Lenny's Podcast: Product | Career | Growth
00:11:42 · Jason Cohen
You can do churn with MRR too, but just for simplicity, let's say with customers. And it's the worst problem for a couple reasons. One is there's nothing you can do about it once it happens. They're gone. There's no saving them, increasing their revenue. There's nothing in the future you can do. Also, it's often correlated with things like negative reviews or other things on social media, which is another kind of preventing growth. So it's kind of a two punch thing of like, they're not here and they may be actively hurting your growth, so that sucks. The math is undeniable, which I want to talk about because this is something where there's a metric I like that is unusual and people find useful. But before I get to the metric, there's also this kind of visceral thing, which is the customer's saying, "This product, I don't want it." And when I think about the gauntlet they went through to get to the product, how did they even find out about me? That was hard already and improbable that they see an ad or hear it. And then they clicked, which is improbable, and then they didn't just bounce off the homepage, which is again, improbable. They actually were like, "Oh yeah, this sounds pretty good." And then they got to the pricing page and that didn't scare them off. They actually had the budget and bought the stupid thing. Then they went through onboarding and invested their time, et cetera, et cetera. That is a crazy gauntlet that almost no one gets through. And after all of that, which clearly means they wanted it to work, they're like, "No, bye." What? Just on an emotional level, you got to go, "Wait a minute, that's terrible. I'm fundamentally not fulfilling whatever promise I made or they thought I made, which is whether that's a product issue or a communication issue." Okay. There's lots of... But one way or another, something is really fundamentally broken just in terms of like, I'm a product person, so what I want to do is make a product that other people want to buy and use. And if they don't, no matter what the metrics say, we're failing our mission, our customers, whatever. So there's just even that non-mathematical reason to go, "Oh my God." Right? So to me, that's already enough reason, but the math is very interesting.
00:13:51 · Jason Cohen
And what I find is when I talk to people, especially on Twitter or something where people are just yapping around whatever they're doing, I say things like anything above 3% per month cancellation is terrible. And people are like, "Oh no, it's okay. Five is fine, seven, six." Everyone's yapping about what they... And it's very abstract. Is four much worse than five? I don't know. And I heard someone else, and blah, blah, blah. So it's very, I don't know, generic and rough. So there's a different metric that I like to use, which keys off of this idea that I think, again, people don't appreciate, which is cancellations grow faster than marketing, and so cancellations overpower the growth of the company and slow it to a halt, i.e. growth slows, right? To where you literally cannot grow anymore. There's a maximum ceiling of how big you could ever be thanks to cancellations. And when you know what that number is, it's much more real and visceral and scary. And so just to kind of justify what I just said, just imagine any company and imagine you just tripled the number of customers that are there and paying, and the same kind, the same age, just the same kind of stuff just tripled overnight. So the next month, would marketing deliver more new customers than a month before? No, because none of your marketing efforts care how many customers you have. AdWords delivers the same number of leads and SEO delivers the same. It does not care how big you are, these efforts. So you're still going to be growing at the same rate as you were the previous month. But cancellations in absolute terms, like the number of customers who leave will triple because you have 5% cancellation and triple... Okay, so still 5% of a triple number is triple, right? So this is the point, is that cancellations automatically grow as you grow, even if you're doing everything right, but marketing doesn't. Marketing grows only as fast as you can improve marketing. We all know that's quite hard actually. It's linear. It's hard to find new channels that aren't trivial. It's hard. And of course we're going to do it, but it's hard, whereas cancellations grow automatically as you grow. So cancellations always overtake marketing for this reason.
00:15:59 · Lenny Rachitsky, Jason Cohen
[00:15:59] S0: The metaphor here is a leaky bucket where are you adding enough water to keep up with the leak essentially? [00:16:03] S1: Right. Except the leaks automatically increase and that's what people don't appreciate. [00:16:07] S0: Because it's a percentage of your entire customer base. [00:16:10] S1: Yes. So we say... When in marketing, we say things like, "I'm adding a hundred leads a month." But in cancellations, we say 5%. Why'd you say percent? Because it's based on your size and it's exponential. That's what 5% is, an exponential. And so there's this maximum size you could ever be. It's when churn equals growth. So how would you compute that? It's actually quite simple because let's say you have this 5% per month, just let's take a number. So it's simply the amount of new customers you add divided by that cancellation rate. That is the amount. That is the limit. So let's suppose you add 100 customers a month and you have 5% cancellation. So 100 divided by 5% is 2,000. So a company like that will never have more than 2,000 customers. And by the way, as you approach that number, growth is very slow because you bring in a bunch of customers and almost the same number leave, so growth is slowing. Ah, look, we've diagnosed by growth slows automatically at all SaaS companies. So that's why this is the first thing, because it's such a hard cap limit and it means that people don't want your product. These are two reasons why it's the most important thing. [00:17:15] S0: Just to clarify, this is logo churn. This is like number of customers, not revenue churn?
00:17:15 · Lenny Rachitsky, Jason Cohen
[00:17:15] S0: Just to clarify, this is logo churn. This is like number of customers, not revenue churn? [00:17:19] S1: Yeah. Well, it is both logo churn and revenue churn. Do the same math. You could say dollars in divided by dollars cancellation rate or number of... I've been saying number of customers just to keep it simple because I think when you look at it and say, "Wow, we will never have more than 2,000 customers." It's just such a visceral, "Oh my God, we got to do something about that." Now, of course, one thing you could do is have more marketing, but you know that already. If growth is slowing, you're already thinking, how do I get more out of marketing? You knew that. The point is that cancellation is this hard limit pulling you down with all these other really bad either implications or side effects, which is why it's so important. [00:17:59] S0: Cool. And when you say marketing, just to clarify, this includes basically all growth work, PLG stuff, marketing, sales? [00:18:04] S1: Yeah. Yeah, yeah. Right. [00:18:05] S0: Great. [00:18:06] S1: Yeah. PLG is nice, but you still need marketing to bring the people in the first place. PLG just means there's not a salesperson unless you're expanding or some other segment. [00:18:14] S0: Cool. Yeah. It's like the whole bucket of just bringing new customers in. Awesome.
00:18:16 · Jason Cohen
[00:18:16] S1: Yeah, yeah. Okay. So assuming you agree, yeah, I don't like customers leaving, that sucks, so obviously you got to find out why they're canceling and do something about it. And the kind of root issue here is they don't want to tell you. They're already out the door. They've already stopped investing in you mentally. So the last thing I want to do is spend time with you or really think about it and diagnose it with you. And I have a funny story about this for myself. So at A Smart Bear, people would cancel, we'd put up this form and a dropdown list, too expensive, project ended, this little stuff like we do, so we could gather data. And one of them did have more selection than the rest. And I realized it was the first one on the list. And I thought, huh, I wonder if people are just picking the first one. So then we randomized the list so everyone saw a different order of the list, and now all the items were picked equally, like, oh, right. It's complete noise. And I know other companies have done similar things also with the similar results that this is a global phenomenon. So okay, so what do you do? The point is, it's hard. So the first thing is you want to ask open-ended questions. I know you want to just get a list, but this is the problem. At least with open-ended questions, I mean, most people won't answer, but at least you might be able to get some kind of thing that they generated. And when you do this, the wrong way is to ask, why did you cancel? Because again, this allows them to say something really simple like budget, which may or may not be true. I'll get to that in a second. What you want to do is say, "What made you cancel?" In other words, what about the product or situation or whatever caused the cancellation? Just phrasing it that way, you get much better results. And I stole this from a company called Groove, who has this great case study online about this very thing. They had an email that they sent out, which is a great email, and they started by asking, "Why did you cancel?" They got 10% usable responses. They changed the same email to what made you cancel, and it's 20% usable responses. So there's, I guess, maybe some anecdata that this is a good idea. But the point is you really want them thinking about the product and not just coming up with an excuse.
00:20:25 · Jason Cohen
The next thing is the few times you do talk to them, so you want to go into, delve as far as you can into there, because most people won't talk, the temptation is to hear what they generate at first and say, "That's the answer." So a really common one is it's too expensive. I think anyone who's looked at cancellation data at any company will agree that too expensive is often the number one or at least top three reason in one form or another. And that is never, ever, ever the reason. How do I know? Because they already looked at your homepage, read all the stuff, saw what you promised, looked at the pricing page and decided to buy it. That means it, whatever was in their mind of what it is, is not too expensive. They already decided with their actions. It was not too expensive. Something else happened, but you didn't fulfill the promise that at least they thought you made or something else didn't work or... Now, it is possible they lost budget, but that doesn't mean you're too expensive. That means they lost budget. That's a very different reason. So it's sort of like, this happens in healthcare, for example. So when someone dies, a doctor has to write what's called a proximate cause, which is why did they actually die? But then you try to also write down the real reason. So let's say someone comes in and the proximate cause of death is they stop breathing. Well, you could stop there and that's like listening to it's expensive and going, "That's it." Well, why did they stop breathing? Because they ran their car into a telephone pole and were injured so much that eventually they stopped breathing. Why did they run their car into a telephone pole? Because they passed out at the wheel. Why did they pass out at the wheel? Because they had undiagnosed diabetes. Now we're getting somewhere. It still isn't just one root cause, another as a sidebar. I hate the idea of a root cause. Complex systems do not have one root cause. They often have many interlocking things that could be done to detect earlier or to change it or to reduce and not one root cause. So the root cause analysis to me is, by the way, an incorrect thing. I'm explaining why right now with the healthcare, right? Because, well, what about this undiagnosed?