Running a freemium web app? Here's a big reason we're growing.
Before Scout, my experience developing software was primarily consulting. Success was measured by delivering software on time and on budget.
With Scout, a subscription-based service, my focus isn’t on scheduling. We are self-funded and we didn’t have the luxury of a venture-backed startup. We’re focused on figuring out which pieces of development work can increase revenue the most. What follows is how we’re approaching it.
The 1% paid conversion rule
If there’s a golden rule of a subscription-type service like Scout, it’s this: 1% of visitors will signup for a paying subscription. This 1% rule exposes itself across industries, price point, and size.
The 1% rule is the Pi of freemium web apps.
It’s very easy to think you can improve this because 1% is such a small number, but your business is the rare exception if your paid conversion rate dramatically exceeds 1%. If your paid conversion rate is around 1%, you need to dig somewhere else for treasure.
As our signup rate is around 1%, what have we focused on?
Retention & Lifetime Value
Increasing the rate that customers renew their subscriptions (retention rate) can have a dramatic impact on revenue. For example, increasing retention by 1/2 results in the following revenue per/month:
If you sum the periods, you’ll see that revenue actually doubles with a 50% increase in the retention rate:
To determine the revenue, I’m using an equation for Lifetime Value, which is the revenue expected from a customer over their lifetime. Every period (in our case, 1 month), decreases the chances that they’ll renew. R represents the retention rate and rev is the revenue per/period in the equation below:
LTV = rev + rev*R + rev*R^2 + rev*R3 + …
This can be simplified to:
LTV = 1/(1-R) * rev
The retention rate can be calculated using the equation below:
R = 1-(# of canceled accounts in a given period / # of accounts in a given period)
So, is it as difficult to increase retention as it is increase the signup rate?
Good news – there is no rule for retention rate
While there is a rule for paid signup conversions, you won’t find one for retention rate. Retention rates vary widely and are a great target for increasing revenue.
Focusing on churn also makes sense in another way: increasing retention by 50% is the same as doubling your signup rate. If your paid conversion rate is already around 1% and you think you can double it, you might be a bit crazy.
I’ve had good success increasing retention by:
- Closely monitoring application performance. As you’d expect, we use Scout for this.
- Getting feedback from users when they cancel.
- Asking users for feedback after they’ve setup their account.
- Aggregating and prioritizing user feedback. We use UserVoice.
- Tracking user behavior. We use Google Analytics.
Focusing on retention rate isn’t glamourous work, but for many subscription-based web apps, it may hold the most untapped potential to increase revenue.
A higher retention rate can have a dramatic impact on signups too
You can double your revenue if you decrease your churn by half. That is a substantial number – it means you could also charge customers the same amount, but double your spending on acquiring customers and have the same income.
Increasing your retention rate gives you room to breath.
Also See
- Andrew Chen’s excellent blog post, How to create a profitable Freemium startup. This was my original inspiration.
- Paul Graham’s post on What Startups Are Really Like
- Our previous blog post, We Just Undid Three Months of Dev work. Here’s What We Learned.
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