If you’ve ever launched a new product or service, you’re aware of the painstaking challenge of successfully claiming the holy grail, the ambition of any product owner: proven product-market-fit. Eric Ries (Lean Startup) describes it as ‘the moment when a startup (but just as applicable for a venture or a corporate product) finally finds a widespread set of customers that resonate with its product’.
So how do you determine whether or not your product/service has entered that stage?
Looking at growth marketing (or simply good marketing;-)), traction is the answer! Growing your use base, therefore, seems like a logical goal and instinctively you start staring at your top-line growth (new users added each week/ month) like a maniac.
Top-line Growth is exciting: you’re seeing the numbers of new onboarded customers increasing, your product shows traction and you’ve even managed to optimize your Cost of Acquisition (CAC) by selecting the right channels and communication.
I’ll let you in on a little secret: growth is easy.
Top-line growth: Scaling too fast
“Hold your horses, what do you mean e-a-s-y? Growth is hard work!”, you might say.
Well, yes but it can be bought, and it has been for decades. Whether it was an above-the-line campaign in the 80’s or social and ad campaigns today, as long as you’re willing to push the money through the funnel, you can achieve the vanity metric that is top-line growth.
It is often the most glorified (and therefore pressurized) metric. We’re all looking for a large use base because we believe it’s how we prove that our product is successful, and that makes it dangerous.
You risk “scaling prematurely”, by overspending your money on growing the top-line numbers before having actually achieved product-market-fit. It’s also one of the most common ways startups die. They’ve raised a first round of capital on shaky numbers and are now expected to scale quickly, so they burn through their funding in search of new users, without spending sufficient time and effort on the more important metrics.
Retention: an iterative process
In its start-up days, Facebook famously chose “# users adding 7 friends in the first 10 days” as their main metric. Snapchat even tracked how many hourly (!) active users they have (had?).
Why? Because it shows usage, real adoption of the product, not just how many new users were pushed through the onboarding funnel. Measuring how many users you’ve retained or engaged might seem boring in comparison, but it’s actually the real metric to successful long-term growth. This is also why it’s so much harder than top-line growth: it demands an iterative cycle of designing, building, testing and monitoring.
Tracking retention can be done in terms of revenue or in term of usage. Through focusing on the first, you might be blind to what’s happening with the second. If your paying customers are being replaced quickly enough when they churn, you might think that all is well, but if you want to improve retention, you may want to focus on usage retention instead.
Additionally, the frequency at which you measure it, is key as well. Depending on your product or service, you may need to track a daily, weekly or monthly usage. If you’re measuring it in a lower rhythm, you’ll have an over-optimistic view of what your churn ratio is.
So next time someone tells you they have thousands of users, skip the vanity metrics and get to the real stuff: what customer retention (DAU/MAU, churn) do they have, what’s the monetary value (Life Cycle Value) of these customers? As such you’ll be able to truly determine whether or not they’ve reached product-market-fit.