Lenny's Podcast: Product | Career | Growth
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?
01:12:12 · Lenny Rachitsky, Casey Winters
[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? [01:12:26] S0: Yeah. So if what your plan is is to use paid acquisition on top of a freemium model to get a percentage of people to convert and hopefully stick around forever, I'd pivot right now. It's like, I just can't see it working. So how do you pivot? Well, how do you make it social so that people are bringing in other people? How do you get a supply side to the, you know, content or education or whatever you're building and make it in the supply side's interest to refer people. Like, you have to do something that's either, you know, building some more organic growth loops into the business or building network effects into the business, or else, like, we could go spend two hours and model out exactly when you're gonna run out of money. Like, it's just that predictable. And, you know, a lot of founders don't like to hear it when I tell them that, but I'd rather them hear it now than learn it three years from now. [01:13:15] S1: Well, we've reached our very exciting lightning round. I'm just gonna dive right in. What are two or three books that you've most recommended to other people? [01:13:23] S0: Definitely The Goal by Eliyahu Goldratt, which explains how my brain works pretty well. [01:13:31] S1: Thinking
01:13:31 · Lenny Rachitsky, Casey Winters
[01:13:31] S1: Thinking [01:13:33] S0: Fast and Slow by, Danny Kahneman. I took a lot of the behavioral economics classes in, my MBA program, and and then his book came out, like, the year after. So I just, like, absorbed it as quick as possible. [01:13:48] S1: Wait. Was he a professor, that was just the the topic? [01:13:51] S0: Some of his, like, pupils were professors of mine. Yeah. Amazing. [01:13:55] S1: Very cool. [01:13:56] S0: And then the third is a book called Profit from the Core by Chris Zook. [01:14:02] S1: Amazing. That's a new one. I love when there's new books being added to the collection. There we go. Okay. Next question. Favorite recent movie or TV show? [01:14:10] S0: Well, Party Down just came back, and that's like [01:14:14] S1: I've been watching that. [01:14:15] S0: My favorite. [01:14:16] S1: I've never heard of it. [01:14:16] S0: It's one of my favorite comedies of all time. Yeah. Go back Cool. Go back and watch the first couple seasons [01:14:20] S1: of Beyond. That's what I've been doing. That's what I've been doing. Great.