Lenny's Podcast: Product | Career | Growth
01:03:49 · Casey Winters, Lenny Rachitsky
[01:03:49] S0: And I've been very impressed with what they've built. I don't know if I'd call it, you know, a marketplace yet. Yeah. Yeah. But the... I I think they were able to abstract away the version of what you just said to something that was actually useful, which is, yes, I don't want more emails to subscribe to, but I do... I am fundamentally interested in more articles relevant to my interest. And no one has really solved that super well. Twitter was a very hacky form of that, you know, where I follow you, and then I see when you post a new blog because you you tell everyone on Twitter you post a new blog, but it isn't built for that. Whereas, you know, the Substack reader will now allow me to be like, oh, yeah. Sure. I'll subscribe. So I really like what they've done. It'll be interesting to see, you know, how big a business that is and and how it all plays out. But I think their execution has been really solid. [01:04:38] S1: Awesome. I feel the same way. And it is... I also wasn't sure whether it makes... Like, it's worth calling a Marketplace. But for whatever it's worth, 80% of my new sign ups are coming from Substack's network, the recommendations feature and their onboarding, things like that. [01:04:52] S0: Do you think that's unique to you because you are already a top one percenter Substacker, or is that a meaningful number for newish players? Like, if I finally switch my email list to Substack, which has been on my list for a long time, you know, that probably won't be the same percentage for me. Right?
01:04:52 · Casey Winters, Lenny Rachitsky
[01:04:52] S0: Do you think that's unique to you because you are already a top one percenter Substacker, or is that a meaningful number for newish players? Like, if I finally switch my email list to Substack, which has been on my list for a long time, you know, that probably won't be the same percentage for me. Right? [01:05:11] S1: Absolutely not. Yeah. No. I think there's definitely... If you're there first and people know of you, more people will recommend you. But I think over time, more and more people start to recommend you. I think they released a stat that something like 40% of their new users are coming from a recommendation or new sign ups or something like that. So it's pretty widely happening, but I don't know how much that is. It's just the top 10. So it's pretty incredible. It was a really innovative feature and good job Substack. And we had, their head of product on this podcast talking about that exact feature for a whole for a whole hour if you're interested. Awesome. Final question, and then we have our very exciting lightning round. And this is around consumer companies and some consumer subscription companies. I know you work with a lot of founders that are building consumer subscription companies and just consumer startups in general. Yep. You often tell me how they're incredibly hard to build into thriving businesses. Can you just talk about why consumer subscription startups are so hard and products are so hard? [01:06:07] S0: I feel like you're making this quite a downer podcast, Lenny. But...
01:06:07 · Casey Winters, Lenny Rachitsky
[01:06:07] S0: I feel like you're making this quite a downer podcast, Lenny. But... [01:06:10] S1: Is... People need to hear the, the truth. You know? There's a lot of happy talk out there, a lot of posts. Here's how you do this. Sure. And sometimes you can't.
01:06:18 · Casey Winters
[01:06:18] S0: I think in order to understand these businesses, you have to start with, why do investors like b to b SaaS? Why do they like b to b subscription? And I think the way most people respond to that question is they're like, oh, predictable revenue. Right? And it's like, ah, sure. I mean, that's cool and all, but I think that's actually not the most important. So I... I'd argue there's two great attributes of b two b SaaS. One is that businesses are more predictable in how well they're routine. They're rational. You can understand who are good versus bad businesses for your product, as well as which ones are gonna grow versus go out of business. And more importantly, the second thing that's great about b to b SaaS is net dollar retention. So what is net dollar retention if if you don't work at SaaS? Well, as a SaaS company, some of your customers are gonna churn. Some of your customers are gonna stay. And normally, outside of potentially current macroeconomic conditions with all the layoffs, when customers do stick around, they tend to spend more. Either they buy more seats if you're a seat based model or they use the product more if you're a usage model. So the SaaS company just makes more money in year two, year three, etcetera. So consumer subscription just doesn't have any of these benefits. Consumers are way less predictable. They tend to retain worse than businesses, and they also don't have net dollar retention characteristics. So if the user retains paying you in year two, you probably make it the same amount that you made from them in year one, not more. What that means is you need higher user based retention than a b to b SaaS businesses with more unpredictable users, and it's a lot higher than I think, you know, founders tend to think. We're talking annual retention that needs to be north of 60, perhaps even 70%. So you look at who's actually been able to do that at scale, and it's a really small list. Netflix in The US, Amazon Prime, Spotify, Duolingo, I think, is emerging as as one of these players that's making it work. And when you look at how they do it, they're either doing it with massive OpEx and economies of scale or through a network effect or some other bespoke growth loop that's not that easy to replicate. So Duolingo has a strong data network effect. The the less... Lessons get better the more people use it.
01:08:34 · Casey Winters
You know, Veep, the company I'm on the board of, has a cross site network effect between creators who create the content and the listeners, and the creators bring a lot of, distribution from their existing, you know, social networks to bring, you know, new people in the app to listen. Netflix and Amazon, they spend billions of dollars, you know, on content. So I think the default path of, like, I'm gonna spend money on paid acquisition. I'm gonna retain half of my audience year over year. That's just a path to going on eventually. And I think what's interesting about these businesses is you can model it. So you can learn when it's gonna happen. You can learn, like, you know, when the retention dips and when you can no longer leave your prop... Properly acquire users. And if you wanna look at, like, a model in real time, just look at Blue Apron. The company raised $300,000,000 in an IPO that valued it at $2,000,000,000. It's worth $50,000,000 today on the New York Stock Exchange. And I think people understand now, if they didn't before, that paid acquisition tends to get worse as you scale. You know, you target the best customers first. They have great conversion, great retention. And then as you expand your targeting of new customers, every one of those metrics gets worse until it's no longer profitable. Maybe two years from now, it maybe be five years from now, but eventually, it'll be no longer profitable. And what network effects allow you to do is they allow your product to get better faster than the customers you target get worse, normally through increased selection, like, you know, some of the examples we gave, you with DoorDash and others.
01:10:10 · Lenny Rachitsky, Casey Winters
[01:10:10] S1: Such a cool topic. I I actually have a post about this that I recall now as you're talking about it. And just to kind of double click on the retention point, and it's, like, freaks you out when you really get into it, that say your retention is, like, 70%, like, cohort retention per year. I forget the math, but, like, every three or four years, you basically have to rebuild your entire user base because it just... It keeps trickling out. [01:10:32] S0: So your growth just has to continue boggling. You run out of humans. Like, it's... Yeah. It's really hard. So, like, if you can retain people incredibly well, meaning those people just never churn, yeah, you've got a great business. But look at the effort the companies that have done that are doing to do that. Spotify does make profit. Netflix, Amazon, they spend so much money to try to do that. And how replicable is that for a startup? I'd rather say, like, let's try and get some network effects involved here. Let's get our customer acquisition cost to zero. You know? Let's think about other ways to monetize because this alone feels like heartburn.