What is More Important for a Start-up: Retention or Revenue?Oleh Mykhaylovych
When launching a start-up, sooner or later you will need to think about a customer’s retention and revenue. Well, it is hard to imagine both of them separately, but we used to make mistakes and forget about it. So, what should you make a priority: clients or money? How should you work with retention and planning? Let’s try to find the answers to these questions below.
Retention and how it works
Customer retention is a process that a company takes to prevent their users from going to competitors. Successful customer retention starts with the first contact and continues throughout the entire lifetime of the relationship.
What are the Benefits of Customer Retention?
- Increase in revenue
- Lower customer acquisition costs
- Increase in referrals
There are 3 goals for retention: satisfaction, extension and advocacy. The main idea is to optimize for all three, one after the other.
First of all, you need to make your customers feel content. Try to figure out if they are satisfied after conversion. Does a customer get the expected value? Otherwise, retention will suffer.
Additionally, you must to ask yourself how you can encourage your customer to repeat the purchase behaviour. How can you upsell users on more features? Now that they have converted once, you want them to do it consistently. Once you have regular customers, you want to use their social influence to reach more qualified leads. Did you know that the Huzzah Media survey figured out that referral programs became one of the most powerful marketing tactics (52%)? If your customers are satisfied, the more likely they will refer you and become advocates for your product.
When it comes to conversion, three core stages of retention exist after it: short-term retention (first experience), mid-term retention (habit forming) and long-term retention (core value reminder). Each of the three stages presents the opportunity for optimization.
Short-term retention represents the ability to get people to experience your core value quickly. Affecting factors for this type of retention may appear in the persuasiveness of your transactional messaging, customer onboarding process intuition, value promises and quality of delivery.
When users experience your core value, you need to form their actions and habits to integrate your product into their everyday life. This may be done with a well-built core value repetition, interesting gamification strategy, referral program persuasiveness etc. Once customers habits are formed, your core value needs to be revisited again and again. Do not forget to improve your product and its features, revive lapsed leads and increase the creativity of retention hooks (i.e. LinkedIn endorsements, @mentions, likes, upvotes).
However, there is a simple 3-step process you can follow to set yourself in the right direction.
1. First Experience
Due to ROI, your user’s first experience is vital and extremely important. If it is not positive, there’s no possibility for short-term retention. That’s why it is the perfect place for optimizing to begin.
Ask yourself this: What steps are important to get my customer to experience my core value? Go ahead and map it out right now. If there are too many steps and they take a long time to get through, you will need to make the user’s experience more simple and intuitive. If you want customers to read a manual before usage, you will need to make it easier.
For example, you can use small tips or popups on your website.
Even the smallest disruption to the first experience can have a big impact. That’s why it is important to do your best to optimize it perfectly.
2. It is all about context
Did you think about goals that users try to achieve via your product? Do they use it for personal reasons or for business? What contextual conditions have to be met for people to understand your product best? You have to switch your customers into that context as quickly as possible. Find the real context that will work best for you and make a call to action.
Asking someone to enter his or her “business email address” is a simple language tweak, but it works to change the context. (Note: It also encourages higher quality email addresses and improves deliverability.) A person who is more likely to retain the information and get the most value from your project is also interested consuming more of your content in the future.
3. Build Personas
Different types of people use your product differently. For example, 54% of women use Facebook to view videos and photos. 42% of men prefer to share their content with their followers. This is a fundamental difference: the average woman is using Facebook primarily to consume and the average man finds it useful primarily to share.
Consider how men and women, personal and business customers, sales people and marketers might use your product. Identifying customer personas gives you the opportunity for better retention because they all experience your core value in a completely different way. Based on their assigned segment, you can cause a custom action flow to ensure their first experience is tailored to them (and their perception of value).
Many entrepreneurs make a huge mistake in believing their great product or service can naturally provide the following of customer retention. Customers will not owe you their loyalty. You have to work for it and earn it — continually. Anyway, having an effective customer retention program will make you be able to identify, track and promote, especially to those users who are most likely to become reliable, loyal and long-term sources of revenue. An early customer retention program for service-oriented businesses may not be necessary, as the quality of the service and support provided will determine the rate of retention. However, product driven businesses, which depend heavily upon the same customer sales, will find customer retention programs invaluable.
Revenue. No doubt that it is important.
Once you create an initial product for your start-up, you need to start iterating on its revenue model. In other words, you need to run a revenue development.
Revenue development should answer the following questions
- Is your target customer able to pay? How much?
- How should you price your product/service? Is it a one-time purchase, a recurring purchase, a subscription, a pay-as-you-go offering etc.?
- What should the price be? Can you build a sustainable business at that price point?
- What will future pricing look like? Will it change when you open new market segments or territories?
These questions are key to a start-up’s ability to build a lasting business. However, you may not find the answers for them all at once. Like product development and customer development, these questions require conscious iteration.
It is a major milestone for a start-up to go from no revenue to its first paying customer. At least, you will be sure that there is one person who is able to pay for your service. It is only the first step of a much longer inductive process. Once you have one customer, you have to then try and find another who thinks the same as the previous one and is able to become your second user.
Once your audience grows, you have to figure out what the pattern is that makes the process repeatable. Why do customers buy your product? How much they are able to pay for it? Would they have bought it more quickly if the price were lower? What would happen if the price were higher? Will your users continue to use your product? Would they refer other people to you or at least serve as a reference and so on.
Until a company earns $1,000 per month in revenue, it should build a product that users will want to pay for. When everything goes fine, you should try to take the next big step and grow your revenue to $10,000 per month. Reaching this step means that you are well on your way to a product market fit and you are just beginning to figure out what the sales process looks like.
Getting to the $100K/month in revenue is a great event in a project’s life. That’s real money. And it is real money to cover not just a one-person team. Certainly, it means that your product market fit is really good. It also means that you have figured out how to acquire customers. However, at this point your business becomes a company with real revenue. The stage of a potential crisis is already behind you. But there is also the other side of the coin – when a company reaches this level, the founders are often tired and need a well-deserved break.
When revenue grows beyond $100K, your project requires more energy than at almost any other stage of the company. When you have no revenue in the beginning, you are just fighting for survival. But when you have $100K+/month in revenue, you are almost afraid of breaking something that works and that you have worked very hard to build.
If you are one of those lucky individuals who can reach this stage, you should take a deep breath, stop looking at the absolute growth in revenue and start looking at the first derivative of the revenue. In other words, do research on the rate of the revenue change. Try to figure out if that rate is accelerating or decelerating. The mathematical analogy hopefully works well for technical founders, but the concept is pretty simple: if you start looking at the rate of change, then you are more likely to realize that you need to do something radical — almost a leap of faith to take you to the next level.
Let’s say we are okay now with the revenue concept. But it is also quite necessary to understand how to measure it. So, the following are possible revenue metrics:
Monthly Recurring Revenue (MRR) is revenue that you expect to repeat on a monthly basis. If you are selling monthly support, such a metric may simply be counted by the price paid each month for it. If you are receiving payments more often, you can divide the amount you received by the number of months in the support period.
Annual Recurring Revenue (ARR) follows the same concept exactly. The only difference is that it measures your year-to-year revenue; thus, your ARR is 12x your MRR. Since both metrics are interchangeable, it does not matter if you are tracking the MRR or ARR.
Cash inflow or “cash in” is quite simple to calculate. It is the amount of money that you receive in your bank account.
Revenues refer to an MRR plus any non-recurring revenue (setup fees, implementation fees or charges for professional services). For example, you are charging a user $1000 for a website development project that takes one month to finish, plus another $3000 for onboarding consulting within the user’s first three months. In that case, the customer will increase your revenue by $2000 in the first month ($1000 for the website and $1000 for consulting) and another $1000 in month two and three each. But since these revenues are not recurring, do not include them in your MRR.
US GAAP Revenues are calculated using a daily recognition base instead of a practical monthly model. Thus, when a customer signs up for support at $100 per month on January 15th, according to this method, you should only recognize $50 of that $100 in January, despite the fact that that customer is adding $100 to your January MRR.
Bookings are the total dollar value of all new contracts signed. It seems that it is not a very clear metric. Due to this method, you should only measure revenue for contracts that are longer than one year. Thus, if your contracts have different support periods (e.g. one month and one year), such a metrics number can be very misleading. The term “Billings” represents money quantity from your invoices that should be paid soon.
Committed MRR or CMRR is a projection of your MRR in the next month or future months based on your current MRR, adjusted by the guaranteed expansion MRR and the anticipated churn MRR. Some projects may have customers that start with a low price but have already agreed to a price increase in the future. CMRR is a great way to track and show this type of guaranteed expansion MRR. If you adopt the CMRR metric to show the guaranteed expansion MRR, make sure that you also take into account the “guaranteed churn” in order to make it consistent.
So, what is more important at the beginning?
Despite the fact that small business owners generate over 51% of their annual revenue from repeat customers, you should not forget about retention. It is about finding balance. You should treat both with the same performance measurement. You always need to capture new customers for your start-up to grow. Different marketing programs and buyer persona research can turn more first-time buyers into repeat purchasers. Thus, it will produce more revenue and delay customers from churning.
Companies that are patient with retention and revenue have more chances to make long-term profits. As b2bmarketing wrote, only 8% of return buyers generate 40% of the revenue. So, working with retention may cause a huge revenue growth. Customer loyalty is not only about discounts and incentives; it is about giving the customer rewarding, engaging experiences. The future revenue stream for many businesses lies not only in new data and new customers but also by understanding the existing data and then treating every customer as an individual.