10 ms·
Twice as happy customers means half the marketing spend
- wjnc 9y agoA practical application of a geometric series [1]. Before my study of statistical distributions I once re-invented the Poisson distribution. It took one look of my physicist colleague to give everyone a good laugh. That was the moment I decided an economists needs more than linear models, the normal distribution and some non-parametric tests. [1] https://en.m.wikipedia.org/wiki/Geometric_series https://en.m.wikipedia.org/wiki/Geometric_series
- raverbashing 9y agoYes, there's no need to do the actual sum, there's a closed formula for that
- cbhl 9y agoWhat are your thoughts about Amazon moving into the subscription box business? https://www.amazon.com/b?node=14809330011 https://www.amazon.com/b?node=14809330011
- eterm 9y agoThis really overcomplicates the mathematics. Steady state implies Leavers = Joiners. If 100 people join each month then you'll have steady state when there are 100 leavers, i.e. when 50% of N is 100. N * 50% = 100 solves to N = 200. In general with X% attrition and Y people joining you'll have a steady number of subscribers N using the formula N * (1 - X) + Y = N Which can be rearranged to N * X = Y.
- solonagathon 9y agoHow would you calculate the timeframe until steady number of subscribers is achieve d?
- codefined 9y agoWouldn't it always require an infinite amount of time? You're summing a series of: 0.5^n * x From n = 1 to n = infinity
- Sean1708 9y agoOnly if you can have a fraction of a subscriber, otherwise there will a finite number of months after which you will attain steady state.
- Sean1708 9y agoIf M is the number of months then (since you can't have a fraction of a subscriber) you will be in steady state when Y * X^(M - 1) < 1 so once M > 1 - (ln Y / ln X)
- smallnamespace 9y agoI'm constantly amazed at the lengths some coders will go to in order to avoid doing a couple of lines of algebra. Have seen people code up complicated Monte Carlo simulations, with all the attendant estimation noise, when basic stats and algebra gives the exact answer, sometimes even as a one-liner. Serious question: Is it simply a strong math phobia, or have people neglected the skill for so long that they've actually forgotten middle school level maths?
- mherrmann 9y agoI think it's that they don't have enough confidence in their mathematical ability to get to the correct answer. Programming lets you experiment and play around with the numbers more easily so you can convince yourself whether what you're doing is correct.
- pdkl95 9y agoI know I've had a few situations where the "play around with the numbers" part happened first. Usually once the actual goal was known the algebra (or similar details) would be obvious... but sometimes the inefficient/toy implementation was good enough. Sometimes half-assed is ok, if it's the the right half of the ass.[1] The wrong half becomes yet another type of technical debt to be refactored "someday". (this is not an excuse to ignore algebra or blindly assume the easiest/most-fun method is correct/useful/sane) [1] https://twitter.com/jimweirich/status/29662011323326464 https://twitter.com/jimweirich/status/29662011323326464 via https://www.youtube.com/watch?v=sCZJblyT_XM https://www.youtube.com/watch?v=sCZJblyT_XM
- dguest 9y agoI think it has as much to do with how math is taught as anything: it's easy to learn how to solve an equation, but convincing yourself that you didn't screw up without looking at the back of the textbook is another thing entirely. Of course there are a lot of softer tricks (like checking limiting cases) which would boost people's confidence, but for some reason this is only really taught in college level physics.
- fovc 9y ago
- patio11 9y agoI mean if you really want to nerdsnipe you could go straight to sum of an infinite geometric series.
- TimSAstro 9y agoVery Von Neuman! http://www.primepuzzle.com/leeslightest/howfar.html http://www.primepuzzle.com/leeslightest/howfar.html
- rtpg 9y agoI think the point here (that a lot of people might not even realize!) is that there's a steady state. One could assume that "well if I keep on going my customer count will keep on going up... right?" This is showing that it won't. Bonus pedantry: your proof just showed that _if_ there's a steady state, then that's the steady state. Turns out that you'll always get the steady state because of "maths" but if you replace 50% with 0% there's no fixed point.
- eterm 9y agoThat's a good point. I guess with a background in maths it's "obvious" that a system with constant in-flow and an out-flow proportional to the volume would approach equilibrium, but that perhaps isn't as obvious to others. I guess it's perhaps also worth pointing out then that the same equilibrium is reach from either side. If you start with a much higher volume of subscribers you'll reach the same equilibrium through attrition down to that number also.
- infinite8s 9y agoThat's only obvious if you remember differential calculus.
- bemmu 9y agoYes, that's the thing I wanted to show with this article. It wasn't entirely obvious to me that it wouldn't just forever increase as time goes by.
- maweki 9y agoMain takeaway: The function f(x) = 0.5*x + 100 has a fixed point at x = 200.
- mherrmann 9y agoI think this is highly relevant for the early stages of a product: Do you focus on retention or marketing? I'm developing a cross-platform file manager [1]. My current problem is that even tough 20 people download it every day, only 2 use it more than once in the first week. Existing users ask me for 1000s of features. But the real problem I need to overcome for growth is that I lose so many first-time users. That's a problem with onboarding, not with features. I blogged about this [2]. [1]: https://fman.io https://fman.io [2]: https://fman.io/blog/desktop-app-funnel-optimization/ https://fman.io/blog/desktop-app-funnel-optimization/
- annnnd 9y agoRetention! Always focus on retention. If people keep using your product then you have product market fit. If they keep leaving - you have an uphill marketing battle.
- Retric 9y agoAnother consideration is getting customers to come back is vastly easier sell when they liked your product. So, you retention over years can end up significantly longer than the average subscription length.
- laumars 9y agoYour issue is slightly different though. Candy Japan is a niche product which has been around for a while but is a subscription model. Where as your application is a new product but in a crowded market where almost all of the alternatives are free. So getting a high conversion is always going to be a tough sell.
- mherrmann 9y ago"New" is relative - 15 months. Regarding your other points: The situation is actually very similar to Sublime Text (which I aspire to): Yes the market is crowded but I see potential for innovation. And paid is the only sustainable way I see to make the project happen [1]. It's free to evaluate forever, just like ST. [1]: https://fman.io/blog/fmans-business-strategy/ https://fman.io/blog/fmans-business-strategy/
- cluoma 9y agoImplicit here is an assumption that the lifetime of subscribers is exponentially distributed. Which may or may not be the case.
- patio11 9y ago"Churn rates are constant given age" is a model which is generally false-but-useful at SaaS companies, particularly for ages over 2~3 billing periods (months), while folks are basically on extended trialing before really deciding on adoption or not.
- eterm 9y agoI agree, if you're going to the trouble of modelling then a stochastic matrix (markov chain) is a much better model. You can model it as a markov chain where each month there's a probability of moving to age + 1 or a probability of becoming 'ex-sub' (general population). You also have a transition from 'general population' to 'month 1' to represent new sign-ups. That has the advantage that you can still find the stationary distribution (steady-state) of the chain without simulation and it doesn't treat churn as being the same for each subscriber age. (It still has it time-homogeneous for a given age of course).
- Grustaf 9y agoSaying that you lose r% of clients each month should be enough information, why should the distribution of customer longevity be interesting?
- jasonkester 9y agoYeah, that's the Churn Equation. The thing us SaaS folks spend most of our time worrying about (whether we know it or not). Given a constant influx of potential customers at a known conversion rate, along with a known churn rate of existing customers, you can find an exact dollar figure that you will eventually plateau at. It sucks. Especially when you're starting out because the "In" side of the equation is small and there's not much you can do about it. Fortunately, as the article points out, there are a few knobs you can tweak. Churn is a nice one, since all it takes is a good product. Conversion is harder, because it involves dark magic like sales and psychology and web design skills. Once you get it figured out, though, there's another formula you can use to determine how much you're allowed to spend to pour one new user into the top of your Trial funnel. If you can get that up to a level that justifies advertising, you can open the valve as far as your budget allows and start moving that plateau point upwards. EDIT: I've been writing about this stuff lately, if anybody else likes geeking out on it: http://www.expatsoftware.com/Articles/things-worth-knowing-about-your-trial-users.html http://www.expatsoftware.com/Articles/things-worth-knowing-a...
- laumars 9y ago> For simplicity suppose 50% of people cancel every month. That means that if I do some clever marketing and manage to get 100 new people to join, then after a month 50 of those would be left. After another month, 25 of those would be left and so on. > Because of this fall-off, even if you run a subscription business forever, you will not have infinite customers. Instead you reach a steady-state number. You should also factor in returning business as well as new business. eg I'm a very happy customer but since this is a luxury it is often the first thing I cancel whenever money gets tighter. For example when moving house or, most recently, when my wife gives birth to our new baby girl. However when finances stabilize again Candy Japan is often one of the first luxuries I re-subscribe to again. I'd also like to take this opportunity to say thank you for providing such a great service. The extra effort you put in with regards to the emailed descriptions of the candy as well as the mixture of normal and alternative snacks make it an absolute delight receiving the box.
- patio11 9y agoThe falls out of the fundamental equation for SaaS and other subscription business models: LTV = prospects * (conversion rate to paying) * (average price point) / churn This makes a 5% increase in prospects, conversion rate, or price cause a 5% increase to LTV (and, eventually, to the enterprise value of the company). A 5% decrease in churn (measured against one's current churn rate, e.g., 5% -> 4.75%) has a slightly more than 5% impact to LTV / enterprise value. So many decisions about running a SaaS company fall directly out of this equation. Competent SaaS operators memorize it or, for less mathematically oriented operators, can at least summarize the relationships implied.
- dfee 9y agoIf you're measuring the LTV of your pipeline, then yes. The challenge is measuring duration (retention length) -- especially early on when campaigns are typically run single threaded and have an outsized impact on LTV of individual cohorts. I.e. My company is 18 months old - what's my LTV? One approach is factoring in the period-churn-rate (if measuring MRR then considering monthly churn). But again, modeling isn't always super defensible.
- brockf 9y agoSurvival modeling is exactly what's needed for these situations. It allows you to (a) consider censored data (i.e., active customers who you know stay for at least X months) and, (b) use flexible survival distributions beyond the standard exponential distribution assumed in the typical monthly churn rate calculations. Source: Run a data science company and we work on a lot of customer lifecycle modeling projects with companies much younger than yours.
- dfee 9y agoI've done a bit of survival modeling, but my purpose was to understand retention across cohorts with certain attributes (typically, sign-up date, though occasionally campaign). I'm interesting in how you've used this to model churn. Is there a blog post or resource you recommend to learn more about this?
- mosselman 9y agoI was a customer of Candy Japan for a while (3 months) and I really liked it. The candy selection was very interesting and fun. A while back I tried a competitor and their selection was very boring and the candy they sent didn't feel very special. The reason I cancelled with Candy Japan was that I found it a lot of money for candy. Not so much a lot of money for the service. Also, candy is just unhealthy, so I am probably better of spending that amount on fruit and vegetables. Overall the candy selection is what would make me choose Candy Japan over a competitor if I would ever choose a candy service again or recommend one to friends.
- rwmj 9y agoHealthiness is a factor. I wonder if they would be more successful if they delivered less often, say once every 3 months.
- hn_user2 9y agoOr maybe an email prior to shipping. "Want to send this months shipment as a gift to someone else? Click here to change this months delivery address."
- deleted 9y ago[deleted]
- foldor 9y agoI totally agree. I would 100% resubscribe if it had an option for once every 3 months. I like it as a rare treat, I just wouldn't want it twice a month. I subscribed on two different occasions, but only for one month at a time. I'd hate to have to keep subscribing and cancelling several times a year.
- mosselman 9y agoYes I very much agree. I would probably subscribe again if I would receive 0.25 or 0.33 of the packages throughout the year at 0.25/0.33 the price.
- SmellyGeekBoy 9y ago
- koliber 9y agoThere's an old saying: It's a lot more expensive to acquire a new customer than to keep an existing one from leaving.
- JoelEmbiid 9y agoPython and first checked the previous result
- icc97 9y agoI love this post - it gets across a fundamental concept that pretty much anyone can understand, which is non-obvious. What I love, that other's here seem to grumble about, is that he's not using any specific terminolgy. He doesn't mention 'churn', he doesn't mention 'geometric' series, he only has one '=' in the whole text. You can print out this article (ignoring the python bit) take this down to your local baker/cafe/<insert non-tech business owner> that's full of stupid marketing billboards but sucks at customer service and show it to them. There's a good chance they'll understand. Frankly I liked it because I could easily follow his logic without slowing my reading. There was parity between my understanding speed vs my reading speed. Plus no-one here seems to be grumbling that he's wrong, just that they can say it in a different way.
- deleted 9y ago[deleted]
- Grustaf 9y agoWhat exactly is it that the local baker will understand? That he should avoid losing clients?
- jliptzin 9y agoThat maybe he should work on improving his cupcake recipe instead of expensive billboards, hiring a sales team, and wasting money on facebook ads.
- Grustaf 9y agoDon't most people know this without math, that acquiring new customers is more expensive?
- robinjfisher 9y agoYou might be surprised. It's fairly trivial to find out where I work during the day but we are representative of the recruitment industry and so much effort is put into attracting and sourcing candidates (generally via expensive job boards). Because the cost tends to be less visible on the ground, there is no realisation around the cost/benefit ratio when compared to keeping existing candidates happy and using them.
- vmp 9y agoI don't suppose CandyJapan has something for the lactose intolerant? :)
- kristofferR 9y agoWhy not just use lactase enzymes instead, way easier than always finding lactose-free products.
- baxtr 9y agoBecause you have to have a supply of lactase pills always readily available on you. I often forget my pills and thus rely on lactose free products, e.g. Lactose free cappuccino... which by the way is much easier to get in Germany than in the states (for whatever reason)
- kristofferR 9y agoI had the same issue, but I got a metal pill keychain holder from Ebay for $2 that helped a lot. I also think this is quite different since it's an order process, where the candy naturally stays at home except when you bring it somewhere, and then it's not too hard to remember to also bring some enzymes, versus randomly discovering an appealing lactose product when you're out.
- baxtr 9y agoThe keychain holder is a good idea, never thought of it. Will check it out :)
- eddz 9y agoGood post, but it does not consider conversion of former customers. I develop a subscription service which launched in January and now has ~9,000 MAUs. This above metric accounts for ~10% of "new" subscribers each month, despite not yet making an effort (such as by sending reminder or "sorry" emails) to re-capture them. The post does make a good point about retaining existing users, though. I would like to add that we saw MAUs spike when redesigning the cancellation process to be more thankful and apologetic than spiteful. (Being a service for Japanese users, we included a little "thank you bow" animated character at the end of the process.) One more point – our cancellations for the first days of the month often come close to outnumbering new users. We have concluded that the reason for this is that users 1. perform their financial housekeeping around this time, and 2. find a low-numbered charge date easier to remember.
- majortennis 9y ago100+50+25= 175
- robotnoises 9y agoKeep going!
- no_gravity 9y agoEven if you run the business for a million years, you will still only have 200 members. If the churn rate is steady. It usually goes down over time though. Because long time customers have a lower likelihood of canceling. In other words: The past does not equal the future. If you look back on your business and see a churn rate of X%, you can expect a lower churn rate in the future. Because the "survivors" will have a lower churn rate then new customers. In e-commerce, this effect often is pretty significant. I know multiple online-shops that make the majority of their business with long time customers. Even though over 50% of new customers drop out after the first month.
- petraeus 9y agoThe reason developers don't use math is because it never fits the real world models.
- daspianist 9y agoGreat concept and nice write up. However, while its potentially satisfying to calculate things like "2x" happy or "0.5x" marketing spend, it is simply a (self-masturbatory) abstraction. How is "happiness" defined, and how does it occur? If you gave away the candy boxes people would indeed be happy and would not cancel, and you get away with marketing spend. Abstraction is nice as a thought exercise. However, abstraction -/> application.
- cdevs 9y agoMy companies current scenario is about 64% renewal rate from all years before but a 50% of that is from the year before current and 25% percent of that is from 2 years before current and so on and so on.. So how does all this differ if you're looking at renewal from year before and renewals from all time ?
- exabrial 9y agoMost annoying thing ever: instead of "Disable this feature", you get "No not now". Stop forcing things down peoples throats. If you are making a great feature or product, it wil sell itself without a heavy hand. I've determined this is a way to tell who is struggling with innovation and who is leading the way.