Sub Club Podcast: Optimizing Your Subscription App for Growth: Eric Crowley, GP Bullhound App

0:03hey you're listening to the sub club podcast a show dedicated to the best practices for building and growing subscription app businesses we'll share insider secrets from the top subscription apps on the app stores let's get into the show hello i'm your host david bernard and with me as always revenue cat ceo jacob biting our guest today is eric crowley a tech investment banker with gp bullhound with investments in companies ranging from spotify to whoop and clients such as all trails pink bike and lingoda gp bullhound provides transaction advice and capital to many of the leaders in the consumer subscription software space on the podcast we talked with eric about

0:43his 2021 report on consumer subscription software the truth about ltv calculations and the new era of organic user acquisition hey eric welcome to the podcast hey david jacob thanks for having me back it's always a pleasure to be here yeah so every year you release this report so we had to get you back so this is the third annual uh consumer subscription software report um and i wanted to kick off just asking you a little bit about kind of the motivation and where your head space is in thinking about creating this like who the kind of target is and and what kind of questions you're asking yourself as you prepare

1:23this report yeah so the report david's referencing is it's the gp bullhound consumer subscription software reporter as i call it css which is kind of a playoff sas um as david said this is the third year i've been writing it um and it started back in 2018 i worked with a company called all trails that you know was starting to monetize really well by selling subscriptions to consumers and it was just like a light bulb went off in my head i was like oh my god this is a phenomenal way to provide a consistently improving product to consumers where you know the margins are pretty good it's easy to access a ton of

1:56different people globally through the app stores or through the web and i just got really excited about it so i started just putting some notes down on my own and then g.p bulhaun really supported me and saying like hey this is actually a pretty big trend there's gonna be some amazing companies built around this space and you know companies like revenue cap that are supporting css companies are just as exciting and so we've been you know kind of slowly educating ourselves and so you know the goal behind the report is really just to force me to do some thinking about the space what it looks like what it will be right as a banker

2:27right you can quickly just focus like transaction transaction transaction and not really do any like long-term thinking about where the world's going so it's kind of putting myself in your guys's shoes right you guys are building revenue cat not for what the world looks like today but for what the world looks like in three to five years and so i try to take the same approach with css and think about where is the the world gonna go so i talked to a lot of smart people as i put the report together entrepreneurs investors get their opinions you guys can see their interviews in the report and then ultimately like to publish it

2:55and so you know the audience i like to think about is is entrepreneurs people that are thinking about starting a cs company or already launched one and they're looking to you know improve their metrics or you know think about their target audience these entrepreneurs rich right by partnering with them you know investing in their businesses and getting to the next level so and the the other way i like to think about it it's my own personal scoreboard right i love to flip back like two years ago and was like was i right about this company and you know you're publishing in public right so people can always

3:21come back to you and say man you were way off and so so i look forward to that i i remember the finding the first one the 2018 i guess reporter 2018 whenever the first one you put out um 2019 2018 i think that's how we met actually yeah did you reach out to me or i think i found it or i don't remember what it was but uh we've had a mutual friend nico interview hey you guys should talk about this um and then i think we just went off on a two-hour tangent uh but yeah i remember being it's still there's still not a ton

3:50of like really focused research or writing on this space um and i think that that you know this won't work that probably won't be true for very long right as like as it continues to grow but like uh going back to like who it's for i mean i imagine at some you know end of the day if if your employer is pushing in some kind of lead gen right but it does provide a lot of value for you know even if you're not interested in a transaction or whatever just to see some like holistic data on a space because like the same i mean eric you

4:21said we're thinking three and five years in the future it's like i wish like a lot of times i'm thinking like three to six weeks in the future right um and so it's even useful i think um you know even if you're you know i you know we're in a bit of an interesting place as a infrastructure provider to be a kind of a bird's-eye view but even if you're a founder on one of these css apps you know like it is useful for you to know like what's the meta environment how's it evolving you know and if nothing else to like connect you with other people who have

4:52you know experimenting with things and stuff like that so yeah i think it provides beyond beyond the uh the uh the lead gen aspect of it it provides a lot of value for people so i'm glad i'm glad you're you're still doing it yeah and just for any of the listeners it is free so you just go to the gpbolham.com website it's all easy to download and then you can see all our past reports as well so yeah we'll drop it in the show notes as well but uh yeah and and speaking of all that um you know it's something we as revenue can't want to get more into as

5:21well i mean just seeing how much value you've created in producing these reports and we're kind of sitting on uh you know now that we're processing over a billion dollars a year in uh subscription revenue uh we've got a lot of interesting data that we uh that i'm very personally excited to share that we haven't uh kind of had the infrastructure to to to do yet but are getting there and uh so hopefully we'll we'll have our own kind of uh state of subscriptions it dives into the the data and some of the trends and stuff in a different way than than your kind of uh

5:55strategy and higher level look at things um but one one thing that has happened uh and it actually was announced before your last report but actually implemented since your last report and that's the app tracking transparency in ios 14 which didn't actually ship to ios what was it 14.4 or 5 or something so um so we're kind of just now starting to see the impacts of it and and you know you took a couple of slides in your report to start discussing it and it really is kind of one of the biggest topics in top of mind for subscription app developers because it really is a huge shift in the

6:36landscape so i wanted to to kind of start with talking about that and one of the things you shared in the um in the the presentation is that you feel like it's a short-term pain that's ultimately going to lead to a long-term gain so i'd love to hear your thinking around what that pain is but then also what you see the the long-term gain being yeah it's a it's a great point and you know anytime apple or google make changes to their their their app stores right it's a seismic shift throughout the industry because it's something that impacts everyone and so everyone has to be aware of these changes and then

7:14ultimately have a plan for them and so i think the change you're talking about david is is really the the implementation of removing tracking for a lot of a lot of these businesses specifically facebook and so what the change did with idfa is it it really deprecated the ability for for marketers within some of these css businesses to really accurately target people specifically using facebook or some of these other social networks and so what it's doing is it's it's impacting the conversion rates on um css css businesses marketing to consumers and so if you just can't find that person that just is in love with for

7:50example biking if you're a strava marketer it just takes you a lot longer to find that specific subscribers you might have to market to 10 people now to find two subscribers versus before you can market to five people and find two subscribers and so it just means marketing efficiency is going down and that can impact growth rates it can impact conversion rates and ultimately impact just financials of these businesses and so it's a pretty important consideration for any uh ceo marketing team on how they go out and get their their business in front of consumers um and if facebook's no longer as efficient they have to find other

8:23ways and so so my my thought is like this is a short-term problem right it's something that's going to take people two to three months to adapt and find a new way to reach consumers but ultimately my hope is for the space is you see the long-term gain which is what i was referencing is that people really focus on organic ways of acquiring customers right so instead of just pumping ads through facebook and trying to find someone who fits a profile you spend a lot more time really narrowly targeting your demographic your niche and then finding ways for them to find your product organically either you know so

8:53like a company that i work with uh we sold a company called pink bike and so what they do is they partner with uh the trail associations for mountain bikers and those trails associations now act almost as the marketing partner of pink bike to let consumers know about the fact that all the trail detail is on is on the pink bike app or it's called trailforks and so that's that's a really powerful organic customer acquisition tool that they don't have to pay for and so you're seeing the same thing happen with like strava's doing this pray.com recently partnered with the nfl so if your team's got a last uh fourth

9:25quarter field goal and you need to get something picked you can go to pray.com and submit a prayer for your kicker i wish i was joking it's a pretty brilliant idea so i think this is really good for the sector overall we're happy to dive into it it's it's a fascinating area uh we it's a callback to uh sub club podcast content but um greg this the uh the plant app this is something that they were doing um which is like we're partnering with uh their shoes nurseries yeah to like get their app into people's hands and yeah i don't know if it's earned media or bought

9:54media but this is more like this is earned right this is like building an audience you've seen it in the maker community actually a lot like in the indie sas community more it's a different game when it has to be consumer scale right like there's a little bit different you have to build maybe a bit more than you would in like oh just blog about how i built this thing and that's enough to get indies but you can apply the same thing right like produce content produce something like low investment for users to get engaged with your brand because you're not building an app unless you have some

10:23i mean maybe you are but you're not going to build something with very high like multiples like if you're if you don't have something unique to offer in the first place but put that in like a more like lightly consumable format start to build that audience and then make that an on-ramp and yeah i agree like that's that's something you own right like your brand is not your brand doesn't exist on the app store right like your brand can exist outside of these like shifting sands and regulations and whatnot and ultimately is like you know gonna get reflected in your asset value if that's something you

10:52care about right so yeah that's that's a key thing we talk about right if any business that we look at that's potentially selling or thinking about raising capital right it's like how are you finding your users and if you're if you're one channel is facebook uh and then consequently like doing facebook ads or apple ads on the on the app store that becomes pretty challenging and so you want it to be such a good product right so it involves more work up front just as you're talking about jacob the product's got to be better it's got to be more efficient it's got to reach consumers where they are with the

11:18problem they have um it becomes a lot more viral and a lot more sticky so i think i think it's going to be good for the sector overall you wouldn't want to name names of course but i am curious if if you've had any clients or just talked to anybody in the space where they were very reliant on facebook specifically and then and have really struggled as things have changed you know i've been seeing some tweets around the um the consumer package good space where some of these cpg companies are really struggling and so i'm just curious if you know without naming names if if there's any kind of

11:57high-level things you could share around apps that have struggled in this new paradigm yeah i mean i definitely can't name names you know obviously i keep everything confidential with my clients but even non-clients you've seen cacs go up 20 30 percent um you see like if you think about like conversion rates from installs to subscribe that's a big metric of actual intent did you find the right user right did someone just click on it and download it great but if they're not actually subscribing that wasn't a successful transaction for you and so the way i think about this david is it's the app store has made tracking a lot

12:28harder so it's harder to find your right consumer so imagine if you're a cpg company you walk into a grocery store and instead of stuff being laid out perfectly across the shelves at the right heights for you they just tossed everything in the middle of the store and said find what you want just go pick it out right you're going to have much lower conversion you're going to have much lower purchase rates because people aren't being targeted with the stuff they want to see and so i think now you have to find you know it becomes more of a specialty situation where you're walking into a store that has stuff for

12:53just outdoor gear or very healthy granola right you're going specifically to that store for that item that's probably better in the long term um for a lot of these companies yeah but there's a lot of there's a lot of folks that have benefited from this relative ease right and and any sort of market disruption is going to be painful i mean i i was like anecdotally i mean david we've heard on this podcast and elsewhere of people who have just like straight up pause acquisition who are like scrambling because yeah you get it tuned to this very fine knife edge and i imagine for like consumer physical goods

13:24like d2c stuff it's even worse because their margins are thinner than software right and they've got inventory and everything yeah it's a totally different market but you know as you do like you the market reshuffles and the people that can figure it out the fastest are gonna are you know gonna come out the best so there's gonna be a shift though so people unders this is like that seismic shift that just shows how much of your reliance is on maybe one or two channels right two two major tech companies sitting here in san francisco if you're truly relying on those and you're doing great fine but if a bump happens right how exposed

13:54are you and so like this will be a benefit for stripe right i think it's gonna be a huge benefit for tick-tock right i think people are finding really good ways to acquire customers through tick tock and so that's a very interesting channel i think it'll be really good for influencers right if you have people that are very passionate about a certain space um and then they go out and um you know have a very core customer base that loves what they do specifically it's gonna be pretty powerful for them too yeah and i was just gonna say anecdotally you know we haven't done a super deep dive in our data

14:23but at a high level i was kind of bracing for our numbers to take a big dip like i i mean you know jacob and i talked about it in the spring about you know how what it's going to look like for revenue cat you know are some of these subscription apps just going to completely unwind and people are apparently figuring it out because you know it keeps going up and to the right i mean the consumer the consumer need hasn't disappeared right so maybe if they just weren't driven you know it's not gonna it can't just disappear overnight right like if you never if you are a coke fan

14:57and you never saw coke out again it's like you're still gonna buy it right like there's there's there's a certain amount of demand that's just gonna find the supply but uh but yeah i know i mean it's hard for us to to definitively say looking at our data in aggregate just because there's so much but there definitely was like this summer was definitely slower than we've had in the past like on my as i'm writing my investor updates for the year and or each month and stuff looking at it but yeah it wasn't like this catastrophic you know macro thing i think we're talking about a lot of like you know probably outliers

15:28that we hear about people who were affected you know more than others but overall i i don't think our i don't think our prediction last year of a potential recession was necessarily false like it does it definitely doesn't feel like it's sped up the ecosystem right but it doesn't necessarily feel like a depression right maybe maybe a slight recession or just a normalization and look at our data in aggregate that some folks used this to their advantage and actually and and accelerated because they knew it was coming and they did focus more on product and organic and other things and so for whatever you know losses there were

16:06other folks more than made up for that and that's it kind of the interesting thing about working with so many i mean we're closing in on 10 000 apps on revenue cat and so you know you kind of have a pretty broad basket where you you know both there are going to be winners and losers but in aggregate subscription apps are just continuing to tick along and do really well yeah david it's like you read directly from bullets on my report [Laughter] another thing i wanted to dive into was the the covid bump because that's that's another thing that's kind of been on everybody's minds is simultaneous to

16:42this um ios 14 and and this is something we've talked about again internally uh with revenue cad is is this summer was the everybody was vaccinated and and delta hadn't kind of bumped yet um and so you know may june and july there was a big shift socially um kind of it felt like especially in the us that we were coming out of the pandemic um and and so simultaneous to the app tracking transparency going into effect we had these like societal shift and then now we're kind of back into it a little bit with the the delta surge but just curious what your thoughts are

17:23on how much of the boost we saw in 2020 really was the pandemic and then how much of that will actually linger as kind of shifting consumer preferences and shifting consumer spends yeah i mean there's there's absolutely companies that benefited from let's just call it the removal of in in person conversations right so like bumble and dulingo two companies that both went public uh right they both benefited because their their business model was designed around not meeting in person for the first couple conversations right and so there's no way to say that they didn't benefit um the way i think about it though in this in the css space it's

18:00very similar to like the overall e-commerce space right as consumers looked around to find a solution for a problem they were having right instacart you couldn't you couldn't go to the grocery store or maybe you felt less comfortable going to the grocery store so you tried instacart for the first time maybe you were you know thinking about meeting someone you know long term but you never you never wanted to try online dating well you couldn't go to the bar so you tried online dating for the first time and so i think what what the pandemic did was it really opened up people's eyes to other options from what

18:27they had been doing for the last 20 years 50 years whatever it was and so they had to find other solutions to you know their demands their needs and so i don't i think it's it's absolutely a coveted bump but i still look at it as really as an accelerant of people adopting new products and services that they would have tried in three to four years anyway but the pandemic kind of pushed them to try something to move out of their comfort zone and try something new so you know i absolutely think you'll see a little bit of a downshift in in some of these companies that had a

18:55really big room right like language learning people had nothing to do for four to five months especially over some of the winter times so people tried a new hobby tried language learning you know that'll probably go down a little bit but overall if you look at it from like a five-year trend it's gonna be up substantially from where it was in 2017 2018 2019 and 2020 you know made it look like a little bit of bump but eventually i think those companies will continue to grow and surpass what anything they did in 2020 yeah that's really interesting i'll back that up as well the unreleased jacob looks at graphs and

19:27then gives uh gives hand wavy descriptions of them but we uh yeah we we were i was kind of bracing for it as well and i would say the summer was slow and like david was saying it's like we're not sure why i think it was i think it was a number of factors things have since picked up again um but i think generally summers are slow for software a and then b like yeah i think we were seeing kind of like a little bit of the payback for for covid perhaps it's a i think it's a plausible theory we don't it's really hard to prove

19:56um but we have not seen you know we we saw our our covet experience was really drastic um and we have not seen a similar like back off from that like it has been like it has been like we just compressed six months and i'm i'm saying partially this is just revenuecast individual story because of where we were last year but then i think also it's in it's indicative of the system in general it's like i think yeah we just compressed a whole bunch of uh like consumer uh behavior change into like a very short period of time and yeah we're not gonna be able to keep

20:28that up right we're not gonna be able to continue to to crunch that in or run out of consumers eventually but um but it doesn't look like everybody's you know because you know because i i think the story for css in general it's like we've this delivers value for people right like it it's it's a good it's a good product right the whole like not every product is good but in general it's like a it's it's a decent deal and so i i i think more people discovering that yeah can only get bigger right yeah i think we talked about in our first our first time together right on the last

20:58podcast which is if these businesses are truly making consumers lives better this is going to be a very long-term trend yeah and speaking of that and the two companies you just mentioned um in the time since we last spoke both bumble and duolingua went public and and some other consumer subscription um apps went public uh so tell me a little bit about your your perspective on the the public investor excitement for css i mean we're seeing pretty high multiples and and both those ipos did did very well um so what are you seeing in the in the public investor space yeah i think i think the public market has really woken

21:35up to this business model the power of it and understanding you know it's public markets they do a lot of pattern matching right if they've seen something super successful they look for something that looks similar to that and so i think a lot of people are waking up to um how powerful sas was not waking up they're well awake very aware of sas businesses so i but i think they're seeing that same pattern starts to take hold on css it just has different metrics right and so you know bumble's now public the match group's been public for quite some time once they spun out of iac

22:04you've got netflix and spotify which are fantastic examples of the international global reach of content and how consumers are very sticky for something they love and so these businesses you can get to scale really quickly like you see noom right is a competitor to weight watchers white rockers has been around for decades but noon built a better mousetrap and they acquired customers at a really quick rate and you know they're well over 400 million in revenue and ready for the public market so i expect them to go public here pretty soon and so i think there's going to be a lot of businesses that follow them that are using this

22:35this metric so and then that will cascade all the way through from public market investors as exit opportunities all the way down to you know series a series b uh investors seeing this business model work and scale yeah i mean i i guess my like what's your like i i when we started seeing these that go public in the last like couple years well i mean honestly it's like since we started revenue card fee like was actually the kind of the first unicorns even like i guess bumble might have been past unicorn when we got started but like there weren't a ton and now it's like every

23:08every month there's a funding announcement for a css company that's a that's a uniform partially that's just like valuations going up and stuff like this but like how do you see you know the evolution of this market long term you know so duolingo pops becomes the first you know are they going to be like salesforce and just be dominant in that space forever or do you see it being maybe more dynamic than sasses i think it's a little more dynamic than sas for for a couple reasons one new consumers like to try stuff right and so if that you know it's with like a sales force or something right

23:40that integrates into your day-to-day operations from a business model perspective right so if something breaks there right your cost of switching is very high yeah it's a little higher right and it's not just you using it it's your entire business right so you've got 10 people using this product or 20 people or 5 000 depending on the size of your company right in css it's it's you maybe you and your family right so it's a little bit of a different switching cost so that's that's one however these companies can scale a lot faster um and they can uh they don't have like the heavy heavy costs you need on the

24:10sales and marketing side so i think they have an ability to actually get to profitability a lot faster especially if they have an organic customer acquisition engine and so i i think that's going to be a big difference between that between css and sas so yeah you mentioned the metrics are different what are what are the metrics that folks are public investors are are looking at for these companies that might be different from a sas company yeah i mean a lot of them are the same metrics but the numbers that are like good are different right so like on a sas business model right revenue growth is just as

24:41attractive as a css business model revenue growth right everyone wants to see high double digits triple digit numbers on revenue growth but like an interesting thing is net revenue retention now that's very different right in css you typically don't up charge people or have additional seats be filled because it's just one person right so you know maybe you get an organic it's not much expansion opportunity right yeah it's you can you could do maybe some some packages upgrades and people are starting to experiment that you can unpack it you can experiment with bum bundling but it's certainly never going to be greater it's never going to be net positive

25:10right no you're never going to see a net potion number where a lot of the sas businesses right people are looking for net revenue retention numbers of north of 120 120 net revenue retention meaning the opposite of churn right which if you have a css business with the opposite of churn congratulations yeah you're doing something well and i haven't found it yet but i will you might be the only one yes i think that's right quick point though to counterpoint to what y'all were both just saying um of all the apps um dating app it's totally slipping my mind tender tinder thank you partnership david look

25:43at us we're like on a wavelength they they have in-app purchase they have consumable in-app purchases to boost your um profile they're one of the few that i've seen that could potentially actually have a a a positive uh net revenue retention whereas most subscription apps are just a subscription um it's going to be interesting to see if other subscription apps can pull off that sort of model that you could actually generate a net revenue retention i i think you nailed it david so that's coming quickly right i think people first experimented with hey look how do i get someone to buy my product every year or every month right

26:28and now it's how do you make it even better so they're starting to listen to their core users and we talk about this a little bit on the ltv side and what do these people want and what makes this experience even better for them and i think you nailed it with tinder right it's the most it's the easiest thing to convince people to encourage more is more you know more relationships right people love more relationships and people are willing to pay for that and so you know then what else what else could this go down the path of right what other options could people pay for

26:53additional services or what we've seen is like marketplaces or transactions spinning off these right so if you have a really passionate user base and they're going out there doing um camping for example like on on the dirt it's a camping uh site right what about doing a marketplace to buy and sell use tents right now it's not a subscription but now someone's paying like okay now they bought something through your marketplace and you get 10 of that purchase price so there's going to be a lot of stuff i think that happens there um to encourage that to encourage that ltv number start rising i just haven't

27:23seen a ton yet make it happen above the churn it's a scale problem i need to do that either we have such scale for that to make sense i was going to say for anybody listening to this that hasn't reached 20 million in an arr probably north of that do not add a marketplace to your life very very much focus focus focus and so i would even say like closer to 50 minutes yeah i mean until you're like how do we get this thing public or how do we show like how do we show like n plus one revenue streams right it's kind of more what it's about than it is

27:51necessarily the revenue generated jacob i'm just a dreamer though you're just a realist and you're just telling me all the stuff that'll go wrong one of the things you just kind of touched on that i wanted to dive deeper into was was the truth about ltvs and i love this slide on the in your presentation uh kind of defining these two cohorts um which i've never heard defined this way and i i really love the analogy and i'm gonna start start stealing it from you and using it uh and crediting you of course um but in the presentation you define um tourists and locals and and then talk

28:27about kind of the importance of identifying these different cohorts so tell me about who the locals are and why that matters and who the tourists are and how companies can start um analyzing their data to understand this and better target marketing better crafty experience in the app and those sorts of things yeah so we're gonna geek out here guys and really go deep into css right so this is where this is where my brain goes sometimes on a saturday night which is just exciting um but so the way i've been thinking about css a lot and so the ltv component of css which is lifetime value which i'm

29:02sure all your listeners are very very aware of is kind of like how much money can you make from this consumer over time right and it's a function of your pricing and it's in a function of your churn rate and so a lot of people are very focused on this metric as investors or buyers right because it's effectively how valuable is your customer so it's an extremely important metric the problem with this metric and lots of other metrics is it's derived from an average right it's looking at all your users that come into your in your ecosystem as paying customers and then how do they perform over time

29:34and it's it's driven it's driven off an average of all your users and so when i've gone through some of my clients data and you look at their user base right we quickly discover there's a there's kind of two different profiles and i won't use any names here but let's just let's just say it's a walking company right so you've got people that go out and they they sign up you have 100 people that sign up and 20 of them start walking every day and they're and they this is what they love and they're tracking they're walking and you've got another 40 that do it for like a month

30:00or two and then they kind of drop off and and they just like all right i'm gonna go do biking or skateboarding or something and i switch then you've got another people that sign up they subscribe to it because their friend pressured him into it and they hate walking and they're never going to walk again and they churn off immediately right so you kind of have those three different groups some that are just going to do it every month some that do it for two to three months and then leave and then some that do it the first month and then say forget this i'm never

30:22going to use this again and so the problem is your ltv of each one of those three groups are very very different and so what we've what we've been guiding investors and entrepreneurs as they think about their growing their businesses really find out who those locals are who are those people that are going to come and use your app every day every week every summer whatever whatever the metric is that you're looking for and find ways to measure that right because ultimately that's who you need to to bring to your community and one those people make the community are more robust right because they're constantly contributing feedback into the community

30:54two they're much more likely to stay around with you guys and so you need to find those tools that they're looking for right like seeing around the corner and saying like okay this person loves walking what else could i provide them what about a weather forecast so now that they are about to go out and walking you know what does the weather look like and oh my god this is now this is my one stop stop for for walking and so i think what we've been guiding people is like if you use the averages as a broad metric and that's great you should because investors are going to

31:19want to know that but but really dig deep into your your cohorts and understand like who's using this every day all day and what do they need and so if you can really identify that and show that ltv to to investors i think you can get people a lot more excited than just like that average ltv right because this shows them potential what it can be over three to five years which is really important if you're two or three year old company right and try to convince someone to invest in you showing them that lifetime value of the tour or the locals is going to be a lot more

31:45valuable than that average yeah i mean if you think about just as the you know i think it's one of the you highlight one of the hard parts of assessing these businesses early on is that yeah your cohort your total subscriber base is very heavily biased on like your most recent cohort because often you're also growing right like that's often like your most recent cohort might be the size of your first five you know uh just because and for that reason you can really have screwy looking data um but you know if you think five years from now most of the those other two groups you mentioned

32:15they'll have churned out from most cohorts right and then the only ones remaining for four years of cohorts will be these locals and these long-term retention and then your total subscriber base is very different than it does today right and yeah i i'll admit like revenue cat we i've tried to solve this problem in the product and we still are trying to solve this problem in the product it's how do we like show people because you're dealing with a mixed population right and like you can also also run into a problem of begging the quest or like doing very like look you go to investor and say like look

32:47look how great my retention is if i just ignore all the bad users right like let me just look at the good ones right but there is something there in that what you're talking about eric that long that very long-term view is that if these users like really do retain for a long time eventually they will be the lion's share of your subscriber base and that churn that we talk about like you know if you're adding one percent of your total user base so the most you can experience off of that is like one percent return right versus when you're adding half you know if you have a hundred you know ten

33:16thousand subscribers and you add ten thousand in a month that's going to be a huge effect to your overall subscription subscription base right um so yeah i think i think you know we certainly have a lot to build on the tooling side right and i think it goes to what you're talking about earlier about we're very early like i think revenuecat we've like just kind of solved infrastructure like infrastructure i mean i would even say kind of because there's a lot for us that we need to do yet um but as far as like data science and actually yeah being able to outside of a spreadsheet understand this stuff it's

33:49it's it's not trivial it's not true at all it's extremely hard and i think like because there's so much more you could do once you've broken those two cohorts into tourists and locals right like how do you acquire the locals versus how do you acquire the tourists archer is coming through like facebook apple store and the locals are coming from referrals okay so maybe your facebook spend is that even worth doing the spending on right if they're if they're turning off after a month or two you know subscribers is a vanity metric right if they don't stay right you can grow we talked about this in our 2020 report we

34:16have like this cheetah versus thoroughbred right and it's really easy to show a ton of growth and you've got all these subscribers and everything is fantastic right but if those subscribers get tired and they churn off right away you kind of probably wasted money on yeah right maybe you got paid back in a month right so you didn't lose like on the cac spend right under but you're not building your business right you're just going to you're pitching people about a heap but not a lot of work right like it's not actually getting translated into business value exactly so is it better to kind of focus on the product right

34:42figure out what those those tourists are using and spend less time on the marketing side and really nail the product side hey you'll probably grow slower right that that's an issue that's a risk you have to take but maybe you can grow more efficiently more capital literally capital's free now so that's not a problem that's the first one and listen half of that's my fault i think it's interesting how this like feeds into you know kind of going back to targeting and ad targeting how often folks will optimize facebook campaigns on like trial conversion and that doesn't even that doesn't that's all your tourists and your locals i mean maybe some of

35:17those that never even start a trial would be because but there's a lot of tourists in that group that start a trial right or convert a trial and a lot of people are targeting off of that right and so as these methods become less good uh it will force it'll force developers to yeah maybe you know do one of these scary things actually talk to users right like actually like find those locals like go in your analytics and i think just think as you were talking i just want to point out that like i don't think you necessarily need to define this off of monetization retention

35:50either it could just be retention like pure usage retention but it could also be engagement yeah i think about the way facebook um oriented their growth teams very early on which was like finding people that connected like that was a really key step for them and their product was to get people to make like two three or four i forgot some number of friends and they oriented all of their growth efforts around that find the thing that people do in your app that shows that they're engaged and give them opportunities to show that and then you know you can use that as an indicator okay talk to those folks and

36:20actually talk to them right like find out put something in your app that lets you reach out to them in some way and like get on a zoom call i've done it's it's easier now in sas land because i i i uh at people i'm an app people like i know how to talk to them but when we were when i was working consumer phone calls were more awkward right it was different you're talking to folks like outside of computer land but still like just incredibly valuable and and and and i think like you know if we want to talk about the way to build the way to fully realize how css is

36:52going to i'm just going to go all in on your term eric by the way so i'm going to we're going to we're fine with that i'm going to push it we're going to standardize but it's not trademarked but knock it out all right so to fully like to fully realize the potential to like solve problems for people like i think we need to lean into this more of this model right rather than i've always kind of like had an uncomfortable relationship with how revenue cap fits into the like hyper fast monetization stack right of like get users check your cac put more money into facebook right and so

37:22um the more that the industry gets away from that the happier i am i don't know like you said maybe it doesn't grow quite as fast but i think the overall tam will be larger right if we take that approach i think that's right and you know i mean i've talked to a bunch of founders that haven't raised capital right and they build something that like their users love right like so i don't know if you guys saw the deal with day one that got bought by automatic raised almost zero outside capital right friends of the cat big fans of day one yeah yeah i was a big i thought it's an

37:49awesome business and he did that exact same thing right he just listened to his users he didn't care about vanity metrics grew really nicely right it wasn't like you know he's not getting tech crunch publishing but that's fine right you know owned an amazing business and then you know got a fantastic exit out of it so i think i think people are really waking up to that's a very much of a possibility here in this world yeah one thing i wanted to highlight too in that graph that you made um and and for people who are listening to this you can go to the show notes and

38:17and we'll have links to the uh eric's uh presentation and and you can find this chart but to visualize it page 18 page 18. if you're following along at home um the line for the locals drops so you know even even for locals you're gonna have some churn early on but then it essentially flatlines um and i'm sure you did that very purposely to kind of illustrate how how long term some of these these this retention can end up being and and it's something we've actually been talking on the podcast about recently is that we're so early in the space we don't even really know what how to measure ltv because you're

39:01going to have people who end up subscribing for decades um and years and years and years if not decades and so and then you know to your point about the the cheetah versus thoroughbred another great chart in the page number jacob page number cheetah versus thoroughbred but in that cheetah versus third bread the other aspect to locals and we were kind of touched on earlier is that those cohorts start to stack so when you identify this cohort that is going to be a very long-term cohort that's going to stay subscribed and have very low churn you you acquire 100 000 this year and then they're still there next year and

39:41you put a hundred thousand on top of that and those are still there next year and by year three you know you just continue to grow this pie of people who are very very sticky in the product and i think that's part of what um you know what you're talking about with dilinguo and bumble and other companies is like we're still just starting to understand even as different as this is from sas we're starting to see similar dynamics as far as early on the churn is so high but then you do have this really strong stickiness over the long term that that that can build a really healthy business

40:19of people who really love your your product and really are invested in it and are going to stay for a really long time um so yeah i just wanted to point that out that that i i love that aspect of the chart of how flat that line is for the locals i mean you can see it in your own spending patterns right like how many of you guys have subscribed to netflix or spotify for more than five years yeah but it's a good chunk of your listeners right so i mean if i look at my phone right i'm gonna subscribe to all trails for the next decade because i love it i've got

40:48css i've i've started subscribing to in 2013-14 like as soon as it was a thing i've been a scribd user for four years and you know i still download audiobooks or uh i download other books from like the san francisco library because i'm probably the cheapest banker of all time but you know i still use scripts finding margin eric you're finding margin that's what that is exactly i pinch pennies all day um but yes i mean i i think those tails david to your point are still being written and so that's the whole point right if you use average ltv and you say all right well we have 30 churn that math

41:18means you lose every user in three years and that's just not how it works right with really good businesses that are delivering value right and so then once you convince people of that right the investment case becomes a very different conversation and then and speaking of that you you had a great uh slide on investor benchmarks and so i wanted to get to that real quick tell me about how you how you thought about these different metrics and what and how investors think about these metrics because you know we're talking about ltv and in there you have ltv to cac of you you know for a really strong

41:52app that investor would be super excited about you're closer to 6x versus less than 3x you start to cool off so um yeah to walk us through each of these metrics and kind of how you think about it how you think investors think about it and even how that's kind of maturing as we understand the space better yeah and just to note like these metrics are all different for different types of businesses right if you've been around for a year these metrics look very different versus if you've been around for 10 years right if you're in high growth you know venture back spending a lot of money these metrics look very

42:23different than if you're a bootstrap business you know just trying to inch out like you know 10 growth a year right so they can be very different and the important thing is how does the story of your business and what you're trying to accomplish tied to these metrics right so that's what we spent a lot of time talking to founders about is is what's good based on what you're trying to do right so it's just how you how do you tell your story through the metrics um but yeah so a couple of your points like on this on the slide we talk about like user growth rates gross

42:51margins ltv to cac uh churn rates free to paid conversion rate and then sales efficiency um and then you know just to talk about something different we we talked about ltv a little bit earlier but maybe talking about uh churn right and so like how quickly do people churn off right and so that's there's a couple different ways to interpret churn right it's one they didn't find your product helpful two they thought it was really expensive um or if they're not turning they really love something you put together right and they decided to pay you multiple times for that either monthly or annual and so what we just

43:23try to do is try to tell the story of where the business is at and where it's going by looking at these metrics and so you know that's why it's so important to truly understand these metrics because if you don't understand the metrics it's hard to tie that to the story so we spend a lot of time with any client or even non-clients just talking about this stuff to truly understand you know what investors care about and it's you know if someone's buying the business they may care a very different they may care about very different metrics for someone who's investing your business for growth right so someone's

43:51going to put 40 40 million dollars on your balance sheet to go grow they may be focused less on ltv to cac now because like your ltv is not formally formed right they don't know how good it is but they will focus very heavily on churn which is a reflection of how good your product is and how good you're finding consumers that love your product right so those those are metrics that they may focus they may be more comfortable spending a lot of money in the next two years right so your cac's gonna look a lot worse because they want to acquire a lot of users to make the platform a

44:18lot better right and a lot of css businesses right ugc is a is a spin-off of user activity on the platform people uploading photos reviews they're adding new new items on on the platform for other users to use and so it's worth spending more money to get those people in the first two to three years because your platform becomes that much better and that much more valuable right so you may be willing to burn down to an ltv the cack of 3x or something like that in the near term or sometimes even 2x or 1x because it's a land grab for those consumers once you're on their platform

44:49right now you want to see that ltv act start to move up a little bit right so you start to put it to four five six x um ltv to cac so it's all about where your business is at it's each different stage but it's important to have a story and a message around why your numbers are what they are of the i have the the slides open slide 37 for anybody who's following along at home um all of these as a veteran sas css person uh every annual user growth rate gross margin ltp all clear to me sales efficiency ratio can you talk about that one because that

45:19one's that one's uh not it's a little foreign to me yeah it's it's more of a metric that's come out of sas just to be honest so it's thinking about like uh it involves like how how many uh users are you gaining it's how much revenue you're gaining versus how much money are you putting out there so it's a little bit of a different metric um and most css businesses don't get to that yet because they typically don't have heavy sales teams um and so we've included it because you're starting to see some of these css businesses really start to grow and so how much revenue you're gaining versus

45:47how much revenue you're losing and how much is it costing you to do that and so that's when you're starting to get into like the 10 to 20 million dollars of marketing spend a year it's it's important to understand like how efficient is that spend being and this is the best metric we use it's called sales but you actually throw in marketing spends uh in there as well it's like all go to market spend yeah are using head count not just like the ad dollars right i want to include it's like a fully loaded cac number so yeah you're all of your people telling facebook what to do

46:18content creators like all that stuff right yeah if you've got a hundred people running around campus right promoting your app right okay how much do those people cost right so it's an important way to think about how much you grow it's and it's a way to think about like how well can you grow capitally efficient capital with you know limited amounts of capital so it's an important one we look at it's typically a later stage right so you've got to be like north 20 million of aeronautics so he's going to be super high when you're small right because you're exactly across important people are discreet right and you can't you're not

46:47continuous so and also your your your revenue just grows less because of like you know you're smaller you're less well known like your less vocals and momentums things like this well we're starting to run low on time but there's so much more i want to talk to you about but just to hit one last thing um i also love this chart you did of pandora versus spotify and it's such a a an encapsulation really of everything that we've been talking about on this podcast is to see how well spotify revenue has compounded over the past few years versus uh pandora which which look was the juggernaut you know when when um

47:29when spotify started um so so walk us through this chart in in how and why you think you know spotify was able to um to grow the way they did while pandora really struggled and obviously there's a ton of you know other business factors and execution and other things but but i think overall this does speak to the power of css yeah and this is this is something we did back in in 2020 when we were just trying to decide like hey what's is this css thing real and a big question you get from from investors and listen i think a lot of them have stopped asking this question

48:06because the case studies are out there is why would someone pay monthly or annual for something they can get for free uh and by get for free it means listening to or watch advertising right and so i wanted to see like all right graphically or like actually numbers do will people more companies make more money by making that really hard decision and say pay me for what i'm giving you first i'll give you something for free in exchange every half hour you watch two minutes of ads right that's a really hard question to say because it involves you putting a lot of value in your product and so entrepreneurs you

48:38know product developers have to say like is this worth money or am i giving something out to people that hey they'll kind of use it if they get it for free right so it's a it's a gut check for people to say like did i build something that someone will buy that's hard that's really challenging to ask yourself especially if you've started with advertising um and spotify you know listen they were a small company based in the nordics right vs pandora us-based juggernaut and raised a lot of money right that's a tough challenge and so they took a really tough thing and said like hey we're gonna go

49:08and make people pay for our product and we're gonna make it better but the crazy thing that happens though right is you make so much more on a user from subscriptions than you do from advertising right on advertising you're trying to pick up pennies per subscription on or pennies per a user on the subscriber you're making 10 20 bucks a month depending maybe maybe 60 a year for a subscriber so the amount of users you have compounds so quickly and then if you have that heavy retention all of a sudden you've got these really thick layers of cash flow that come in every year use that cash

49:38flow you invest it back in product you invest it back in product and you do it again and again and again and all of a sudden you've got a better product and if you have a better product people will come to it and if it's something that they're using daily right why would you not be comfortable like paying five bucks right if i think about like how much my netflix subscription is right it's 11 a month or something like that right well i probably watch 10 hours in netflix a month right so i'm paying a dollar an hour to be entertained that's a pretty good deal

50:06and so like i think if people people start doing that math and you start to see like how powerful that that subscription is per user versus an ad driven it becomes pretty interesting and so i think you've seen this case study play out over and over and over across css where if you build a good enough product you know a 10x product versus the free option people will pay for it and spotify does double dip as well which is interesting is that they they have a good enough free tier and people can listen for free but they choose to spend even though they can and so so spotify is a great

50:38example of of double dipping with a great freemium tier but then a good enough product and a compelling enough reason that people will pay yeah not to mention i i don't know the specifics of pandora and spotify it's like fundraising history but if you have like the subscriber and paid subscription revenue momentum it makes capital more easy to access and you look at some of this i think of some of the strategic stuff that spotify has done like they got the beatles on spotify pretty like early on and led zeppelin they spent big on partnerships and content and stuff and if you have momentum if you have hard dollars it's a

51:11lot easier to go to an investor and be like hey like i want to raise x million dollars look at this revenue growth i have like this is very clearly a business i can remember raising money and the pre revenue is everything era or like trying to raise money and it was like a lot harder right because it was just like hand waves and we're going to grow and like and now it's like yeah for better or worse you go over the curtain and you show something right but the big benefit too i think for founders it's not just for investors for founders it's like yeah you build a great business

51:39you're building a safety net right like if you can't fundraise it's not the end of the world and like you have options and i think that's part of the reason why i also i mean now we're getting into fundraising like macro but that's part of the reason the fundraising environment is crazy because businesses are sturdier than they've ever been like they need capital less than they've ever needed it right and so like that's why it's gotten cheaper um or you know evaluations got higher same thing right so um anyway yeah this is fascinating to put this i i ardio's not on here which was my horse and the i was like really

52:06pulling for them and it gets the whole different story of why that's not on there but uh but yeah it's fascinating well i think that's a really fun place to end the the story of spotify one of the biggest juggernauts in the space um but we're going to include in the show notes a link to the to the report uh a link to your linkedin and twitter to follow along uh anything else you want to share as we wrap up eric no guys i mean always a pleasure to join um one thing i will you know just for your audience users we are trying to make

52:33the gp bullhound css report a resource for founders and so this year for the first time ever we did include a link to to a survey and so if you want to contribute your data what we'll do is we'll kind of aggregate everything anonymize it and then we'll provide back like in a summary to users to say like hey here's here's your ltb to how does this compare to other you know founders at this stage and so we are trying to be a resource so you know i'll probably give you guys that link if you don't mind we'd love to have as many people as possibly

53:02contribute um no pressure of course all of it be anonymized this isn't a marketing tactic for us it's us giving back to the community um and so yeah we'd love we'd love people to take a second to do the survey but if not also don't hesitate to email me tweet at me hit me on linkedin with questions comments and specifically stuff we got wrong absolutely love to hear like where we can learn better yeah so because we're not we're not building we're just talking about what you guys are and also by the time you you print this thing it's like stuff's changed right like it's changing so fast the whole apple

53:31stuff when we were publishing what's happening every day and i was like this is unbelievable reporting changing every minute yeah exactly yeah i had to change the powerpoint you guys had to change code i think it was a lot harder well it was great having you on eric and we'll have to make this an annual uh tradition sounds good welcome it yeah

53:51we'll see you next year see you in 2022. all right thanks david thanks jacob to make sure you never miss an episode subscribe to the show and your favorite podcast player thanks so much for listening until next time [Music]

54:12you