
Analyzing churn rates, free trials, and other metrics - shinryuu
https://jlongster.com/analyizing-profit-metrics
======
jeremydeanlakey
> You might think "just crank up the growth until you hit $10k/month".
> Something weird happens ... you ended up losing money with high growth.

Ratio of new customers showing losses vs old customers showing profits.

Your ratio of new to old customers basically IS your growth rate.

As that ratio increases, you could show "losses". But financially, it's more
like investment than losses.

You probably should, in fact, crank up the growth in this situation. Think of
it as an investment and calculate your rate of return.

Edit 1: I threw together a quick spreadsheet to illustrate the point (shows
cash flows per customer):

[https://docs.google.com/spreadsheets/d/19mbsjcwlyLs_KsvPrjdt...](https://docs.google.com/spreadsheets/d/19mbsjcwlyLs_KsvPrjdtw9IWUG_CAak0qpDo9F_711g/edit?usp=sharing)

Edit 2: On second thought, rate of return is the wrong measure because time
value of money is not significant. What you care about is Customer Acquisition
Cost and Customer Lifetime Value.

Edit 3: FYI I'm a developer now, but was actuarial, and Excel whiz w/degrees
in finance & accounting. I'm always happy to give anyone a little bit of free
help with things like this.

~~~
jlongster
Thanks a lot!

I had a hunch that it was something like that. "loss" isn't really the right
word, but I'm focusing on cash flow for the next year. You're right though -
it's an investment, but I'd like to figure out the math so I can learn how
much cash I need upfront to fuel a specific % of growth.

Checkout your spreadsheet now. don't quite understand it yet, but I'll follow-
up with you on twitter (saw your tweets)

------
lars
Friendly reminder that churn rate isn't a meaningful metric, because churn
probability is not constant throughout a customer lifetime:
[https://medium.com/swlh/youre-all-calculating-churn-rates-
wr...](https://medium.com/swlh/youre-all-calculating-churn-rates-wrong-
cbab072cd992)

The churn rate will almost certainly go down on its own as your user base gets
older, and consist more of long term customers. What you're usually looking
for is to compute average customer lifetime, which is better done without
assuming constant churn probability, see the linked post.

~~~
xyzzy_plugh
Don't folks usually track churn amongst cohorts anyways? Churn rate without
any associated facts is almost completely meaningless, as you suggest, other
than to elicit concern.

~~~
jrochkind1
Did the OP?

~~~
jlongster
I did not, but I was only focusing on the next year anyway. It's just
something to take into account losing customers. If I take a pessimistic churn
rate and it goes down over time I'll be better off.

I haven't read the linked post, will do. I don't think I have nearly enough
data to know customer lifetime though. I only have 4 months worth of data.

------
mynegation
Cannot access spreadsheets now, but limiting free trials to one bank account
would be the first thing that I would do. The second is to offer annual plan
with a discount. The industry practice is to price annual as 10*monthly price
(aka "2 months free"), and play with these numbers. That does introduce
another parameter to the model though: the separate conversion rates to annual
and monthly (or - how these 6% would be split).

~~~
jlongster
Yep, seeing the effect of $.50 instead of $1 for trials when there are are lot
more users & trials was really enlightening. I'll most likely do that. I could
even not provide bank syncing for trials, or require a credit card. Will do
something like that.

Definitely going annual as well - tempted to go _only_ annual, but we'll see.

~~~
juped
Annual is unappealing to most subscribers - but some percentage will go for it
if it's available. Like 10%ish (may vary but definitely a minority). This
minority will smooth your cash flow quite a bit.

~~~
SiVal
What evidence/reason do you have for the claim that annual is unappealing to
most? (I'm not advocating anything here, I'm hoping to learn something.) I
would assume the same thing if there is no discount (no compensation for extra
risk and time cost of money), but I can only guess at how people respond to
annual options with various discounts. Do you have anything more (including
your own guesses)?

~~~
chiefalchemist
Has anyone ever tried:

Annual plan only available after 6 months of membership?

While I understand that sounds counterintuitive, if not odd, it:

a) offers an incentive to stay.

b) with that goal line in mind, the offer of annual when getting there has
special meaning. As opposed to a random "you've stayed. You must be happy.
Wanna go annual?"

Again. I hear what you're saying, but in a nudge-y / Hooked sorta way it might
work.

~~~
yskchu
Bloomberg (magazine not terminal) did that for me, annual plan wasn't
available during sign up (though there was a cheap 3 month trial); after a few
months on the full monthly plan, offered me annual plan at a discount.

I took it.

