sell that well, and if you make something and do tell people, it might. It’s not that mysterious.
One thing for sure, though, is that growth always slows down. Always, it’s a law of physics, which I’ll explain why that’s so. Because, of course, the whole point is to explain what to do about it. This is a graph of the content affiliate marketing campaign at WP Engine. In these years, you can see this curve, you’ll see why this curve is really common all the time. However, it doesn’t have to be like this. Well, sometimes it has to be like this, but then it can be fixed. And we are fortunate to have Joel, the founder of Buffer, who will give an entire talk about this journey. And, of course, what we all want to know. Hey, what happened over here? I want to do that first, too. So, that’s going to be great.
Why customers leaving feels personal
Okay. The thing, so the first thing I want to talk about in terms of growth is when people leave, because to me, if I feel it here, like, forget finance, finance for a minute, because what happened? Like, first of all, someone had to see something that we put online, or get told, and I mean, how many people click through a link like point 1% or something, right? Like it’s almost impossible for anyone to get through that. And then they went to the home page and didn’t bounce off in three seconds. They thought the features were kind of good. That’s also like only 1% are going to end up, you know, going through. They weren’t scared by the pricing, they bought it, they actually tried to onboard, and they were there for a year, and after that whole gauntlet, they left. That’s like telling me my product sucks, because they got through all of that. What the hell? So, like, to me, that’s enough reason already to say this must be kind of important to like find out what’s going on. It’s hard to find out why people are leaving, because they don’t want to talk to you once they’re leaving. So, after all that, they cancel. I don’t like that. Also, there is a saying I use, which is “cancellation wins,” meaning not only is it personal, but it wins in terms of your finances. It controls your growth rate. I want to explain that.
Marketing is linear, cancellation is exponential
So, marketing, like normal marketing, when you spend money and channels, and you know, get, get, get people to show up is linear, and this is what I mean by that. Here’s the growth, just new customer growth at ConvertKit, now called Kit, over, I don’t know, 10 year period or so, and you can see this kind of, like, you add more and more people every month, of course, it wiggles, but it’s mostly linear, and here’s why. Because if you look at a typical marketing channel, what happens is you figure it out. Hooray, that usually doesn’t happen, but okay, for the ones that does happen, and then pretty quickly you get to however much you can get out of there, like your AdWords worked, and so whatever. There’s certain number of searches, and some people click, and you’re kind of there. And then you have this optimization period where maybe you can eke out a little bit more out of there, and that’s what’s going on, but then everyone’s seen it already, like they’ve gone to the website, they’ve searched the thing, if they were going to click the ad, they probably would have clicked it already, and then it gets, then it often declines for reasons like, yeah, I’ve seen the ad seven times, like I’m tired of you, or I’ve even tried it, and whatever, or the competition heats up, especially in any kind of auction-based thing, like AdWords, because AdWords, the highest ad goes to the dumbest bidder, right? Whoever is willing to spend the most, whether or not that’s a good idea. Well, okay, okay, so over time, like that’s not good for you, in terms of at least ads. That makes sense for you to run, or the channel might decline altogether. Maybe that will happen in search, maybe it’s already happening in SEO. It certainly happened with things like magazines that I used to advertise in 20 years ago, and I would just slowly watch it go like this, because people don’t read the magazines. So that’s what happens. So this explains this curve, like I just showed you this same curve, you can see, oh, it’s fine. And then it kind of does this slight decline, and it doesn’t really help when you, when you stack other marketing campaigns, because, like, you, maybe you find more, that’s that’s an answer, more marketing campaigns in more areas, right? So, over time, you stack more, some are bigger than others, but you’ll notice that when you take a curve of that shape and stack them, you get a curve of that shape still, just bigger, which is true. It is bigger, your marketing is doing more, but it doesn’t grow forever. Paid ad spend doesn’t grow forever, or other kinds of direct marketing can’t grow forever. And so that’s what you see, more or less, obviously, because it’s an idealized thing. So you see more or less with stuff like kit, but cancelation doesn’t work like that. It works in a completely different way.
So, suppose you have a company with 1000 customers, and marketing is adding 100 per month. Hooray! And just suppose the cancelation rate is 5%, so every month 50 customers leave. That’s 5%. So, overall, this company is growing by 50 customers a month, no problem. But now imagine the same company if they were to triple immediately. Well, AdWords doesn’t just triple because none of the marketing channels care how big you are, so that still just adds 100 customers a month. But cancelation does care, that’s what 5% per month means. 5% of your size definitionally grows in absolute numbers as you grow, so this company now is shrinking. Marketing didn’t do anything differently, but just size alone makes cancelations grow definitionally. So, in other words, marketing grows linearly, cancelations grow exponentially. That’s what a percent is, it’s exponential, it’s the bad things exponential, that’s not good.
The growth ceiling, and how to measure it with Max MRR
What the good thing to be? Shoot, and so in this again, hypo, well, the blue line of the new customers is real data. My red line here is hypothetical, as if ConvertKit had a 5% per month cancelation, and if it did, the cancelations would grow like this, and notice, of course, the bad part when cancelations are as big as, or even exceeds new, that’s when the company would stop growing or even shrink, and so if you graph that, that’s what happened, it would grow as long as marketing can keep up, and then when it can’t keep up, it would flatten out or shrink again, same shape of curve, more or less, that we’ve been seeing, and so this is what I call a growth ceiling, and we all have it, and cancelations are the main cause of what it is, because you could say so is marketing, but I would say yes, but marketing, you can only be marketing for so long, and so it’s really cancelations is the dominant feature.
Now, what’s interesting is you can measure exactly what this is, what this number is for you, and this is what I recommend doing, I’ll show you why. So I call this metric Max MRR. So we have new MRR, cancel MRR, all kinds MRR. Here’s Max MRR, the most MRR you could have before that happens to you, and the calculation is actually quite easy, because we just have to put into metrics what we say on the graph when cancelations get as big as new. That’s when we hit our ceiling. Cancelation dollars is as big as new, and another way to say cancelation dollars, of course, is just our size times our cancelation rate, same thing, and so that’s it. We already, that’s the whole formula, nothing to it. When new money coming every month, divided by my monthly cancelation rate, that is the biggest I can grow. See, it’s very easy to calculate, you might as well do it. So, like in this example, this hypothetical example, let’s just say it’s around 150k a month, that’s being added, ish, on the right there, and we’re a hypothetical 5% cancelation rate. So, the ceiling is 3 million, and that’s what you see.
Okay, so it just makes sense. That’s part of what happened at Buffer again, like we’ll let the experts talk about what happened at Buffer, right, but one of the things about Buffer is the cancelation rate was 5%, not hypothetically, actually. And so, guess what happened? Cancelations caught up. Oh, what a surprise. Of course, there’s more to the story, as you’ll hear, but this is the part that’s useful for my story.
Okay, this did not happen at ConvertKit. Why not? This is the actual MRR size. Sorry, yes, MRR size of ConvertKit over the last 10 years, pretty linear, although there’s blips. Uh, oh, blips, but then it kept going. That’s pretty cool. And you already know what the new looks like. New crept up, but we know cancelations would win. How did they keep it up? Because that was their cancelation rate. They kept pushing it down, they kept intentionally doing things to shove their cancelation rate down, so it got down to right now about like 3%, or maybe 2.8, I can’t remember. This data is online, by the way. This is all publicly available stuff, which is great. Have to thank people like Nathan Berry at ConvertKit and Joel at Buffer for making this data available, so that we can learn this stuff. It’s really quite incredible. So, we have to owe them a lot of gratitude.
Max MRR as a predictive tool
So, here’s something you can do. Again, what you can do is you can plot your max MRR every month, you can calculate every month, and you can plot it on top of your MRR, so here that is in green in the case of ConvertKit with their real data, not my hypothetical one. And what I want to point out is, remember there was these wiggles. Well, if you were sitting in an executive meeting in 2018, you know, you could maybe explain away, oh, you know, our revenue wasn’t good this one, but you could look how much the max MRR dips. It’s like really obvious, you can’t get away from that. And when you look at why in this case, it was because their cancelations spiked up. Who knows why? Maybe they did that on purpose. Don’t know. It happened again here. This time it was because new MRR dipped, as opposed to cancelations going up. But the point is, in both cases, the revenue curve, it would be hard to see that there’s an issue, but it’s easier to see with the max MRR curve, because it changes so much and so quickly.
This is my argument for plotting max MRR for all your companies, because it reacts really fast. You can see the reaction faster than you can see it in things like your revenue, looking at that in buffer, you can see that even more, for a long time things were going well. But look here, if you were plotting max MRR, you would see right here we’ve got like an issue to solve, something’s changed. If you just looked at the MRR, it’s like slightly weight, like you wouldn’t know. So see how much more useful that is. Now you don’t need another metric to know that you’re starting to shrink, like that’s pretty obvious, but again, look how much the max MRR changed, how dramatically, and then stayed down. That tells you something. Also, here it would again be easy to convince yourself maybe it’s not working, maybe it’s kind of working, maybe we’re getting there, but with Max MRR so much lower, meaning that we’re shrinking, you know that you’re not in fact close, that’d be useful.
And then here’s another example of its predictive power. At the end, when it gets fixed, it actually takes a long time. This scale is super long. This scale is more than 10 years along the bottom, so you could be where that arrow is, is about six, maybe even 12 months in. You could finally see, you know, what it’s working. Our revenue really is going up, but look how quickly the green line pops up. You would know within months, a month or two, this is working, because the maximum line would tell you that months and months before the revenue line makes that clear. So this is part of why I think it’s great. A lot of people say, too, like a cancelation rate is hard to internalize, like it’s for good, you know, I can find people on Twitter that say it is, and people that say it isn’t. So, max MRR is much more visceral. This is it. This is the top. What do you think about that? How is that changing over time? It’s just, to me, it’s a much better way of saying the same thing, perhaps, but I think better.
Why cancellation surveys mislead you
Anyway, so this is why growth always slows, because cancelation does so, unless you work on that. So, the obvious thing is, well, we got to find out why they’re canceling, so that we can push, do something, and push that number as low as possible. So, we do stuff like this. This is what I did at WP Engine, of course. I had a drop down list with things like this in it, that’s what we do, and people would pick things, and I saw they were picking too expensive, a lot, like that was by far the most, like that’s useful, but then I realized too expensive was also the first item in the drop down list, and I thought, well, maybe they’re just rifling through, you know, so then I randomized, everybody got a random order of items in the list, and all of a sudden, guess what? All the items were picked evenly. In other words, they weren’t telling me anything. It was useless. And, of course, because they’re already canceled, or they’re canceling, they’ve already mentally checked out. They don’t want to spend any one second on you, helping you out, you know, investing in you. Why would they want to do that? So it’s kind of understandable.
There’s a company called Groove, though, who unlocked a really nice way of doing this. They had the same problem, they had a drop-down list, same thing, same, my story, but they started writing emails, open-ended emails, and they tried lots of stuff, and most of it didn’t work, but then they hit on one that worked. So I want to show it to you, because you know you could copy it, and so you know, notice that the subject line is not like some corporate whatever, it’s quick questions, not capitalized right, which drives me nuts, but whatever. If it works right, and it’s from Adam, the founder of Adam from Groove, not CEO, it just says, “Thanks out of the bomb.” There’s no like crazy footer, you see, like it’s human, a human being wrote this. It really seems like it. It’s just three sentences. Used to be that website, three sentences. I don’t know if that website’s still there, but I liked it anyway, and they just asked, why did you cancel? It was open-ended, and their usable response rate, meaning actual stuff like, well, it was because of this bug, or I couldn’t integrate with that, or, you know, I expected to do this, but it didn’t. That’s what I mean by usable, was 10%, which to me is pretty great. It’s a small number, but it seems pretty great, then they were playing with other things, titles and text, and they tried something else. What made you cancel? So, again, changing from why did you cancel to what made you, instead of why, it’s picking an item, a thing that caused it. Just a slight change in words doubled the usable response rate. Holy, all right, 20% is not bad. Actually, this is now, now you’re getting good feedback.
So, will this work for you? Who knows? Because they have their market, their customers, their stuff. Like, there’s no, not necessarily, but I think we can learn at least that it’s worth trying and iterating in some way that might make sense, even stuff that might look unprofessional, potentially to try to test it to get there, and you could start with this as the A version, and then test other Bs to accelerate this, you could do that now.
The deeper cause is never what they say
This thing about too expensive, because we still, even once we fixed our methodology, we heard this a lot. Here’s the issue with this. Remember, what they did to get here. One of the things they did to get here is they saw the pricing and decided that was fine and bought it. So, what do you mean you cancel because it’s too expensive? Why did you buy it at all if it’s too expensive? It doesn’t seem like that’s really the reason, so what’s going on, and this happens with all kinds of feedback in cancelation. You could argue it happens with all kinds of product feedback too. I would argue that, but let’s stick with cancelation, square. It’s definitely true, is there’s the immediate reason why they canceled, and then there’s kind of the deeper reasons. Some people call it a root cause. I don’t like that word, because there’s usually not one root cause in a complex system. Usually, there’s lots of stuff that can affect it, or monitor it, or shortcut it, or prevent it. Usually, complex systems are more complicated than that.
So, in medicine, when someone dies, there’s a form, and you fill out, and one of the things is proximate cause of death, meaning the last thing that happened that made them die, and so you write things like stopped breathing. Yeah, that, you know, that’s, I can tell that’s what happened. But then you ask why, and I know it sounds like five whys. It is sort of why they stopped breathing, because they were in an accident, and their injuries were too great, and so they stopped breathing. Why they are in an accident, because they passed out at the wheel, and why did that happen? Because they had undiagnosed diabetes, and so the real cause, or a deeper cause, is that they had an undiagnosed illness, and that’s why they died. That’s the better reason, or the more useful actionable reason why. And again, like, is that the only thing? No, because you could say, like, well, why was it undiagnosed? Is it because we have a terrible health care system in the US? Well, we definitely have that. We definitely have that attribute. So, probably, but maybe they didn’t go to the doctor. Why not? Maybe the doctor did tell them, they didn’t listen. Maybe, maybe, maybe. And all these things are useful. Those are all useful things. So, I don’t mean to say there’s just one for the sake of simplicity.
So, but when we think about feedback from cancelations or product, we often are like, oh, they said stop breathing, let’s make breathing features, it’s like, well, that’s maybe not the reason, you know, maybe we need to make features about the actual thing going on, so in our case, like, too expensive again, like it’s not what really happened is something like they wanted this feature and they’re willing to pay for it, but it turned out it didn’t do this or didn’t integrate with that, or they were too confused, they couldn’t get it working, or they did, and that’s something else. I don’t know what, some something that’s actually useful to you, and then because that wasn’t there, it was too expensive, or that’s not even really the reason, they was just with what they wrote, right? And so you’d be tempted to hear too expensive and say, “Oh, well, then let’s lower the price,” or “Let’s put features in a lower tier,” and none of that would work, because that wasn’t actually the reason all along, it was that the feature didn’t work, and so they already, by buying, told you that the price wasn’t the issue.
Okay, so digging into this deeper cause, I don’t want to say root cause, but these deeper causes is important in any cancelation feedback for this reason. Now, if the root causes, let’s just call them that, are important, and if after they cancel, or they’re in process of canceling, they don’t want to talk to you, the obvious thing to do is find out before they cancel that they’re in trouble because they haven’t canceled yet. They could still engage, they’re not gone, they’re not mentally checked out, they’re just not being successful. And there’s a million ways you could find out that they’re not being successful. And so at WP Engine, we call this not being on the happy path. A lot of people use that phrase, we didn’t invent it, but it’s nice. So the idea is that the happy path is something like they signed up, and then they added these three things, and they clicked this, and they deployed that. I don’t know, whatever is success with your product, right? They added this much in their data, whatever it means, like it’s going well, right? So, whenever they don’t do that, and it may not be linear, but whenever they fall off this happy path, that’s not good. We should reach out, maybe that’s automatic, maybe it’s this, maybe that, but like, you know, right, it’s those moments where you say, “Oh, this is a moment where we should reach out,” and they haven’t canceled yet, but they’re going to, and so now you can probably engage. So I wouldn’t wait till cancelation, that’s the worst time, is even with the emails, the worst time.
Onboarding: where you get the biggest return
Okay, the other bit of advice with cancelations is that onboarding is often gives you way more bang for your buck than later on, and to show you why, this is some data from a video I made called the Profit Whale. I guess I like animals, I got Smart Bear, I got The Profit Whale at IT Watch Dogs, we had dogs and we had a Weather Goose and Weather Duck, so I guess I just, I’m a barnyard sort of product person, I guess. Anyway, so this video, the profit whale curve. Oh, you’re not supposed to sell anything while you’re up here. Good thing I don’t make any money off of any of this. Okay, I’m safe. I’m just selling for my ego, that’s okay. Okay, that’s okay. It’s the only reason. Okay, so that’s fine. All right, so I have this video, and here’s, how many people are watching the video over time? YouTube gives you this, and you can see, like, holy shit, like 30 seconds, half the people are like, no, which is not good for the ego. Okay, gee whiz, sorry.
So, if I improve that by a little, though, because such a big drop off, I improved it by a little, actually, I could get like half, or sorry, I could double the number of people who watch the whole thing, which is, of course, the real value, especially if you think about this in a software sense. This is just an allegory, right? This is really your customer cohorts in software, and so if your onboarding improved a little bit, your lifetime value, or the number of people that stick around for, let’s say, five years, that could, like, double, that’s enormously valuable. Whereas improving here is fine, but wouldn’t change that much, the lifetime value, or the cohort value, or all that kind of stuff. And there is stuff I can do in the front, I could get to the point, I could have better hook, I could use music, or not use music. I did use music, it was me playing the piano, maybe I shouldn’t do that. So, okay, this is actionable, so that’s good. So, same thing at companies. Onboarding is often where you get a big bang for your buck in cancelation.
Getting your existing customers to grow you
Okay, so cancelation is the thing that determines this growth ceiling more than anything, because, and so you should find out why and improve cancelation. Okay, fine. But what about the marketing side, like the thing where it doesn’t grow forever? Okay, but like, could it? Like, could we improve that end of the equation? In other words, could we make marketing do something like grow based on our size instead of growing based on our spend? And, of course, the answer is yes, because there’s many sources of customers. There’s ones where it grows based on how much you spend and its capacity, and all the other stuff we said, and stuff that more or less, it’s true that if you were to double the number of customers, you would more or less double the effect, you would more or less have twice as much social media followers, blah blah blah. So, I don’t want to go through every one of these, you can read whole books about them, etc, but I want to give you two interesting notes that I think help in this kind of a thing, since, of course, if you can pull this off, this is an antidote to the cancelation problem, and therefore an antidote to the growth ceiling.
So one of them is on referrals, which just means customers telling other customers to join, and you know, how this normally works, you know, invite a friend and get 75 bucks, that’s the normal type of thing. I hate this. It’s like you turn your customer into this weird skeevy salesperson. Imagine them calling a friend, like, “Hey, man, excited for this thing, I’m gonna get money.” Like, it just not, I don’t like it. The right way, is what I call give and get referral program, and the idea is that both the giver and the getter should get something of value, and it’s much, much better if that’s not money, but something of value, could be money, it’s better if you say, if we both join up, like PayPal did, if we both join up, we both get $5. That’s better. But Dropbox is maybe one of the best examples where you invite a friend and you get 500 megabytes more storage. So now you’re imagining the customer calling a friend, “Hey, man, if you sign up on this thing, it’s cool. I use it, and if you sign up, we both get more storage for free, like we were both getting away with something, you know.” We don’t have to pay them, so let’s do that. Totally different conversation than the one way thing. So that’s really great. This, of course, worked for Dropbox, which doesn’t prove it always works, but okay, it’s nice. And the founder of Dropbox said this is the reason many times that this is the reason for their explosive growth early on is this particular program, so you know, take that what you will, but like the referral program, don’t make them sales people, make them like, hey, together we can get, that’s a nice program.
The other little note about this kind of marketing I want to mention is you can just ask people for advocacy, you can just ask them to leave a review somewhere, or to say something online, or whatever, you can just ask. Do you ask? I mean, we almost never did. And then one time we noticed that our trust radius score was lower than we wanted it, and you know, maybe there were some garbage reviews there, maybe not. I’m not going to get into that, but we were like, hey, you know, we never ask our customers to go to Trust Radius, and so we just started asking, like, hey, if you wouldn’t mind rating us on Trust Radius, and we didn’t go only at our great customers, or, you know, there was no filtering, it was just asking, and our score skyrocketed, and we had the best score, just because we asked, and we were confident enough that, like, it’ll be good, I guess. If we were wrong, we get what we deserve.
You can just ask, but then the question, the obvious question is, when do you ask? And we’re used to people asking, like YouTubers, like and subscribe. Yeah, we know, but ironically, that’s a YouTube video about why YouTube videos say like and subscribe. I think we know why they ask. We don’t need to. So, when should you ask? Well, not here, because I haven’t delivered enough value yet. There’s no reason for them to subscribe yet. In fact, they’re probably leaving. That’s what’s happening. And here is not a terrible idea, except it’s the fewest number of people that are still around. So, there’s probably something like this that’s the right time.
So, with that as an analogy in software, when would be the right moment? So there’d be stuff like the first time that they have some real tangible success. So, for example, say the software, the idea is you’ll write blog posts with AI. Okay, well, let’s say they do that and they publish it and they’re getting real traffic to the post, that could be a moment to say, oh, maybe you could leave a review or tell on social media and say, oh, I just published this thing, it’s getting traffic, that would be a reason for them to talk about it, or some milestone. So, Buffer, as I mentioned earlier, Buffer is a company where you can queue up your social media posts, and they go out on some sort of schedule. So, imagine you’ve done 100 of those, they could say, “Hey, for your 101st post, how about saying, like, oh, you know, I use Buffer for this, it’s working pretty well, you know?” You don’t have to, but just a suggestion out of nowhere, so some kind of random milestone, hundreds, not the only reason, hundreds milestones, so we happen to have 10 fingers, right? It’s fine, it’s an excuse. If they just rated tech support experience high, that’s a good moment. I just had this great experience. They could say, if they upgraded the software, I guess they’re being successful. That’s a moment to ask. When you do surveys and they respond, just the fact that they responded at all means that they’re engaged in some way, so maybe they’ll leave a review because they’re engaged in some way, or beta program. If someone says, I’m willing to test your new software, that’s pretty good, like that’s, you know, or when they get an award or something. So, we have customers at WP Engine who win awards for their websites, and then we’re like, yeah, you could mention it’s on WP Engine, you know, and I often do, and so that’s nice.
There’s also the moment where referrals make sense, and so I’m going to bring back Dropbox, just because it’s such a successful example. So, at the risk of double dipping, when do they put up that message about the refer a friend? They don’t do it all the time. What they do is they wait until you’re running out of space, and then they say, well, you’re running out of space, which means you’re going to have to start paying for it, or you could refer a friend and get more space and not pay for it. Well, that’s a good moment to ask, because that’s when they have the pain. So, if you have a referral program like that, maybe that’s also when you could ask for that kind of thing.
Okay, so maybe we could get our existing customers to help us grow, because then it would be proportional to our size. Another thing is, okay, we have a bunch of customers, some cancel, but maybe some that are left over grow, maybe they pay us more. That could also maybe offset cancels, maybe. So, let’s look at that, where the remaining customers, if they grow, can offset. So, let’s say there’s a hypothetical company where this is a cohort of 10 customers, and every month they lose a customer, which effectively means early on their cancelation rate, well, it’s still bad, it’s still 10%, but their cancelation is, let’s say, relatively low, and then at the end, boy, the cancelation rate’s high, because they’re losing a third of their cohort, or whatever, right? So, if you imagine that at random they upgrade, then indeed, while the cancelation rate isn’t too big, upgrades could make up for it, either partially or maybe even completely make up for it. So, yeah, on the other hand, if cancelation is too high, then no, you’re bleeding customers so fast, doesn’t matter if the remaining ones are going, like it’s just too bad. Also, I would say, if your cancelation is that bad, they don’t like your product, like that’s not good. You need to fix that anyways. That’s priority one. So, maybe it can help. Maybe this is part of the answer.
Net Revenue Retention: the only way to build a large company
And so, the typical metric people use for this is called net revenue retention. So, you take a cohort of customers, and however much MRR they are at the beginning of a 12 month period, at the end of the 12 month, how much revenue are they still? Some upgraded, some downgraded, some canceled. So just whatever it is, not new, just this cohort, we follow them and just ask what happened after a year. And so, for example, suppose there’s 100k of MRR at the front of the year, and then 20k of MRR of upgrades occurred, and there were some downgrades, 35 canceled, so in total they ended at 75k, so that would be a 75% NRR, or in a more positive case, suppose $50,000 of upgrades came in, only 10 downgrades, not much cancels, and so, oh boy, it was actually bigger at the end of the year, so that would be a NRR that’s more than 100%, because they grew despite cancelations, the net net of everything they grew, of course, that’s good.
Okay, so it’s useful to see the difference in companies, the same company where we vary only NRR to see what difference this makes. So, in this case, this is a company in all three cases that starts at 10 million of ARR and is growing 5 million per year from the marketing, even, because you know that’s typically what happens, and then we start with Company A at 75% NRR, and it barely grows because as they’re adding on customers to core, okay, so this is just like we said before, in this case, 5 million is the amount of new that we’re adding, and 25 is the percent cancelation essentially per year, so that would cap them at 20 million, and that’s what’s going on, so this is just max MRR again, we’re just seeing that in action there, right, but then you have the company with 100% NRR, so just upgrades, balance, and cancels exactly. And then, of course, they’re growing linearly, because they’re just growing with marketing, whatever marketing does, they get to keep forever. And so they defeated the growth ceiling in a linear way, and then once NRR is greater than 100%, not only are they defeated, but they’re growing, because the customer cohorts are going, plus they’re adding marketing, and now you have this accelerating growth, even though marketing is not, and in fact, because of the pressures of the growth ceiling, and so on. This is the only way to make a big company. Say that again, it’s the only way to make a big company. Is this, I’m not saying you need to make a big company, not saying that, I’m just saying, since we’re talking about growth ceilings, if you wanted to, it has to look like this, or there’s a growth ceiling, right? And so all the companies that went public recently in SaaS, all of them have a positive NRR, because otherwise they couldn’t have the kind of revenue needed. In fact, the median is really big, 119 is a really big one, of course. Otherwise, it wouldn’t be this big.
Okay, so you can also see this with Dropbox. The number of new customers year by year has been declining every year for a long time, fewer and fewer new customers per year, but their cohorts net grow. This is a graph of that, and as a result, even though they have fewer new customers every year, their overall revenue is just like a line, kind of like what we just said, lower new, but NRR, and so even at 2 billion of revenue, they’re continuing to grow because of NRR.
Justifying price increases
Okay, so hooray, but we need to justify it. We don’t want to just raise prices, and we certainly can’t do that all the time, so we have to justify it. So, I want to talk about that a little bit. So, the obvious thing is, make the product better, then they’ll, duh, but I think the key thing here is it’s not just adding features, it’s adding features that they’ll pay more for, that’s not the same thing. There’s a lot of features they want, and then there’s features that they will pay more for. And how many times have you been on a customer call? We’ll buy if you had this, we’ll upgrade if you had that. And then no one way that I tried to, I tried to debug that particular scenario in general with product is it’s very easy for them to say, like, yeah, that sounds good, yeah, I want that, that’s just an easy thing. In fact, saying no is harder, so you’re probably not getting the truth if you’re getting the easy answer. So, what I do is, I ask them to say, oh great, well, walk me through what that would be like for you in your workflow, like you would, you’re in what software, and then you pull up our software, and you click what, like that level of detail, and what happens is, if they really like it, like, oh yeah, and here, you know what I could do today, I have to do it, and then I would just click this, I get it, I put, and I’d be done, and you’re like, okay, that’s the real, that’s a real piece of feedback, but what normally happens is, they say something like, yeah, right here, I’d, um, I guess I would, would I export it, oh, but that wouldn’t go in there. Yeah, and then you realize they did like that, maybe genuinely like the concept. That’s fine, but this isn’t something they can use, because you force them to think it through, and then they get stumbled. So that’s a little tip for any kind of product stuff, really.
Okay, but then this is why SaaS companies have this two-axis pricing thing, so you might want to consider it. One axis is pay more, get more functionality, and the other axis is use it more, pay more. So, like, this is Slack, you pay for every active user that’s up, and you pay more per user if you’re doing more features. I mean, of course, this is really obvious, but NRR is the biggest reason to do this. One other reason is segmentation, of course, but NRR is another reason. If you use Slack more and use more of it, then you’ll pay them more. Slack has a very high NRR, by the way.
Another thing I think is easy to forget, I think even in companies I’m affiliated with, we don’t do a good job of this, is to show how much value you’re delivering and how that’s changing, so that people are primed mentally to pay more. So, here’s a dashboard of a security product, and it’s showing, oh, look, we did all these things, we block stuff, like, here’s, we blocked all these attackers and stuff. Cool, because normally with a security product like this, I don’t know what’s going on, it’s invisible, so if you don’t tell me something, like, I’m not really sure it’s doing anything, or whatever. But imagine, I not only saw this dashboard, but I got an email every week, every Monday, perhaps, that says, “Oh man, here’s how many attacks we blocked, and you know what, that was 5% more than last week, which was 5% more than before.” Like, we just keep blocking more and more volume for you. So, eventually, when they go trip over some sort of pricing barrier, they’ve been primed to think, man, this product keeps just doing more and more. I mean, they’re not literally thinking this, but you know, they feel like this thing has been doing more and more. So, when they finally trip over it, it’s not a surprise. It feels like there is value, and so forth. So, this idea of showing the value, it’s not just to inform the customer about what’s going on, it’s also to set their expectations of what’s going on, and that helps you with things like that. Otherwise, you’re like, oh, surprise, we’ve been blocking more for you, you should pay more, and like, what? I forgot you were even there, you know? Right. So, this is more important than maybe it first sounds.
When to expand: the adjacency matrix
So, finally, I mean, you might have been wringing all you can out of this product and market, and so on. And so, it might be time for things like going into creating a whole second product, maybe reselling one to do that quicker, or a whole new geography or some other kind of big adjacent move, and that’s a big question. So, for example, if you’re HubSpot, you might have a marketing hub, and then that’s going really well, and you’re like, yeah, but we’re going to run into a growth ceiling, which is true, by the way, and we need to do something adjacent, like a different market or somewhere, what’s adjacent to this that’s also huge, and they’re like, well, if you market really well, then it goes to sales. So, if we had sales and marketing, then we could have like one big thing, and sales is a big area, so we’ll have a sales hub. And meanwhile, Salesforce is like, you know, we have a sales cloud that’s going really well, but we’re gonna hit a growth ceiling, which they have, but you know what? If sales is going really well, we could just push forward into the stack into marketing, and you know, collect that all together, which they did. Did you know that the marketing cloud generates more revenue for Salesforce than the sales cloud? Yeah, because growth ceilings. Okay, so basically the question is, do you prefer hubs or clouds? That’s the, I don’t know, so okay, so but this general question of product expansion, or I like to say adjacency, something next to what we’re doing, right, is a good question, and it’s also good for things like new features for pricing tiers, or improving the current, like really for all these questions, all these things, this could be a good question, so it’s hard to analyze this, I want to give you the framework that we’ve used many times to figure out, like, what are the not incremental features, but one of these kind of big moves, whether it’s a whole new product, or a new geography, or new market segment, some kind of big move to try to change the growth ceiling, right, change that.
Here’s how we thought about it, and I’ll use a specific example that we did do. This is early in our growth life. Oh, by the way, if you asked me what happened right there, the answer is we changed pricing. And if you ask me how we changed pricing, I can give you all the details. So I’m happy to tell you that. Also, I’m writing a book, and I have a chapter about that, so I can also just give you the chapter too, and you can have it.
Anyway, so hooray, we changed pricing. So about here we’re growing very fast, as you can see. We started noticing that these enterprise style companies were buying our product, one of the biggest banks in the world, one of the biggest software companies in the world, blah blah. And we’re like, hmm, maybe that’s just what big companies sometimes do, which is true, but maybe there’s some kind of opportunity to expand something into the enterprise. What could that mean? So we had at least, we had a lot of ideas. Let’s just take two of them. One was marketing campaigns, so we’ll have targeted marketing campaigns to the enterprise with something about WordPress and websites. We’ll have landing pages for them, but besides that, we won’t change anything else. Same website, same prices, same products, same engineering, you know. We’ll just try to do that. We don’t expect that to be hugely successful, but maybe incremental revenue, maybe they’ll help, and also we’ll learn, and that’s a nice way to take a step in. But another idea is like, let’s just make a new product, let’s have this be the second product. In this case, it’s not really a new underlying engineering, it’s a new customer segment, but that means we have a whole division, marketing, sales, account management, engineering, product, probably support too, because they’re going to need account management stuff devoted to this as a big investment, and we will have much bigger price, we’ll have to add some features, governance, and God knows what, but maybe we could double the amount of revenue of the company over time because this is a big segment, they spend a lot of money, and so forth, so you know, maybe that investment is worth it.
Okay, so how do we analyze this again? I think about adjacency, when I think about that, I think about we have existing strengths, assets, capabilities, because of our team, because of our code base, and what it can and can’t do very easily, right? What we know about our customers, like by the time you’re thinking about this kind of expansion, you’ve got something, and so this next thing you do has to leverage that as much as possible, or else why are you doing it, right? You could do it, we could start an Only Fans site, but like, why would we do that? We don’t know how to do that. So, that’s one side, and the other side is, of course, since we haven’t done some of it before, it’s a risk. It’ll take some investment. It may not work, and there might be current problem areas in the company that can’t handle that. And so this is, I wouldn’t say balance, I would say it’s an equation that’s to solve.
And so here’s how we did it. Very simply, I call it the adjacency matrix, and the idea is that you list these functional areas you have, like marketing and sales, and you may not have this, like, if you don’t have sales because it’s self-served and don’t have it, it’s fine, don’t have the boss, it’s all right. So, just, whatever is like a significant thing that you need to do, include things like engineering and the business model, like what the pricing and packaging is, unit economics, budgeting, that kind of stuff. Notice things like training, like it’s not right, because this is like what the area does, like people, so if I change things on them a lot, I need to retrain or make new materials. So it’s not just what does sales do, it’s like, how would we implement that? So these are the things that will have to be brought to bear with any new initiative, and so then what we’re going to do is rate these things in these areas, not like a rubric, not with weights, not with numbers, and nothing’s getting added. It’s not a Cosmo quiz.
Okay, we only get three choices. One choice is we can say, oh, to implement this idea will be trivial for this department, it’s just run of business stuff. Sure, they may have to tweak this, add a bullet to this slide, throw a thing on a web, but this is what they do anyway. This is like just totally normal for them. They will barely even notice, it’ll just be a little project. The second possibility is it’ll be project, we’ll have to do stuff, but it’s totally within our wheelhouse. We’ve done this before. Yes, we’ll have to train the sales people, but it’s one more slide, one more thing. We’ve done this like 10 times with different things, it’s just the 11th one, so yeah, it’s work for us, but like nothing that we, the kind of change we can easily do, and then finally there’s the overhaul, like we don’t have the right team, we don’t have the right expertise either, we’ll have to learn it, which is risky and slow, we have to hire it, which is risky and sort of maybe fast, maybe still slow. We’ll probably make a lot of mistakes. It probably will take twice as long and twice as expensive as we thought. Maybe it won’t work at all, right? Like, it’s hard. It’s hard. That’s not a deal breaker, by the way. Doesn’t mean you can’t do it. You’re just saying that’s what it is.
And so then you just analyze together as a team, hopefully with people from these different areas. What it’s like, so with enterprise campaigns, marketing has to do some, but like product and other stuff doesn’t have to do anything, because we defined it that way. We defined it as marketing and not products. Okay. And then with the new product, of course, it’s harder, because we said it’s going to be a lot more work, but also more impact. Notice, impact isn’t on this list, because this is not a rubric that’s telling you what to do, it’s an analysis to help you.
Okay, so all right, but in what ways is it actually hard? Not engineering, well, that’s useful to know, and so forth. So, what to do with this is again not adding anything up, but a discussion area of like, how does that feel? Are we okay with having to overhaul half the company in order to do this thing, or does that just not make sense? Now that I see it on paper like that, I realize how much work it really is. A lot of times, ahead of time, without people in the room, you just didn’t realize that it is, or is in fact easy. Most people in the company do not know what’s easy or hard in engineering, so if you don’t get in a room and do like this, people don’t know. Even engineering may not know without talking to other people, but what they meant by that thing, right?
Okay, and then there’s like, what are we leveraging? Are we leveraging enough stuff that that’s our strength is one question, but another one is this question of where the overhauls go. Again, they’re not deal breakers in themselves, but there’s this question of what are we prepared to do. It’s my experience that at any given time in a company there’s always teams or even whole departments that are in trouble, like they’re failing, so like maybe let’s say it’s sales and you say, oh man, our sales capacity is down, we just lost our best sales person and our VP of sales, so someone steps up, but like they don’t really know what to do, and morale is low, and you know they’re barely able to sell the current product, and maybe some of that is marketing leads, but nobody even knows, because we don’t have that capability in sales to really know what an SQL should be, and so they’re just in the scut, it’s like, okay, look, this will always happen to every department at some point, they come in and out, that’s life, so again, no judgments, just that’s where we’re at, but maybe engineering is like we’re good, we’re hitting tech debt, we’re happy, healthy, we just hired another great person, like everything’s pretty good.
Okay, in that scenario, you look at this and you say, oh well, we can do B because we’re not asking sales to do anything, but our engineering team, that’s healthy, they’re ready for the challenge. They’re like, “Hell yeah, let’s go build a new thing, we’re set.” Whereas doing A would be a horrible idea, and I don’t even know what ideas A and B are, or what their impact is, or how adjacent it is. I don’t even know. I just know that one of these we can execute, the other ones we should not execute. So, this is the other use of this, is to say, “Wait a minute. Where is this overhaul stuff? Is that okay?” And if things are healthy, that could be one of the smartest things you could do, is go into an area that is not a pivot, but something new, but that you’re ready for, that could really make a big difference. That could be really smart. It’s just not smart if the department’s not ready to handle it, that’s all right. So, again, no numbers, no adding things up, just a thing to try to weed out or really understand what is the consequence of these decisions.
And often I find this makes it a lot easier to know, and it’s easier later to explain to the whole company why. Hey, I know a lot of people have been talking about, we should go into Japan. It’s a great thought, because they have all this, you know, they have this blah blah blah. The thing is, right now our marketing department and our sales department, we’re not ready for it. We’d have to make a whole new subsidiary over there. Our finance team actually not ready for that either. We have to get maybe a partner over there, and it’s just that particular work we’re not ready for. But there’s this other thing where it’s perfect for us, because it’s a new engineering team, which we were hiring anyway, and you can see how it folds into this narrative to explain why. I think often, as leaders, we forget that explaining why really well is part of what aligns everybody, makes people feel really good about the decision. So, something like this gives you, not an outline, but let’s say a skeleton of talking points that helps you go, okay, that’s why we are doing this. That’s cool. That makes sense. You’ve thought about it. So, this is so you could apply this in many places, I suppose. But this is how we think about larger changes like that.
If you’re not growing, are you dying?
And so there is a growth ceiling, because cancelation wins. So it’s so important to diagnose why all of the time, it’s a continuous, never-ending thing. The earlier the better. Track the max MRR and graph it, because it’s a predictive metric, and I think it’s sort of a more visceral metric than cancelation.
Is a great question, is besides regular marketing, which I’m in favor of. I know there’s a lot of people like, don’t do paid marketing, and this is maybe one of the reasons I disagree completely, I’ve always done lots of paid marketing, we’ve grown hundreds of millions of dollars in ARR with paid marketing, like it’s good, it just has a ceiling, and so, okay, so how could we get our existing customers to give us more customers, and how can we get our existing customers to pay us more money, and then finally, like when it is time to expand, because that’s one of the ways to exceed the growth ceiling. What makes sense for us, back to the original question, if you’re not growing, you’re dying. Is that true, or is it a bumper sticker, or just, I don’t know, something like a VC would say, because they want you to work hard or something. I’m really tempted, just like my contrary nature is like, I want to say, yeah, that’s wrong, here’s why, but actually, I think it’s right.
In fact, because maybe some of you are sadly experiencing this now, I hope not, but when you’re in a situation that’s like that, unfortunately, this was just one marketing channel. We were not in this situation, but when you are, it’s hard. Like, morale is low. Your competitors are always winning. Maybe you’re having to lay off people here and there because the revenue is going down. Then everyone’s wondering who’s next, and there’s no opportunity for advancement or growth personally, because like you’re just trying to hold on to what’s there, there’s maybe people blaming people for stuff, maybe they’re even right, arguing about what should be done and what isn’t being done, like it’s actually pretty bad. And it was a founder, like you didn’t get into this to try to save something that’s dying, like you might need to, but that’s not why you did this, you like innovate and build something, and I don’t know, have something kind of healthy and happy, ish. Happy is probably the wrong word, fulfilling. Nobody’s happy. Mark might be happy, but I don’t know. And so I actually think it is true, because it’s not a good situation for anyone, when it’s the case.
Actually, I think more or less it is true, but we can do different things with this notion, like maybe growth isn’t revenue all the time, it could be profit, obviously. So, if growth is hard, profit is much more in your control, and especially if it’s done in a way that respects the customer, and so on, because it’s more about your own operational effectiveness, and so on, and less about screwing the customer, then that could be great, and all of a sudden there is money, and that’s growing. Number go up for some number that matters. There is more money, you could even hire someone, or at least people are not worried about their jobs. The founder can make more money, so maybe it’s if we’re not growing profit, we’re dying. Maybe that’s the right way.
There could be other things. There’s mission-based companies where the question is, are we growing our impact in our mission manner? To me, that’s one of the most compelling, exciting types of companies, and I find that customers of those customers are super loyal and love it because of the higher mission. Employees are often happy to be there, even for less pay than market, because of the mission. Like, I don’t know, that’s pretty, and plus you’re affecting some kind of mission, so maybe that’s what growth means, growing our impact in the mission as opposed to our revenue. It could be a nice way, so there’s lots of things it could be, maybe not lots, but there’s different things it could be.
So redefining what growth means is one way, but the other way you could think about it is personal, if you as a human being are not growing, then you, as a human being, are dying, and okay, maybe that’s putting it a little extreme. On the other hand, maybe you know a relative or somebody where they retired and then they went downhill really fast and they stopped growing, they stopped being needed, or a spouse died, and the other one was not far behind. Now, you could say that’s purpose. It’s not necessarily personal growth, right? We can get into all this. It could be about purpose on earth. Why am I here? What am I doing still? Motivation. So, fair enough. But I think things like that purpose and growth is maybe part of the answer as a human being, that might even be literal, at least for some people, maybe even some people in this room, since we’re all very driven, so maybe if we’re not being driven, maybe that is in fact a problem, because this is what we’re, our company is like early on, it’s just like, oh my god, we’re about to run out of money all the time, keep every customer like you’re just in the scattered, but then when it finally kind of works, it’s like, hey, what, and especially if growth slows or growth starts to decline, and it’s not fun anymore, you might be facing a difficult thing. Should I leave? Should I sell? Like, what should happen? That’s difficult. That’s a whole nother conversation. Again, I’m happy to talk about that. I’ve gone through this, and I’ve done things like sold and not sold, left and not left, replaced myself as CEO, not replaced myself as CEO in various times, so I’m happy to talk about at least my personal experience with this kind of wrestling with this sort of existential dilemma, but still maybe it comes down to again, if you were not growing, maybe you’re dying, and that you can take a personal look at that, and maybe other people at your company too, they all deserve to be fulfilled and to grow, so I’ll just leave you with this question, whether it’s directed at your organization or directed at you personally. What are you going to do next to grow?
Q&A
Mark Littlewood: Yeah, you can go and sit down if you want. I think people might have some questions. Walk on Music. Please welcome Jason Cohen. Special. Yeah, we’ve got some time for questions. Who’s got questions? You’re going to learn how business and software questions work. I will point to people and microphones will magically get to you, and I try and cycle through questions as quickly as possible. I’ve got you, Carl. Give me a hey, spank me. So I want to get through as many questions as I possibly can. Bear in mind these microphones are rigged, so if your question starts with “this isn’t so much a question as a point,” it will explode, and it will leave you with egg on your face. A very clever mic, keep these questions to the point. So we’re going to start with Carl, and we’re going to go to Mark at the back.
Carl Ryder: So that was great, as always. Two questions: one is you had the asking people why they leave, and it not really working with combo box questions that we ordered. Has anyone ever tried, when you got to the point about gifting folks features, giving them a choice of gift your friend your favorite feature, and then they actually, in the moment, they actually tell you which ones are most valuable, because that’s the one they give to the other folks. My other question that I want you to talk about was, I know that a lot of folks don’t like spend on paid marketing, because I think you tend to chase, you acquire customers that are just going to churn on you later, you spend money to get them. Sometimes, if you just try to keep that curve from flattening out, the marketing folks tend to follow their metrics and just chase those. And I think you’ve done a lot of good work on how to think about which customers are the most valuable customers to target that marketing out at, which I think will be quite interesting to hear.
Jason Cohen: Okay, great. So I don’t know if people have gifted features. I like the idea of you discovering their true loves by doing that. That’s really cool. I think one challenge is they will, in order to gift it, that means people normally don’t have that feature, so that means this must be part of some higher tier that they have, and they have this feature, and so they’re giving it, they’re saying someone can have a lower tier and get the feature, but that limits that to whoever has some higher tier, I guess, because if it’s a lower tier, but maybe you’re saying they just have to say what it is, and it’s not really gifting that, or it’s just part of the pattern, but anyway, I love the idea of revealing people’s secret preferences through things like that. That sounds very valuable to me. Of course, you’d want to know why, but you could follow up and say, “Hey, I noticed that,” and if only 10% tell you, that’s still pretty good, right? So, I like that.
In terms of paid marketing, not giving good people, I just find it all marketing is like this, where you can get garbage or not, so it’s definitely true that in paid you can tap veins that are terrible, especially if you lock down to a segment and that’s a bad segment, then of course that’s what you’re going to get, but similarly, if you lock down into a really good segment, then you can get a lot of good traffic out of it, so if you spray and pray, then probably that doesn’t work very well, but if you’re hyper-targeted at who your right customer is, then that should work. Now, of course, that depends on you knowing who your right customer is. There’s some talks I think about that early, some here, or there have been in the past. Certainly, I could talk separately about that, and there’s several actually experts around here on this topic of how do you really precisely say what my best customer is and how would I position for them, but I’m happy to talk about that more later too.
Mark Littlewood: Steven’s at the back, and who’s got the next question, so I can get that other mic.
Mark Stephens: Hi Jason, you mentioned adding features that customers are prepared to pay for, and you also talked about how markets can get competitors coming in. So, I wondered what your thoughts were in terms of not just actively doing that, but possibly defensively changing the product or changing the sales strategy as a result of other companies potentially changing the landscape or changing your customer’s expectations of what they might want to buy. What’s your thoughts on that, or do you just ignore
Jason Cohen: it? I wouldn’t ignore it. There’s a saying that you should ignore the competition, and it is true that you shouldn’t make decisions based on the competition, whatever that means, because you don’t know what they’re thinking or what’s working. I have found a lot of times once you find out what’s going on under the covers of the competition, half the stuff you thought was brilliant is actually terrible and losing them money, and so, just chasing them is a bad idea. Sometimes we found that out by buying them, so just always assume that’s their best face, and it’s not their true face, right? What matters is what customers want. So, to me, the example I always give is if the competitor comes out with a new feature, you can ignore that, but if your customers say, “Oh, man, look, I love you, but I really like that,” and if some of them start to actually leave, and they start saying, I like that feature, then you got to do that feature, but that’s because the customer said so. Now they may have been prompted because the competitor did it. Okay, fine. The competitor might have changed the expectation, or it just might be a great thing. Fine, the cause might be a competitor. Okay, but the thing you’re focused on is the customer and what they wanted, and you’re always following that, so it’s sort of like they say in soccer slash football, if you watch their feet, you got to watch their hips and body, because when they’re committing their hips, that’s when they’re going, so you got to watch your customer and not the competitors flying around, and who knows what they’re doing. Who knows if it’s even smart. Got to listen to the customer still, but you can’t ignore them because your customers aren’t ignoring them. They’re going to their pages and looking, and they’re reading something someone said online about them, and you know, especially if it’s a brand new customer, they may be comparing. So, since they’re looking, you can’t not look, because again, that means you’re not understanding your customer right, so you got to look, but focus on the customer.
If the landscape is totally changing, which arguably AI is doing, of course. Again, I don’t want to talk about AI, because you hear plenty about that already. I wouldn’t even probably, that means you have to do AI, but what does that really mean? Nobody wants AI in the sense of, like, look, I want them to go use AI. Nobody wants some other company to use AI. No one says that. What they want is more of whatever they already wanted. I’m a marketer, I want more leads that are high quality. I’m sales, I want to close more good sales. I’m in product, I want to enjoy product management, whatever the thing is they’re doing, they still want that. Now, if AI can make that better or different or more efficient or more delightful or a new thing they couldn’t do before, great, but only because they already wanted to do that, and AI is somehow facilitating something that previously was impossible. Thumbs up, but they didn’t want AI, they wanted the thing they always wanted, and AI is a reason. So, with that in mind, should you just do AI? No, not for that reason, but if competitors, or just in your mind, you want to be the one who’s changing market expectations due to what AI could change, not just because AI. Now you’re talking, and it could be that a competitor came out with something that it’s impossible for you to match that feature without AI, because of its nature, and customers want it. If that’s all true, then you got to follow, or maybe a different segment who doesn’t care. I say follow, but another way is, of course, to target a different part of the market that has different preferences.
Audience Member: Thanks for the talk. Quick question, and you started talking a little bit in the end with profit, but I’m kind of curious, so with generating net revenue and getting more money from customers, have you considered, and you also see parallels with more on the profit side or on the improvement side? So servicing your customers better, right, as kind of driving that down, that also brings the additional money that you’re bringing in, not from getting more from customers, especially in commoditized markets, but like in improving your own service.
Jason Cohen: Is the question, can good customer service result in lower cancelation slash even people paying more
Audience Member: slash driving more, and you see, is kind of some of the same that drives it in there, for
Jason Cohen: sure. Customer service can be, you know, I think Jeffrey Moore calls it the whole product, you think about features, but it’s really the entire experience, its features, its implementation, it’s the service, maybe they’re service partners or integration implementation partners, depending on the product, there could be all this stuff that’s the product, right, which I agree with that notion, and with that notion, of course, service has to be one of the things, including having terrible service or no service, like Gmail. I use Gmail, has no service, so I guess that’s bad service. It’s also free, so that’s a trade, right? So, there can be lots of answers to what that is, right?
I think here’s a trap you get into, though, because, of course, you could say we have great service and we’ll charge for it, and that sounds pretty good. One question I immediately have in that case is, why is it that your customers need great service from you now? If the answer is because the product’s not really that good, and so they’re constantly coming, they can’t see this, so they have to ask you, this is broken all the time, then having great customer service is a band aid, not some kind of strategic advantage, and ultimately it won’t cause them to stay, because ultimately it’s a bad product, and that’s what they want.
But if the reason is, oh yeah, the product’s great, we do service at this next level. We help them think about how to solve their actual problem. We help them with their strategic problems. So, like at WP Engine, people will say things like, I don’t know who to hire to do X, or I don’t know which plugin I should use to do Y. That kind of customer service that’s consultative, that’s adding value. That’s not because the product’s not good, it’s because we’re adding even more value. Okay, now we’re talking. Now, does someone want to pay for that or not? Different question, right? But hey, at least that really is genuinely adding value, not band-aiding over a problem. So, the first thing I would ask, with can service help, is what’s going on? If it’s that kind of service, I would say yes, that can help, but if it’s a band aid, then ultimately no, might temporarily help, probably does, right? But ultimately, it’s not a solution. So you could say it’s a tactic and not a strategy in that case.
The other thing is, there are interesting studies that show that when you use support less, you’re more loyal. Same studies show that NPS is not correlated with loyalty. High NPS does not mean you’ll stay, but not using support is correlated with loyalty. Now that’s an interesting combination. We did used to do NPS at WP Engine. I can confirm that in our case NPS was not connected with loyalty either, interesting, it was a surprise, I think, to everybody. You’re happy, you’ll stay. Actually, no. So, if you think of it as the purpose of support is to make people happy, because then they’ll stay, actually, no. The data show that having to use tech support to then get a high NPS, I know it’s not, same thing, I’m being rough, I realize it actually doesn’t work for loyalty, but having a better product that they like, they don’t need to call support, does. So I would take those as first level things. The product should work first. And then, if great support is this value on top of it, genuinely, that’s different. That sounds really good, but I feel like for a lot of people one of these other conditions fails, in which case I would say that that’s what you should look at first.
Mark Littlewood: Final question, and the reason I went over there was two reasons. Firstly, to give this fantastic young man a book, which is a present, it’s a prize, because he’s the first time attendee to ask a question. Also, very shallowly, I’m sorry, Jose, I had no idea who you are, so I had a sneaky look at your badge. This is Jose. So, final question.
Audience Member (Jose): Awesome, thanks, Mark. Thanks, Jason. That was a great presentation. My question is, what are your favorite sources of education? Like, what’s your favorite book? Oh,
Mark Littlewood: I can answer that, Jason.
Jason Cohen: Well, there’s this website called asmartbear.com. It’s got these great articles about everything, so you should definitely read that. On what topic specifically?
Mark Littlewood: Microphone. One
Audience Member (Jose): of my favorite books was Software as a Science Marktel book. Try to find
Jason Cohen: other topics. What topic are you talking about?
Audience Member (Jose): That it was just general business.
Jason Cohen: I know, like, what topic do you want to know? Book,
Audience Member (Jose): do I want to know about, probably just better product market fit,
Jason Cohen: better, finding it at all?
Audience Member (Jose): Finding it at all. Yeah,
Jason Cohen: it’s interesting,
Mark Littlewood: I think you’ve got a book in your hand that’s going to be pretty helpful on that.
Jason Cohen: Yeah, yeah, I think so. I’m actually not great at the bookshelf. I have a bunch of books on my bookshelf, but there’s, you know, 1000 times more books than there is on my bookshelf, so I’m not really sure. One thing I find with product market fit is that when it happens, it’s almost always a surprise, and often they don’t know why it happened just now. It just takes off, and all of a sudden demand exceeds their ability to meet demand, and very often you’re like, why is this happening, they’re like, we don’t even know, and leave me alone, because I’m busy servicing it, and so it’s sort of like what Lenny said, that is the normal case, but that’s interesting, because if that’s the case, that means that wasn’t that intentional, it was somewhat intentional, because they were trying to find their ideal, you know, all the usual stuff, right, because the outline is clear, you have a market that is lucrative, where people are spending money, they know they have the problem, they actually have the problem, they have a budget for it. They’re already spending the money, they want to spend it with you and not a competitor. They are buying today, and not kind of kicking the tires. There’s some kind of urgency behind it. There’s some sort of inciting event that’s causing them to go, “God dang it, we got to do this now,” like Bob Moesta talked about at previous business of softwares that you can watch videos about, and of course, the product has to solve that really well, hopefully be delightful in some way, so that it’s also emotionally attractive, and you have to say so on your homepage, so they realize when the perfect customer shows up, they realize, oh, this is for me at the right price, and also your advertising has to pick them at the moment of that inciting event, I got to do this because, and then your ad is right there, hitting them, or some kind of recommendation, but you already know all that, because you can read articles like a smart bear, or that, or here, that say that already, so we know that.
So, okay, that’s the stuff to seek, and yet most people aren’t successful, and when you do, you’re like, oh, I don’t know why, I guess some combination of that, and whatever we did wrong wasn’t fatal, and so what do you do with that? And I said, I think the best thing, since I don’t have a good book recommendation, not that there aren’t good books, but I just don’t have one, is in general with advice, there’s so much advice, and I find that anybody that says do X, there’s someone else that says do the opposite of X, and in both cases, I can find companies that were successful and failures having done that, so if this two by two is all filled, what the hell do we do at that, right? And so I think what you do is you say, okay, there are many philosophies or approaches or ideas, and they’re probably fine, probably all pretty much fine in their way, but what that means is you get to pick, well, that’s actually good, because what that means is you can say which of these feel like I can execute it really well, like this matches me, my personality, my skill set, what I’m excited about, what I have energy for, whatever. Maybe you don’t even know why, you’re like, I just like this framework, I like this book, I like the way Noah Kagan is so irreverent, or I like the way Rob Walling does this, or I like how Bob Moesta has all this experience with big brands, you just like it. That’s enough reason.
If you have a lot of choices that are all good, you should use reasons like, well, if they’re all decent, I got to pick the one I can execute best, that gives me the best chance to be good at it. Then, once you do that, you want to be consistent within it. In other words, you don’t want to make inconsistent choices. So, by picking one and then staying consistent, making other choices that are consistent with having made that choice, now you’ve got something where at least you got a chance, because you’ve leaned into your own strengths, avoided hopefully some of your weaknesses. I don’t know how to do that, good, then don’t do that one, it’ll just add risk, don’t do that. So I think when you have a lot of good choices, that’s a structure you can use to pick anyways, and increase the probability that it’ll work, or at least be energetic, and maybe even fulfilling, even in failure, because it was a good attempt, and so I would look at advice where ultimately you feel like this is making me a better version of who I already am, not a different person, but the parts of me that are relevant, with a little more experience. If that’s the feeling, then that’s okay to use that emotion to select.
Jason Cohen
Jason has built four software startups, both bootstrapped and funded, both alone and with co-founders. All of them grew to more than $1m annual revenue.He sold two, and currently serves as CTO of the fourth, WPEngine, with 380 employees headquartered in Austin, Texas. More recently, he has also been an angel investor and was a founding member of Capital Factory, an Austin incubator and co-working space. He writes about software and startups at ASmartBear.
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