Let me share some thoughts on the single most important concept we wish we knew before starting @readwise.
It’s called 📈 CARRYING CAPACITY 📈
(We’re still early in our journey, but we have been working on @readwise for 5 years now, and we have created a sustainable business, so I like to think we’ve learned some lessons along the way.)
(Excel is the *one* domain where I’m not a wordcel 😛)
In a series of LinkedIn posts from 2015, he defined it as:
“The number of users where the rate at which we lose users equals the rate at which we gain users.”
This is in stark contrast to enterprise where the best companies not only don’t lose customers, but those customers grow in size over time.
(This is referred to as “negative net churn”)
Sure, they lose some accounts, but the expansions more than offset the losses.
Negative net churn is actually growth.
You *will* lose subscribers. Period.
It’s especially pronounced in consumer productivity (versus, say, entertainment):
As your customer base scales, you’ll notice the number of subscribers cancelling each month steadily increases even though the percentage churn remains ~fixed.
👆 This is carrying capacity.
It’s an asymptote. You’re done growing.
You can even calculate it as (a) average new subscribers per month divided by (b) monthly churn.
At capacity, each month you’re losing 1,000 subs (10,000 x 10%) while replacing them with 1,000 new subs.
The limit, sadly, does exist.
I had a hard time believing this too, but @rahulvohra (as always) was right.
There will be spikes here & there, but the trend is predominantly linear due to a mix of app stores, WOM, paid advertising, integrations, SEO/SEM, influencers, hustling, referrals, etc.
This is exactly what the growth chart of a (successful) consumer saas product looks like in the 2022 era.
Let’s apply them to a fictional but typical consumer productivity saas biz.
I’m basing “typical” on a half decade of talking to other founders in the space, reading everything I can (thanks @readwise), and, of course, my own experience.
During this free beta period, you accumulate 100,000 active users.
(For the record, this would be world class hustle & retention for a first-time founder.)
After 1 year, we had 3K users. (lol, yes)
After 2 years, 10K.
After 3 years, 30K.
These are onboarded users. Not active users. Not paying customers.
0 to 100K in 2 years would be a feat, but let’s go with it anyways.
Freemium will offer greater top of funnel growth, but lesser conversion. Free trial the opposite.
Assume you choose freemium to maintain growth and not alienate your beloved beta users.
Pricing is an unbelievably hard decision, well beyond the scope of this thread.
For our purposes, let’s just assume you paywall a subset of premium features for $8.33/mo ($100/yr) comparable to other productivity tools.
How many of your existing 100,000 active users will convert to premium?
Rule of thumb conversion rates on freemium are ~2% to 5%.
So let’s use the upper end of the range (5%) for the initial paywall event.
100,000 x 5% = 5,000 subscribers paying $100/yr = $500K ARR
You can look at your historical website traffic and signup rates to make an educated guess, baking in new growth initiatives.
For our example, let’s assume you’ll add 50,000 new signups per month (to be clear, this would be ~INSANELY GOOD~ 🤯).
Let’s return to benchmark of ~2% to 5%.
Assume it drops to 3.5% as you’re spreading to less core users.
50,000 x 3.5% = 1,750 new subscribers per month
This is ~60/day, which any consumer saas founder will tell you is a huge day.
The final number we need is churn.
We can look to @lennysan who’s compiled the best benchmarks around.
A more down-to-earth assumption for your biz might be something like @duolingo which retains ~20% after 1 year.
Let’s use the GOOD churn midpoint: 4%/mo.
1,750 subs/mo divided by 4% churn/mo = 43,750 subs
At $100 ARPU, that’s $4.4M ARR.
This is as big as this consumer product will get.
Building for 2 years, converting 5,000 initial subs, adding 1,750/mo thereafter, and churning 4%/mo results in a 5- to 6-year journey to asymptotic growth.
This thread is really just a redux of that talk and @rahulvohra’s articles on carrying capacity.
You can play with ARPU, steady state growth, and churn, but they’ll only stretch so much.
e.g., it’s hard to charge more than $20/mo (in consumer) or drive churn below 2%.
Trust me. I get it.
But I would advise you not to expect to outperform the base rates unless you’re deep in the idea maze with a validated breakthrough. Growth is HARD.
In many ways, it’s like starting over.
(I now speak from experience thanks to @ReadwiseReader.)
But these transformations are rare.
If you this is the outcome you seek, you should just avoid consumer saas from the get-go.
If you had explained all this to me before @readwise, I wouldn’t have believed you.
Even a few years in, I wouldn’t have because churn takes so long to notice! But this is how it goes.
If you have a consumer software product you want to work on, we advise you to plan to operate within the limits of this carrying capacity math.
Hopefully you outperform, but hope is not a strategy.
Why raise $10M to spend 5 grueling years on a startup that’s barely worth your liquidation preference?
If you want to go VC-scale, just go enterprise or consumer social.
Those are the ways.
I hope this thread helps you in yours.