The surprising advice from a founder who built 2 unicorns | Jason Cohen (WP Engine)

A lot of product teams, a lot of founders build something, it starts to show some success and then all of a sudden it just stops growing.

There's a series of questions that I ask to diagnose why is growth slowing. The first question is, are customers leaving? Think about the gauntlet they went through to get to the product. How do they even find out about me? That was hard already and improbable. They didn't just bounce off the homepage, which is again improbable. And they got to the pricing page that didn't scare them off. They actually had the budget and bought the stupid thing. And after all of that, which clearly means they wanted it to work, they're like, "No, buy what?" Like, just on an emotional level, you got to go, "Wait a minute, that's terrible."

Step two is pricing positioning. Your prices are way too low because you just guessed and you haven't changed them. What often happens is you raise prices and signups don't change. Just think about a company with 1,000 employees and 400 million in revenue or whatever. If they see a product that's $2 a month or even $100 a month, the thought is like, "That can't be good enough." We position this conversation as how to deal with stalled growth, but it's actually just as useful for how do I grow more?

Do you know right now which channels are saturated and which aren't? You can't just rely on marketing forever. Just adding one little feature and then hoping we can flog Adwords is not going to work.

The last question is, do you need to grow? We all have heard the phrase, if you're not growing, you're dying. Is that true or is that the kind of thing that investors use to make founders try to grow even when they shouldn't?

Thank you. It's an honor to be here.

Almost 20 years. I started when blogging was cool and I'm still waiting for blogging to come back and be cool again but it's not yet.

Yeah, newsletters are cool.

Okay.

Yeah, it's not that many. It's something like maybe, well I would say between 150 and 200 that I'm proud of and probably about 300, 350 and that's it over you know about 18 years and that's because I only write in depth. Some are long, not all are long but none are short I guess. And I've always had a rule even though you're supposed to write really regularly and not just for algorithms but they used to say again back in the days where I started, oh yeah it needs to be like really regular so people know when to expect your thing and they plug it into their day and all this. So it's always been true that you should be regular and I never was because my attitude was always I will only put out stuff if it's the best that I can do. It's up to the reader to decide if it's good or useful. And if so, if I don't have that, I'm just not going to publish. That's the way it is. And so there's years where I've published once or twice only the whole year. Maybe I was busy or didn't have the energy. Other years were yeah I posted you know 40 times or something but even then it's only that because I can't do something of that magnitude and also found unicorns which I did during that same time and run them. I can't do that all at the same time and produce a lot so it's fewer and hopefully better but that's in the eye of the reader of course.

Well not for 18 years, right? Like over that time you...

Okay, so with 300ish posts, 200 you're proud of, there are so many directions we can go. There's a few that I've picked that I want to spend most of our time on. The first is you have a really pragmatic way of approaching growth stalling. And the reason I want to spend time here is because a lot of product teams, a lot of founders build something, it starts to show some success, it's going, it's growing, and then all of a sudden it just stops growing. And I think that's one of the most painful things to go through. And I've never come across a way to think about how do I solve this because I think a lot of people are just like, okay, I guess that is not working. Let's move on to something else. You have a very specific way of approaching this problem and I want to read actually a quote from Will Smith and this is something that has stuck with me ever since I read it because it's so true. So in his biography he has this line. People ask him what's it like to be famous and his answer is becoming famous is amazing. Being famous is a mixed bag. Losing fame is miserable.

That's funny. So first of all, I think a lot of people are experiencing this right now. You have a lot of companies have reasonable products and their growth has slowed. Why? Could be the economy because it's not as good as a lot of indicators say. We all know that for example jobs are not as good as the indicators say. It could be because AI or the threat of AI or the expectation of AI blah blah blah. Who knows? It also can just be size. As you get bigger, growth slows because you know what? You're not going to grow 2x a year forever. So it slows. There's like just mechanical things. So there's many reasons why things slow and sometimes it's all of a sudden although then maybe there's some event like an algorithm changes or something happens but actually I think what's really common is it just slowly gets slower. In other words, it decelerates but it kind of, I wouldn't say sneaks up on you because most people are looking at growth all the time. So it's not sneaky, but it is sort of a little bit more gradual, right? Just like you just feel more like you're running through mud, like ah god, we're just still doing so much work and it's not having as much of an impact. And so that's what I see. And when I say that's what I see, so I've built four companies. The last one is a unicorn. The one before that was also a unicorn. The previous one was bootstrap. This one was VC funded. And I've invested in about 60 startups. Some of them failed completely. Some of them were very successful, some in the middle because of course, right? And so when I say that's what I've seen, that's the context of what I mean by what I've seen. So there's a series of questions that I ask to diagnose why is growth slowing in this order because it's one of these things where the first one that's a problem, if you don't fix that, it doesn't matter if you fix one of the ones below. Just like if I don't know, maybe if you had a marketing funnel and there's a step where everything falls apart and you're like, well I'll just tune the bottom of it a little. It's like that's not going to work. It's not going to help enough like you got to go where the biggest issue is. So this is in that sort of order.

So the first question is are customers leaving? I.e. logo churn, right? Churn with N. You can do churn with MRR too, but just for simplicity, let's say with customers and it's the worst problem for a couple reasons. One is there's nothing you can do about it once it happens. Like they're gone. There's no saving them, increasing their revenue. There's nothing in the future you can do. Also, it's often correlated with things like negative reviews or other things on social media, which is another kind of preventing growth. So it's kind of a two-punch thing of like they're not here and they may be actively hurting your growth. So that sucks. The math is undeniable, which I want to talk about because this is something where there's a metric I like that is unusual and people find useful. But before I get to the metric, there's also this kind of visceral thing which is the customers saying this product I don't want it. And when I think about the gauntlet they went through to get to the product, how do they even find out about me? That was hard already and improbable that they see an ad or hear it and then they clicked which is improbable and then they didn't just bounce off the homepage which is again improbable. They actually were like oh yeah this sounds pretty good and then they got to the pricing page and that didn't scare them off. They actually had the budget and bought the stupid thing. Then they went through onboarding and invested their time etc etc. That is a crazy gauntlet that almost no one gets through. And after all of that which clearly means they wanted it to work. They're like, "No, bye. What?" Like just on an emotional level, you gotta go, "Wait a minute, that's terrible. I'm fundamentally not fulfilling whatever promise I made or they thought I made, which is whether that's a product issue or a communication issue." Okay? Like there's lots of but one way or another, something is really fundamentally broken just in terms of like I'm a product person. So what I want to do is make a product that other people want to buy and use. And if they don't, no matter what the metrics say, we're failing our mission, our customers, whatever. So there's just even that non-mathematical reason to go, oh my god. Right? So to me that's already enough reason, but the math is very interesting.

And what I find is when I talk to people, especially on Twitter or something where people are just yapping around whatever they're doing, I say things like, you know, anything above 3% per month cancellation is terrible. And people are like, oh no, it's okay. Five is fine, seven, six. Everyone's yapping about what they and it's very abstract like who is four better much worse than five? Like I don't know. And I heard someone else and blah blah blah. So it's very generic and rough. So there's a different metric that I like to use which keys off of this idea that I think again people don't appreciate which is cancellations grow faster than marketing and so cancellations overpower the growth of the company and slow it to a halt i.e. growth slows right to where you literally cannot grow anymore. There's a maximum ceiling of how big you could ever be thanks to cancellations. And when you know what that number is, it's much more real and visceral and scary. And so just to kind of justify what I just said, just imagine any company and imagine you just tripled the number of customers that are there and paying and the same kind, the same age, just the same kind of stuff just tripled, right, overnight.

So the next month, would marketing deliver more new customers than a month before? No, because marketing doesn't, none of your marketing efforts care how many customers you have. Adwords delivers the same number of leads and SEO delivers the same, it does not care how big you are these efforts. So you're still going to be growing at the same rate as you were the previous month, but cancellations in absolute terms like the number of customers who leave will triple because you have 5% cancellation and triple. Okay, so still 5% of a tripled number is triple, right? So this is the point is that cancellations automatically grow as you grow. Even if you're doing everything right, but marketing doesn't. Marketing grows only as fast as you can improve marketing. We all know that's quite hard actually. It's linear. It's hard to find new channels that aren't trivial. Like it's hard. Of course, we're going to do it, but it's hard. Whereas cancellations grow automatically as you grow, right? So cancellations always overtake marketing for this reason.

Right. Except the leaks automatically increase and that's what people don't appreciate.

Yes. See, we say in marketing we say things like I'm adding 100 leads a month, but in cancellations we say 5%. Why do you say percent? Because it's based on your size and it's exponential. That's what 5% is, an exponential. And so there's this maximum size you could ever be. It's when churn equals growth, right? So how would you compute that? It's actually quite simple because let's say you have this 5% per month just as a number. So it's simply the amount of new customers you add divided by that cancellation rate. That is the limit. So let's suppose you add 100 customers a month and you have 5% cancellation. So 100 divided by 5% is 2,000. So a company like that will never have more than 2,000 customers. And by the way as you approach that number growth is very slow because you bring in a bunch of customers and almost the same number leave. So growth is slowing. Ah, look, we diagnosed why growth slows automatically at all SaaS companies. So that's why this is the first thing because it's such a hard cap limit and it means that people don't want your product. Like these are two reasons why it's the most important thing.

Yeah. Well, it is both logo churn and revenue churn. You do the same math. You could say dollars in divided by dollars cancellation rate or number of customers. I've been saying number of customers just to keep it simple because I think when you look at it and say wow we will never have more than 2,000 customers. It's just such a visceral oh my god we had to do something about that. Now of course one thing you could do is have more marketing but you know that already if growth is slowing you're already thinking how do I get more out of marketing. You knew that. The point is that cancellation is this hard limit pulling you down with all these other really bad either implications or side effects which is why it's so important.

Right.

Yeah. PLG is nice, but you still need marketing to bring the people in in the first place. PLG just means there's not a salesperson unless you're expanding or some other segment.

Yeah. Yeah.

The temptation is to hear what they generate at first and say that's the answer. So like a really common one is it's too expensive. I think anyone who's looked at cancellation data at any company will agree that too expensive is often the number one or at least top three reason in one form or another. And that is never ever ever the reason. How do I know? Because they already looked at your homepage, read all the stuff, saw what you promised, looked at the pricing page, and decided to buy it. That means whatever was in their mind of what it is is not too expensive. It was they already decided with their actions. It was not too expensive. Something else happened like but you didn't fulfill the promise that at least they thought you made or something else didn't work or now it is possible they lost budget but that doesn't mean you're too expensive. That means they lost budget. That's a very different reason, right? That's not that you're so it's sort of like this happens in healthcare for example. So when someone dies the doctor has to write the approximate cause which is why did they actually die? But then you try to also write down the real reason. So let's say someone comes in and the approximate cause of death is they stopped breathing. Well, you could stop there and that's like listening to it's expensive and going that's it. Well, why did they stop breathing? Because they ran their car into a telephone pole and were injured so much that eventually they stopped breathing. Well, why did they run their car into a telephone pole? Because they passed out at the wheel. Why'd they pass out at the wheel? Because they had undiagnosed diabetes.

Now we're getting somewhere. It still isn't just one root cause. Another as a sidebar, I hate the idea of a root cause. Complex systems do not have one root cause. They often have many interlocking things that could be done to detect earlier or to change it or to reduce and not one root cause. So root cause analysis to me is by the way an incorrect thing. I'm explaining why right now with the healthcare, right? Because well what about the second diagnosis? Well, maybe part of the problem is we have a healthcare system that isn't preventative and part of it is that but they didn't go to the doctor anyway and okay so there's all kinds of things that could be useful and interesting to prevent this or make it better. That's the point. That's what an analysis should be is this array of things, not the root cause. Anyway, something along the lines of undiagnosed diabetes is much more of a cause than stopped breathing. So when we say it's too expensive, and that's the reason you're making this fallacy. You got to go into well, they wanted this stuff, but it didn't work with Linear, which is what they use. It only works with Jira. And so there's a lack of integration. Now, maybe we should write that integration, maybe we shouldn't. Of course, it depends on how much we hear about it. And of course it's going to depend on other things but that's the reason not it was expensive right and so this idea of getting into not even the root cause but let's say rooter causes.

Yeah the more root. I think some people probably say five whys and just paper over what I just said with that and maybe so but I just let's not be so simplistic about that because again five whys sometimes implies that there's some root cause at the bottom of the whys let's be a little more smart about that. So anyway, these things too expensive. This is not it. Maybe project ended really is project ended. Okay. But even there I see just today on an entrepreneur forum someone said yeah you know we're starting to see more people have project ended as the reason. And so there's nothing we can do about that. Now see that's incorrect. That's only true if you only look at the approximate thing which is project ended. You're correct that you can't make that project not end. Exactly. Yeah. Okay. But wait a minute. If your software was more successful and the project was more successful, would it have ended or is that actually an indicator that your product wasn't that useful or didn't do its job? It's possible. Like in this case, who knows, right? But that's possible that it really is your fault. Another example is but you picked what target segments you were going after. Did you pick a market segment that was easier to sell to but their projects end like small business and consumers where very often the small business does go out of business or the project ends etc because when things are small they have high variance and lots of things can knock them off the path and so on. And so is it your fault for picking the wrong ideal customer profile or target segment? And so yes, that one case of that one project, it's not your fault, quote unquote. But by saying that, you're just ignoring the fact that there is maybe something to do about it. Now, all this is maybe. None of this proves you should change your market, right? But the fact but when you say there's nothing we could do about it, you are closing the door on these things that might be the right thing. And very often, as I think probably a lot of people here listening to this know, the market segment you pick has a lot to do with your retention rate because everyone acts differently, right? And so anyway, I know it's a lot on this topic, but I just feel constantly people make this particular mistake of not getting, not just abdicating responsibility or just listening to the first thing they hear and saying that's the reason and that's not right. So that's the big thing about listening.

Another thing is you got to ask when people are in trouble but not yet canceled. You might be able to save them. You certainly can learn more because you can talk to them like they're not shut off yet from you. So this might be they never uploaded their data so they're not being successful. They are calling tech support too much. They're in trouble. They're not calling tech support enough. They're not engaged. They didn't log in for a while. Like there's all kinds of things where now of course this is all going to the details are going to depend on the product obviously but there are signals that are correlated with cancellation. Now if you have a lot of data you can literally correlate signals with cancellation and try to extract that precisely but even without data you can guess and guessing and having a theory acting accordingly and as you get more data adjusting your theory this is a wise way to proceed even without data. So if you can catch them when they seem like they're off the happy path, they're in trouble, like that's a better time to do it. And then the last thing I would say about this detection is if you don't know what to do or all else being equal, then focus on onboarding. Almost all companies have a whole lot more cancellation in the first day, 30 days, 90 days, depends, right? But the first period than the whole rest of the customer's life. And also small changes in the onboarding can have large effects on cancellation. Whereas later on that's not necessarily true. It could be but it's not necessarily true. So a really dramatic version of this is if you've ever done YouTube videos which I know you have but if a listener has ever done YouTube video and you see the retention of the viewer on a YouTube video, it has this thing where it falls like just so much you can't believe in the first 30 seconds and then if it's a decent video, it'll flatten out as people decide to watch the video. So in that crazy looking curve, for the people that watch it for 15 minutes, maybe there's something you could do to keep a few of them staying to the end, but that's not going to change very much how many people get to the end. Whereas for me, I've only done a few, but what I see is about 50% fall off in the first 30 seconds. Well, if I can get that from 50% to 55% stay, that's an additional and at the end of the line, I only have 20% still there, which is pretty good for a longer video. But if I get it from 50 to 55, I might get it go from 20 to 25% staying. In other words, if I shift to 10% at the front, which maybe I could do, like I can't be dramatic, but maybe a little, then in the output, I might be able to increase it by 20-30%. So that's a huge change. And so in the SaaS equivalent is, as we all know, if they leave early, not only is it bad, but it's super unprofitable because you spent all this money to acquire them and then they never stayed around long enough to pay it back, much less to be profitable. So if you can do a little bit in the onboarding or shift the onboarding percentage a little bit, it pays off enormously in revenue and profit over time by making them successful. And so again, if you don't know what to do, onboarding is a good bet. And even if you do know what to do, I'll still bet that onboarding is a good bet for where to go.

Exactly.

Yeah and you'll I know you're going to do that anyway but you got this cap.

What made you cancel?

Yeah.

Yeah. I think what I find with AI is this with this sort of thing with surveys, is this...

Yeah. It is bad at picking out details that are actionable. When I say AI, of course, I mean LLMs, which is probably what we mean when we're looking at natural language, right? And if you think about it, it sort of makes sense because the LLM is an averaging machine, right? It's predicting the most likely that's an averaging kind of a thing. And so when what you're looking for is a kind of average, it's usually pretty good. So, summarization, topics, themes. But when you're asking for like what is interesting and not average, it's actually pretty bad at it. One way that I found that's sort of useful is yes, I'll ask it about themes, but then I'll say now pick out every specific detail that goes under one of these themes, put it along with which customer said it and the link to blah blah blah. So you'd have to play with this to tune it, right? But like that kind of thing so that a human being can then still see the detail which is what triggers in your mind. Wait a minute but that means we should do that right because the topics won't do that. The topics will be I already know what the topics will be. It'll be stuff like I couldn't figure out how to do this integration right like the topics are actually not going to be that surprising probably. It's the details that are going to be the triggers for actionable stuff or patterns or something like that. So yeah, AI is not useless, but it's not as useful as it sounds. It's probably still a good idea to just read all this stuff. Although AI might be able to clean up, you know, maybe people's grammar is bad. It's a weird language. Okay. Yes. Like that's annoying. You could clean that up, but I wouldn't rely on AI to do the thinking for that reason.

Yeah.

What I would say is it is not hard. You don't need a lot of customers to go talk to the ones who are in trouble.

You do need a lot of data or customers to mathematically know what behaviors are correlated with cancel and therefore to spend your time wisely. Then you need a lot more data. But to your point, even if you have the data, it's not entirely clear whether some kind of mechanistic thing is all that important. One way I look at it is, you know, it's very common advice. You should try to get more good customers and fewer bad customers. Of course, you should. And so therefore they say you should see what the good customers have in common. But that's not the end of the sentence because a lot of the things the good customers have in common, they also have in common with the bad customers because it's just what your customers do. Just what anybody does. So it's what the good customers have in common that are different from what the bad customers have in common. Okay. So with that in mind, this kind of like it has to be both or else you're sort of not getting you're just getting correlations that are not helpful. The cancellations or talking to people who are in trouble is another application of that. So what is correlated with people who actually end up cancelling, not just what you know and so I think that mindset is correct if you add the other side of that to it.

Yeah.

Yeah.

Customers leaving, people leaving, actually canceling your product. So I kind of look at it like a question. The first question is: are people leaving too much? Because if your monthly cancellation is 2% for SMB, that's good. You could try to work on it, but since it's already good, it's still probably a good ROI for you to work on it. But it's possible that you've got diminishing returns and that this isn't really the reason or it's not really reasonable for it to go lower. I mean, how low can it go for SMB? There's some floor and you might be near it. So the first question is: is logo churn too high? And trying to set a threshold that's lower than what people normally want to do.

The next question I have is: is the pricing correct? Which of course pricing is a perennially interesting topic. I know there's this funny thing, especially with newer companies, that the pricing is always too low. It's not always, but that's the common thing. Patrick Campbell, who has 4,200 data points about startups—let that sink in a little—has this great quote which goes like this: 'Your prices are way too low because you just guessed and you haven't changed them.' It's like, yeah, if you really look deep within, you realize like, yeah, or we just picked whatever our competitors are doing and that's it, or we added or subtracted something because reasons. That's probably not good.

People are scared to raise prices for obvious reasons. But if we set aside the emotional reasons, whether they're correct or not, the sort of economic reason people normally give is they have in their mind this microeconomic supply and demand curve thing. And the demand curve says that if you raise the price, demand goes down. That's why the demand curve is always going that way. And so they understand, I think everyone understands. But maybe you raise prices by 10% and signups go down only 5%. So overall, it's better. But the opposite could happen too if I'm on the other side of the demand curve. So that's how most people think of it.

However, this is not how it works. That's how it works in microeconomics 101 textbooks. That's not how it works in the real world often. So what usually happens is you raise prices and signups don't change. When I say signups, I mean the signups per month, the rate at which signups go up. This happens all the time. Even for solopreneurs on Twitter who have strange projects. It happens all the time. They raise prices. They're like, 'I was scared, but then signups went up.'

I once talked to a guy. This is really funny. I'm going to not say the name to protect the innocent. So he had a product that he was selling essentially to enterprise and government, so larger companies. And it was to me way too cheap. So he said something like, 'Yeah, I charge $300.' I'm like, '$300 a month? That's not enough.' He goes, 'No, per year.' I said, 'Okay, just do me a favor, how many signups do you get a week?' And he's like, 'One or two?' Because this is enterprise and it was a startup. I said, 'Okay, just for fun, just change it from per year to per month.' So, in other words, we're 12xing the price.

So he did and he still got one or two per week. Like nothing changed. I'm like, 'Okay, what are you going to do next?' And he goes, 'Oh my gosh, well now I have so much more money and profits. I'm going to hire an engineer. I'm going to do this marketing.' And I'm like, 'Time out. What you're going to do is raise prices again.' Like you just told me you 12xed the price and nothing observable changed. That means you're not near the price yet. You don't have to 10x it again necessarily. Maybe 2x, maybe 50%, but you're not done. I mean, you can do those other things too, but you're not done with the price. It didn't even occur to them still.

Okay, so why does this happen? The reason is that pricing selects the market. So if you only think of the market as people with very limited budgets, barely can do anything, not getting much value out of it, then it is true that if you raise prices, you'll get fewer of them because they were never getting that much value out of it anyway. They don't have that much money. So if you raise prices, they're gone.

But think about just even a mid-size company, forget about enterprise, just think about a company with a thousand employees and 400 million in revenue. If they see a product that's $2 a month or even $100 a month, their thought is like, well, that can't be good enough. They're not mature enough. It's not going to do enough. The support's not going to be good enough. They probably don't have good governance policies or other things that we need. Whether that's true or not, this is what it looks like: it's low quality, cheap, whatever, aimed at SMB. So they just won't buy. They're not in the market for the thing.

So it's not true that they have this demand curve where, oh, since it's cheap they all want it. That's what the microeconomics curve says. It's so cheap that they should all want it. No, they don't. None of them want it because it looks bad. So as it gets into a price range that makes sense for the kinds of things that they need, then their demand actually goes up. Then it can stay up while it's in a good range. And then of course at some point you are priced out of them. That particular kind of company's like, 'I'm not going to spend $10 million a year on it. Are you kidding?' So yes, it does slope down and go away.

So it's not a normal curve, but it slopes up and then it's something and slopes down. Who knows exactly what shape it is? Probably none of us know, but it's more like a mesa and not a line that goes up to down like in the textbook. For that market, it's only the very lowest, you might even say worst in terms of metrics, end of the market that has the microeconomic slope that you're worried about. So what happens is you raise prices and you enter a different market and that's why the signups go up. Or you leave behind perhaps a worse market anyway. And of course everyone will tell you the more they pay, the higher retention is, and all the kinds of stuff gets better when you charge more.

So this question is: is pricing correct? This is kind of what's in my mind when I ask that question. It's like probably the answer is no because pricing is very hard. It's just as much art as it is science. You've had some really good people on here on pricing. In fact, so good that I've bought some of the books that those people have talked about because I love the interview so much. So I believe in all that. No problem. I believe in it. Nevertheless, they also say it's art and science and it's very difficult. And also once you augur it in, the world changes. Like 5, 10 years later, the market is different. The world's different and so it's still unclear.

Also, price is not just the number on the web page. It's easy to think that. But how it's structured is just as important. How the product's positioned is just as important. So, for example, this example I've written about before online. It actually was something that happened in my life, but I changed the story to make it simple and real and clear without having to get into lots of detail. So the story version is how this company was able to charge eight times as much for the same product just by talking about it differently.

So just by positioning it differently, eight times as much. Again, this happened to me, but it's too complicated. Those details are not interesting. So say there's this company called Double Down, and the idea is that it halves the cost of your AdWords because it makes it so efficient. So that's what it says on the web page: 'Cut your AdWords cost in half.' Which is a very good pitch, isn't it? Simple, obviously valuable.

But when you think, so let's suppose I'm a customer and I spend $40,000 a month on AdWords. What am I willing to pay for Double Down? Well, if you do cut my AdWords in half, then I save 20K, but I'm not willing to give 20K to Double Down because then I'm not saving any money. In order to actually save money, I need to give Double Down less money. How much less? I don't know. Let's just call it a quarter. So I pay Double Down 5K to save 20. So I'm really saving 15. Double Down's making 5K a month. That's pretty good. Everyone's pretty happy at this 5 grand a month price point.

So there's nothing wrong with this. No one's doing anything wrong. That's a perfectly valid company. However, think about these two situations that the CMO might be in talking to the CEO at the end of the year. Scenario one goes, 'We started using this tool, Double Down, and it halved our cost. So we were able to spend that money on some other stuff. We were able to save money.' And the CEO would say, 'Great, that's good. We're going to renew and I'm happy to hear it.' Again, nothing wrong here.

But let's take a different tact altogether. What does the CEO want to hear more: growth or saves money? Both are good, but I know which one is healthier for the company, increases market share, is better competitively, and also makes the company more valuable. It's the growth. So what we'd really like the CMO to tell the CEO is, 'I increased the growth rate of the company,' not so much 'I saved money.' That was way better.

So here's how we could do that with Double Down. Yes, Double Down halves the cost, but what that means is right now the company is paying 200 bucks per lead. Let's call them leads, whatever this is outputting. Well, if I halve the cost of a lead, I could get twice the leads for the same money. I'm already willing to spend $200 a lead and I'm already spending 40K a month for it. So if Double Down halves the cost, it means I can get more leads. So the way I could pitch Double Down is: 'Double the leads per month.' Period.

Now if I'm willing to spend 40K for this number of leads, how much am I willing to spend to double the leads? 40K. I just said I'm willing to spend 40K for this number of leads. So doubling it, I'm willing to spend 40K to double it. So if I give Double Down 40K, not 5K, for the same product—which is the leads are cheaper—but then now the pitch is 'I doubled the leads for 40K' instead of 'halved the cost for 5K.' So Double Down gets 8x the money because it gets 40K for this product, not 5K for this product.

And everyone's happy because the CEO goes, 'What did you do?' And they said, 'Oh my god, I doubled leads.' 'What?' 'Yeah, at the same ROI as we had before, same CAC, I doubled leads.' CEO goes, 'How could we do more of that?' Like, just everything is so much better, same product. Now, I know it's a little bit of an exaggeration, etc., because I'm trying to make a point. But the big point is, or the largest point, is pricing is not just the number on the page.

It's positioning. It's how their budgets work. It's how it's structured. Like it's per site or it's per usage or it's per seat or it's per—all of this stuff is part of what pricing is. And often even if it's the same price or the same product, depending on how that's structured, it either seems fair and good or it seems unfair and too expensive or whatever. And so in particular with the positioning, the big lesson for product managers is: sell more of what the company values, like growth. It doesn't have to be growth. It could be something else. Their retention for their customers, how competitive they are in the market. There's various things they could value. Growth is an obvious one.

Sell them that they're going to get more of what they value as opposed to saving, cutting ROI, saves time, saves money, more efficient. And again, there's nothing wrong with saving money, saves time. It's just that it caps this price and this value that they perceive that you do. Whereas if you deliver more of the value that they already value, it's—I don't want to say uncapped completely—but the cap is maybe an order of magnitude higher than saving. So again, it's valuable to save. You're not doing anything wrong. That's not how to talk about what it is and therefore help set the price.

So yeah, it's a long way of saying when again I think 'is your pricing correct,' I'm thinking in a maybe more general way than just the number. I'm thinking about the structure, the positioning, and all that. And my guess is when growth is slowing, there's a lot of improvement that could be had there.

The thing you have to remember is that pricing is not this knob that you can turn separately from the rest of your strategy. So when you say like even when I just said raise prices or whatever, you can't just raise prices. These new customers have different demands. Now maybe you need SOC 2, now your other governance stuff matters, now integrating to certain systems you didn't know about matters, maybe now they need professional services. You can't just raise prices and change market and like that's it. And maybe that's wise to do, but maybe it's not. Maybe you realize that sure, of course, that other market has certain advantages, but they also have disadvantages, and we don't want those either because we'll no longer be competitive because the way that we're distinguished, competitive, special, interesting, valuable is only valuable in the market we're in.

The next market does not value it like that. And so, uh-oh, actually, that would be really bad for us. Or it could even be cultural. We're a company like Buffer is a great example. Buffer could go up market and try to sell social media tools or whatever. But they realized we are a company for the little people. I don't want to sell to a big company. We're never going to make a product for them. We don't want to. This is who we are. This is what we want to do. This is what's fulfilling to us. So we're not going to go there. So it can be cultural. It can be certain goals. It can be other aspects of the business model or the strategy. But it's not this kind of like, 'Oh, I'll just change this.' It's a decision about the whole strategy and that too we could talk about for hours. But I'll just caution that 'Oh, I'll just go enterprise' is of course not how it goes.

Yes.

Is pricing right? And why do we think it is? Because we probably don't have good reasons yet.

And maybe that's obvious, but it's useful to tie it back to the sort of mental model we've got going. And of course the metric here is NRR, net revenue retention. And the way that's computed is you say what is the revenue of customers right now, existing customers, the whole total, and then one year from now what of that remains. So not new customers coming in, not talking about them because we're asking about the cohort that exists. What remains? So with cancels it goes down, with downgrades it goes down, but with upgrades it goes up. So when I say remains, it could end higher than we started if upgrades exceed cancellations and downgrades.

And now we are talking about MRR and not N because N doesn't have an upgrade and just only goes down. Which again is why I think the N is actually the most important one. Because think about it: a lot of times people think, so if you've heard of NRR, you might think, well, that's my golden metric, I'm done. But the issue is if NRR is positive but N goes down too fast, it doesn't matter because not enough people are left. And so there's not enough people left over to upgrade and so actually you're wrong. And so NRR does not include that and therefore it actually undercounts what's going on in a bad way, like in a way that hurts you.

There's yet another way to see why what I'm saying is right. There's this thing in investments where let's say I started out at $100 and the stock goes down 20%, now it's at 80. Then it goes up 20%. Is it back to 100? No. Because 20% of 80 is 16, so it's 96. So if it goes down 20% and up 20%, it does not come back to 100. It's worse. When you have a loss, a percentage loss, you have to have a greater percentage gain just to get back to where you were. In this case, a loss of 20% requires a gain of 25% to get back to where you were. This is why NRR isn't quite right because NRR is saying that a loss of 20% from cancellations is offset by 20% from upgrades. As we just saw, no, it's not. That only gets us to 96% actually.

So this is why, again, I believe in NRR. I'm saying you got to track it, like it's good. Just in the back of your mind realize it's not quite that good. And looking at N helps keep you honest about what's really going on with these customer cohorts. So that's why they're both useful. In fact, this is why they're both useful. So NRR of course is important. A nice way to see this is if everything I'm saying is true and there's these limits because of cancellation, then there should be no way to get a big company, like a public SaaS company, unless NRR is greater than 100. Like otherwise cancellation should just win. And that is in fact the case. There's over a hundred SaaS public companies and something like two of them have NRR less than 100%.

Like that's how it goes. And those companies have horrible financials and their valuations are bad. It's not good. It's not a good thing. And in fact the median for an IPOed SaaS company, like at IPO, the median NRR is 119%. So that's what it takes. You can't do this. You're limited unless... Now your goal may or may not be to get that big, but the point being it's mandatory for growth.

Now if the literal customers are just leaving, you got to plug that hole first, like you said. But okay, if they're okay, that's why this is in order. If that's generally okay, now we turn to NRR to say, okay, but the ones who stay, they're hopefully happy. They need to grow. Okay, so that's kind of the full story of NRR. I think people who've heard of NRR don't necessarily think about all those things and realize that. So a good question is, okay, what do I do with NRR? But I think the answers are pretty clear: you add features, you have different tiers, you change the pricing in some way with usage or seats or something that kind of goes up automatically as they get more value out of it. So I don't think that's terribly interesting to double click into. It's sort of obvious.

I would say, oh look, it's tied into pricing because of their behavior. But the main thing is you want it to the point where the customer themselves would agree when they pay more that they are getting more value. Hopefully, they even think they're getting far more value than the price going up. I'm going to say this as if it's precise, which it's not. But they need to feel like if the price doubles, yeah, but I'm getting five times the value, so that's fine. Like that should be the feeling whether they can measure it or not.

A good way to do that is to say, well, then you should be measuring whether they're getting value out of it. Often we measure usage metrics and other kinds of metrics within our product because we can. But actually what's really important is to measure how does the customer value this. And we need to measure that so that we make that go up because if we make that go up they'll be willing to pay in whatever structure. And if that isn't going up they won't be willing to pay. So even if we start making them, they'll leave. And we all know, we've all probably done it ourselves. We've all had products we love, but then as we scale, the price goes up faster than we feel the value is, and then we start looking for other products. Like we've all experienced that.

So that's what I'm saying. To do that, you want some sort of measure of the value the customer is getting. If you're really lucky, that can be a number. That would be wonderful. Then go do that and maybe that's your north star. But admittedly, it's not always possible. So then the question is the usual questions of metrics. Are there proxy metrics that we understand? They're not the full picture, but they're helpful. They're part of the... And I'm a big believer in saying not all important things are numbers. I mean even things like how differentiated are we in the market—not a number but it's very important. So this might be one of those things that's important but not a number.

So okay, can we get some proxy metrics, even of behavior, other things? Something better than some metric that's just operational. And even if it's qualitative, okay, can we do that? Can we talk to customers and ask them qualitative questions to try to say like, you know, I would just say do your best here. Because only when you generate more value for the customer can you then decide how to split that with the customer in terms of things like price. But that's my—that's in fact how I think of it. That very phrase: how do we create more value for the customer and then split that with them. And when you do that you're keeping the customer forefront in mind. You are taking some—like splitting means you get some. Like let's not forget it's not a charity. And on the other hand, first we should think how are we generating value for customers and then we can take a little—we've now earned the ability to take a little piece of that. So to me this is the right way to think about NRR. Not just 'we'll add a feature and make them pay'—true—but let's actually take it from this different perspective.

Yeah.

Yeah, I think that's right. And maybe you don't deserve it. Like, in other words, especially when there's investors or other sort of forces saying like, 'Hey, we need X, Y, and Z.' The forces that are not the customer saying that, yeah, you can be coerced into making pricing or other kinds of policies that in fact are not good for the customer. So one tool I use is when anyone claims anything really: is that really true or is that really actually good for the customer? Because look, we are going to do things that are selfishly good for us. We have to. We can't just do things that are bad for us. But is this in fact good for the customer? Because often even in an internal proposal, we say it as if it is. 'Oh, this pricing will be good. It'll raise prices on everyone, but it's better because of this reason that we're sort of justifying.' It's like, well, will the customer say this is better? If the answer is no, it's like, okay, it's better for us, but sorry, we have an equation where it has to be better for us and better for the customer. Sorry, it's an AND. And of course, not all companies do that. And we experience that as consumers on the other end of that, and we don't like it. And that's not a good long-term strategy even though it might work in the short term, as many bad long-term strategies are.

What I would say is the rules are true everywhere because they're based in the mechanics of finance in the business. Now you are right that in the consumer segment or small business segment for that matter, they tend not to grow. So that doesn't mean the NRR question is invalid. It means dang, we can't think of anything. That's okay. Then you go on to the next question because you can't think of anything. But it would be more strategic if we could.

And are we trying hard enough? As a consumer, I do not want to spend more with AT&T, but they're also not giving me any more value.

So you're right, but as a product manager, it would be 10 times more valuable for you to think of something like that than to move on to other things. Or there's other ways like other products—we didn't talk about it and it's okay because of course each one of these you could go on forever. But another way is a second product. A second product sold to the same segments that you're in so that your existing customers can buy it. Well, I don't know why that wouldn't work in consumer. It certainly works in consumer and apparel.

Yeah.

But I would say the mechanics of how the finances work is the same. You're just saying I don't have this lever to pull. And then I would say okay, then you need different levers. One that we didn't talk about is one way to offset the cancellations is existing customers grow. But another way is if existing customers bring in new customers. So they didn't grow, but they brought their friend. Now this is absolutely something that happens in consumer. But it's also an answer to this thing where cancellations grow exponentially. Because existing customers bring in new does triple if you have more existing customers. Aha. So this is stuff like refer a friend and all this kind of stuff. Again, some of this is obvious. We don't need to enumerate that. But those things are good.

And so in consumer you might say, oh, it's easier to try to get someone to invite a friend with a coupon and blah blah blah than it is to try to get them to grow. But in B2B that may not be true. I don't get a mid-size company to refer. That doesn't make sense. So once again, this question of how do we have the existing base help us grow is still correct in consumer but its manifestation could be very different. Of course, I agree with that. But I mean, how could we not say—of course things like word of mouth and inviting friends, of course that's enormous with consumer and this is one of the reasons why.

Oh for sure. Right, right. It's more growth. It's just maybe a little more evocative.

Like if growth is really good, the problem is generally operationally scaling to meet the growth. And so you're focused on that. It's when growth slows, you're like, 'Whoa, wait, wait, wait, wait.' We have to focus on growth now, as opposed to of course it's always nice. So yeah.

Get all these gems. Change the color of your app to something fancy.

So, okay. Logo churn. Pricing. NRR. And then maybe it's stalled. So this is really a stalled question. Maybe your acquisition channels, your marketing channels are saturated. We're done. I mean, what we tend to do is flog the people doing AdWords, get more, flog the SEO people, get more searches. It's possible that this is it. Maybe this is it in some sort of physical law. There literally isn't anything else. Or maybe this is it, just this is how good we can be. We're just not—this is it. But there really are limits.

There's different words for it. Inventory is sort of the old word, like with magazine ads. Inventory was the word, but there's just this amount. Like there is only so many searches in your area and you can only appear once in the search results for a given keyword. So there is this limit of what you can get. Even if you were number one position for everything, other things that are not even practical, there's still a limit and there's some kind of practical limit that's below there that we don't really know. But maybe we're there or maybe we're close.

And worse, channels tend to decline over time. So I think people talk about S-curves, right? Oh, I didn't figure out this market, then I figured it out. We unlocked it. Now we're getting 100 leads per month through Facebook or whatever. But then it kind of taps out and then we go into this optimization mode. Can we eke out another blah blah blah, which is right, that's right. And you call that an S-curve because it's shaped like that. But that's not what happens. What happens is it starts with an S-curve and then it starts sagging. Its butt starts sagging down.

So I wrote an article about this called the elephant curve, which is what I named it, because it's like this trunk and then it's this butt. And there's different reasons why this happens, but if you talk to any marketer, they'll all tell you, 'Oh my god, let me tell you this story.' They all have stories about it because yeah, this is what happens. There's different reasons. First of all, the audience gets saturated, because there's all these little marketing-isms and I don't know if they're true or not. I don't think any of it has any data that actually proves it, but whatever. Like, you know, if words start with the same letter, that's better. I don't think anyone's ever proved that's true, but marketers seem to think so.

Okay. Well, one of the things is someone has to see it seven times before they act. Okay. All right. Well, maybe they saw it seven times already, so they don't want it, or they saw it 20 times. So initially you hit people who hadn't seen it yet. But now you have. And especially with magazine ads as I used to do before there was no such thing, that's exactly what would happen. You'd have this nice surge and then like, well, we've seen this before. So you still get a little trickle. You still get some because it was just that moment they needed to see it again. But a lot of people have already seen it and they don't want it.

Or the channel is declining and they'll never tell you. When I did magazine ads, every year they would tell you what their circulation is, and every year it would go up and then the magazine would go out of business. Conferences are the same way. Attendance is great. Attendance is great. Oh, wait. We're out of business because we couldn't get enough people to come. What? What they said? It was great. And more quietly, AdWords, Facebook ads, even SEO searches, this does happen all over the place. Affiliates, it can happen. And now with AI, I mean, I don't even know. It's disrupting everything. We've all heard stories going all different directions. I think the answer is I don't know. Shrug is the answer. And what will it be like in two years? Another shrug.

But the point being they're not all going to be growing a lot. That's not one of the futures that AI will bring. So it has this sag. That's just a very long way of trying to prove this point. But it's yet another reason why you can't just rely on marketing forever because not only do you try to stack things, but there's not an infinite number of marketing channels you could advertise in that your customers are actually going to. And they sag. Oh no. Like it's even harder to keep up. So it's kind of like reinforcing my very first point here with this. But here, are they all saturated? Because we could flog marketing all we want. It's not going to work. So maybe growth is slowing because all our channels are saturated, possibly even sagging, but even if not, okay, not growing. And so we can't just flog the marketing department. It's going to take something else. Then the obvious thing is get more channels, but again, maybe there aren't any. So there's many possible things to do, but this is this critical thing to notice.

Because I guess I would put it this way. Do you know right now which channels are saturated and which aren't? If the answer is no, I'm like, well, okay, maybe that's because the answer is all. You know, that needs to change how you think. Just adding one little feature and then hoping we can flog AdWords is not going to work. Even if the feature is great, not going to work. So there's different things that could work, but that's not one of them. And yet, that's probably what we're doing. Let's add another feature and marketing can flog it is often the answer. But if you're in this state, that isn't the answer. So this is why like you could say it's obvious to say this or that, but are you acting like this is true? You know, often we don't. Okay, so there are many things to do. Again, we don't have to enumerate all of them or something. It's just simply the right question to ask. But for example, some people are like, we've done direct, maybe we should try things like SEO and social and these other indirects, or vice versa. We're really good at SEO but we've never taken out ads. Often if you've done ads and they're optimized, you know what content might be good to write stuff for SEO and maybe even vice versa. So, it's a good idea and sometimes it works, but here I have no data. I only have my feeling here and actually you probably have a lot more visibility into this, but my experience is a product that's sold really well direct actually doesn't do well in things like social and SEO and vice versa. If you're getting a lot of traffic through SEO, adding ads often costs a lot and doesn't really move the needle. Like you can tell me, is that because I don't have data to support that theory.

Yeah. So, you know, should you do that? Yeah, probably. Especially if you're at some scale and you can just afford to because it's such a clear thing to do. But probably you'll have to get more creative about what it means to add a channel or something like a new product or a new market where it's actually new. It's expanding in a new way rather than trying to incrementally expand what you're already doing. So an example of getting creative on a channel is what Constant Contact did when they had this very problem of growth is slow. We don't know how we sell email marketing newsletters to small business before all these modern tools existed. And one of the things they did that restarted growth is they physically went to a bunch of cities and held workshops showing here's how to do email marketing for your small business. So the restaurateur and the dentist and everyone would come to these sessions and they teach them how, of course teaching them how with Constant Contact. So they became customers, right? You would think there's no way this is cost-effective physically being in these cities and dragging people in for a $20 a month product like no way. It was very effective and actually solved in that moment their restarted growth. They were very clever about, first of all it's a clever idea but then they were clever about how to do it. They took like power users who were also agencies. So like these could become customers of their, okay, all like you could be clever about like how is it that we do something different, something new. So that's possible. Of course, it's always hard to say, 'Think of something clever.' That's a weird finger-wagging thing to do, but okay, it's true. But yeah, it could be a different type of channel. For example, HubSpot famously tested selling through agencies instead of direct. It ended up being 50% of the revenue after four or five years. So, it's one of the main reasons why they're able to continue growing. Same thing happens with my company, WP Engine. Tons of our websites are sold through agencies that create WordPress sites. So there could be something that's not direct anymore that's another channel of human beings or something like that could in fact dramatically change your growth rate. There's lots of examples like those. So but it could be like it's time for the next product, and I said that earlier because it's always possible. Of course we all know that's very hard. It's risky. I have sort of a framework that I use to think about that kind of expansion which I'm happy to provide. I've also written it up but I'm happy to say it right here. But usually you want to stay in the target market you're already good at and grow from there. But sometimes the whole point of the expansion is to change the target market or add something where you're leveraging something else about the company that you have as an asset going somewhere else. So this is what this framework helps decide. But one way or another you probably want to plant one foot into some strength or asset that you have, move the other foot which is the risky part, but the idea is that yeah, well we have this big upside so we're taking that bet and that becomes a smart bet. So with things, of course that's true for any of these things but especially if acquisition channels are full and it's like we literally can't ask the marketing department, like that's just not one of the choices. It almost forces us to start taking these more drastic bets to say, 'Well, we got to do something and that's not one of them.'