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.
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.
- 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.