Lenny's Podcast: Product | Career | Growth
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.
01:10:32 · Casey Winters, Lenny Rachitsky
[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. [01:11:08] S1: And this is also why a lot of these companies pivot to b to b. They realize, there's... They're not gonna get anywhere with B2C. The other lesson I took away because I interviewed a lot of these early B2C subscription app founders and employees, and I think about companies like Grammarly, Duolingo, Noom. Forget there are a few more. One of the other trends across them all is they're all very efficient and very small for a long time because they needed time to figure out how to make anything work and then just continue to stay small and super scrappy. [01:11:37] S0: I think that's a great point. It was an interesting case study between Calm and Headspace. [01:11:41] S1: Because [01:11:41] S0: Calm remained, like, 10 people forever. [01:11:44] S1: Wow.
01:11:44 · Lenny Rachitsky, Casey Winters
[01:11:44] S1: Wow. [01:11:44] S0: And, you know, Headspace had gone into, like, you know, hundreds of people. And Calm, like, basically never lost money, and that allowed them to be... You know, allowed them to pivot easier during, you know, massive changes, like, you know, app tracking transparency, like, through a wrench into all paid acquisition. So if you're not losing money, like, cool. You have time to figure out how to, like, grow again. But if that increases your burn by, like, a $100,000,000, you have a lot more of a panic on your hands. [01:12:12] S1: So maybe just to tie the loop, tie the knot, close the thread on this, topic. If you're a b to c subscription founder, what would be some takeaways that you would want to put in their head to think about how to maybe survive?