Lenny's Newsletter · Product & Work
TIER 5 2021-01-05
> ## Q: I read your post about [the most important bottom-up SaaS metrics to track](https://www.lennyrachitsky.com/p/the-most-important-bottom-up-saas), and I was wondering – do you have the same kind of advice but for a consumer subscription business? Whether you’re in B2B or B2C, subscription businesses are so hot right now. And it makes sense — recurring revenue is hard to beat. Instead of starting from $0 each month, you start each month essentially at the peak of your previous revenue.  B2C subscription businesses come in many shapes and sizes, but you can roughly break them down into three categories: Content, Software, and Physical Goods.  What they all have in common is that a regular person (not a business) decides to pay a monthly fee for access to something — content, software, or something they receive in the mail. And when it works, it works very well: - Netflix: $230b - Spotify: $60b - Stitch Fix: $6b - Duolingo: $2.4b - Calm: $2b - Strava: $1.5b - Ipsy: $1b+ - Masterclass: $800m Now, to answer your question, to succeed, a consumer subscription business needs to nail six things: 1. 📈 **Acquire new users** sustainably 2. 🤯 Get enough new users to **quickly experience your value [***Most important for Software]* 3. 😍 Make sure enough users **continue to find value [***Most important for Content]* 4. 🤑 Make sure enough users **decide to pay** 5. 💸 Make sure enough users **continue to pay** 6. 🚚 Be able to **deliver the product/service profitably [***Most important for Physical Goods]* Below, you’ll find tall of the most important metrics to watch and optimize across these six buckets, but if you want the short answer on metrics to track, here’s where I’d start: #### Software subscription businesses: 1. **Activation rate**: The *percentage* of free/trial users who **hit a valuable milestone** in the first X days after signing up (e.g. meditate, watch a show, listen to a song, find a match, sync a folder, etc.) 2. **Intensity of engagement:** [L7/L30](https://a16z.com/2018/08/06/power-user-curve-l30-l7/) 3. **Conversion from free to paid**: The *percentage* of free users who convert from free/trial to a paid subscription X weeks after signing up 4. **Cohort retention**: The percentage of paid users who are still paying 1 month and 1 year later #### **Content subscription businesses**: 1. **Cohort engagement**: The *percentage* of users who are **still doing something valuable** (e.g. meditating, watching, listening, learning, matching, etc.) X weeks after signing up 2. **Conversion from free/trial to paid**: The *percentage* of free users who convert from free/trial to paid X weeks after signing up 3. **Cohort retention**: The percentage of paid users who are still paying 1 month and 1 year later #### Physical goods subscription businesses: 1. **Second-order retention**: The *percentage* of users who don't cancel after their first order 2. **Contribution margin**: Incremental profit earned for each unit sold, subtracting all variable costs from a product’s price 3. **Cohort retention**: The percentage of paid users who are still paying 1 month and 1 year later Have any suggestions, ideas, or questions? Leave a comment👇 [Leave a comment](https://www.lennysnewsletter.com/p/the-most-important-consumer-subscription/comments) Hungry for more? Keep reading. # The most important consumer subscription metrics to track #### **1.** 📈 **Can you acquire new users sustainably?** - **Free user growth**: MoM growth in free/trial users [*Over 20% is great*] - **Payback period**: How long it takes to recover the cost of acquiring a new customer from their subscription revenue [*Under 6 months is great*] - **Virality**: The average number of new users an existing user drives [*Over 1.0 is great*] - **ROAS**: [Return on advertising spend](https://www.bigcommerce.com/ecommerce-answers/what-is-roas-calculating-return-on-ad-spend/), by channel [*Over 4:1 is great*] #### **2.** 🤯 **Do new users experience your value?** - **Activation rate**: The *percentage* of free/trial users who **hit a valuable milestone** in the first X days (e.g. meditate, watch a show, found a match, synced a folder, etc.) [*[Benchmarks](https://discover.mixpanel.com/rs/461-OYV-624/images/2019-Mixpanel-Product-Benchmarks-Report.pdf)*] - **Total number of activated users**: The *total number* of free/trial users who have **hit a valuable milestone** (e.g. meditate once, watch a show, listen to a song, match with a user, sync a folder, etc.) in the past X weeks #### 3**.** 😍 **Do users continue to find value?** - **Monthly (or weekly) active users**: The *total number* of users who **have done something valuable** (e.g. did a mediation, watched a show, took a lesson, had a match, etc.) in the past X weeks - **Cohort engagement**: The *percentage* of users who are **still doing something valuable** (e.g. meditating, watching, listening, learning, matching, etc.) X weeks after signing up - **Intensity of engagement:** [L7/L30](https://a16z.com/2018/08/06/power-user-curve-l30-l7/) for software, time spent for content #### **4.** 🤑 **Do your users decide to pay?** - **Cohort conversion from free to paid**: The *percentage* of free users who convert from free/trial to paid X weeks after signing up, broken out by monthly and annual [*[Benchmarks](https://adachen.com/freemium-and-free-trial-conversion-benchmarks-9fab38d096da?gi=f9cb3789537d), [Benchmarks](https://medium.com/parsa-vc/consumer-subscription-kpi-benchmarks-retention-engagement-and-conversion-rates-9ac13b57c3d3)*] - **Revenue growth**: MoM growth in new purchase revenue (i.e. revenue from first-time purchasers) - **Velocity**: Median time to convert from free to paid - **Length**: Split between monthly and annual subscriptions #### **5.** 💸 **Do paying users continue to pay?** - **Cohort retention**: The percentage of paid users who are still paying X months later [*[Over 70% at 6 months is great](https://www.lennyrachitsky.com/p/what-is-good-retention-issue-29)*] - **Second-order retention**: The percentage of users who don’t cancel after their first experience - **Subscriber growth:** MoM growth in new subscribers [*Over 20% is great*] - **Resurrection**: The percentage of churned users who re-subscribe #### 6. 🚚 Can you deliver the product/service profitably? - **Gross margins per order**: Net sales revenue minus the cost of goods sold - **Contribution margin**: Incremental profit earned for each unit sold, subtracting all variable costs from a product's price - **Contact rate:** Percentage of all users who contact support at least once - **ARPU:** The average dollar amount you’re collecting from a customer ## 🤓 Further study 1. [10 Factors To Consider When Evaluating Consumer Subscriptions](https://nbt.substack.com/p/10-factors-to-consider-when-evaluating) by Nikhil Basu Trivedi 2. [Hierarchy of Engagement](https://sarahtavel.medium.com/the-hierarchy-of-engagement-expanded-648329d60804) by Sarah Tavel 3. [Consumer Subscription Software Insights](https://cdn2.hubspot.net/hubfs/4119751/GPB%20Research%20Reports/GP%20Bullhound%20-%20Consumer%20Subscription%20Software%20Update%20-%20Aug%202019.pdf) by GP. Bullhound 4. [The Internet Subscription Startup is Winning](https://tomtunguz.com/consumer-subscription-services/) by Tomasz Tunguz 5. [Twitter thread on this topic](https://twitter.com/lennysan/status/1343730958013501441) See you next week! *Thank you to Adam Fishman, Mike Duboe, Yuriy Timen, and Sriram Krishnan for feedback on this post.* ## **🔥 Job opportunities** **✨**Sponsored job of the week: **[Senior Director of Product at Plume](https://www.linkedin.com/jobs/view/2344670919/?trackingId=YHvRTxoetClV7013SkxEAQ%3D%3D) ✨** 1. **Product**: [Descript](https://jobs.lever.co/descript-2/08f9b563-c3e6-49a4-be07-82fafc1868af), [Kudo](https://kudo.bamboohr.com/jobs/view.php?id=32), [Hipcamp](https://jobs.lever.co/hipcamp/d04821c3-fb9a-4d3f-9a7a-1b75deacc09f), [Plume](https://www.linkedin.com/jobs/view/2344670919/?trackingId=YHvRTxoetClV7013SkxEAQ%3D%3D), [Prenda](https://apply.workable.com/prenda/j/63270A44BB/) 2. **Growth**: [BasisOne](https://www.basisone.com/careers/growth-strategy-lead), [Coda](https://boards.greenhouse.io/coda/jobs/4794809002), [Prenda](https://apply.workable.com/prenda/j/AC98C5FDFB/) 3. **Design**: [Ashby](https://jobs.ashbyhq.com/ashby/145ff46b-1441-4773-bcd3-c8c90baa598a), [Office Hours](https://docs.google.com/document/d/1_aHEl08ahc6NjOhwmi9GQlNv8CvlOwf8hL-FyCrmAes/edit), [Runway](https://www.notion.so/A-Product-Designer-baa24543701f472bb291d4429812064a), [Watershed](https://www.notion.so/Designer-Watershed-7cb7bf8bd750432399d36e83e4e32391) 4. **Engineering manager**: [Cerebral](https://boards.greenhouse.io/cerebral/jobs/4076598003) 5. **Frontend engineer**: [Levels](https://www.notion.so/levelshealth/Join-Levels-Remote-Developer-58454f0db7e3466692f7b75db6237ddf), [Practice](https://www.notion.so/Front-end-Developer-929e1933b9b4432a851043adbb7bff04), [Tome](https://www.linkedin.com/jobs/view/2323962506/) 6. **Backend engineer**: [Driveway](https://www.notion.so/Driveway-Senior-Engineer-758d5ce4ce764f9ea920c5728ee136f3), [Transform](https://transformdata.io/careers/) 7. **Fullstack engineer**: [Cascade](https://www.cascade.io/jobs/full-stack-product-engineer), [Centered](https://www.notion.so/Software-Developer-e7cad269968e4d5aaeb1f6da9e282626), [Icebreaker](https://icebreaker.video/product-engineer), [Iggy](https://www.notion.so/askiggy/Full-Stack-Engineer-IggyAPI-5a8c1825028e421b9587538718f370b4), [Primer](https://www.notion.so/Senior-Software-Engineer-Full-stack-web-San-Francisco-CA-3a0af35008104def82836a5b9a5a88e1), [Runway](https://www.notion.so/A-Product-first-Full-stack-Engineer-5e056689b68048aeb1ccfea6ac73eb9e), [Snackpass](https://jobs.lever.co/snackpass/7c3bb72b-70d3-45ca-9dea-eea57ed5333d), [Stytch](https://jobs.lever.co/stytch/00c92a1b-36c2-46f6-8af1-885a6bbd6bd4) 8. **iOS engineer**: [Pairplay](https://www.notion.so/Lead-iOS-Developer-ba18577b6ba44ad68e45b8e7a957353c), [Primer](https://www.notion.so/Senior-Software-Engineer-iOS-San-Francisco-CA-87f0fd3ee3dc4c3f8d0419c07fcdd434), [Stytch](https://jobs.lever.co/stytch/d3bf3860-4aaa-4a23-8e28-dad20957be44) ## **🧠 Inspiration for the week ahead** 1. **Watch**: Enormous xylophone in the woods of Kyushu 1. **Listen**: [Growth and Go-To-Market with Brian Balfour and Pascal Levy-Garboua](https://podcasts.apple.com/us/podcast/growth-go-to-market-brian-balfour-pascal-levy-garboua/id1316769266?i=1000501725550) 2. **Read**: [Meet the unicorn founder that braved war zones and missed meetings to make his mark on the startup world](https://fortune.com/2020/11/19/calendly-founder-tope-awotona-startup-unicorn/) #### **How would you rate this week's newsletter? 🤔** [Great](https://t.sidekickopen82.com/s1t/c/5/f18dQhb0S7kF8cV_VXW1CdjwB59hl3kW7_k2847sD3qkVNxJHk1CX2ZcW2bzNJl8lkfc1101?te=W3R5hFj4cm2zwW4cQKtC3KcLnYW4hLZp03ZVbTxW1JB0ML1--tKxW20ZTw51-YpBFW1W_jBk1ZmvHBW21j9tt1-_j_TW1Vnkcj1V3fMvw1V21pC4Hp2&si=7000000001348012&pi=6174bab6-7009-4402-a497-3d6f867fbea1) • [Good](https://t.sidekickopen82.com/s1t/c/5/f18dQhb0S7kF8cV_VXW1CdjwB59hl3kW7_k2847sD3qkVNxJHk1CX2ZcW2bzNJl8lkfc1101?te=W3R5hFj4cm2zwW4cQKtC3KcLnYW4hLZp03ZVbTxW1JB0ML1--tKxW20ZTw51-YpBFW1W_jBk1ZmvHBW21j9tt1-_j_TW1Vnkcj1V3fMvw1V21pC4vX2&si=7000000001348012&pi=6174bab6-7009-4402-a497-3d6f867fbea1) • [Meh](https://t.sidekickopen82.com/s1t/c/5/f18dQhb0S7kF8cV_VXW1CdjwB59hl3kW7_k2847sD3qkVNxJHk1CX2ZcW2bzNJl8lkfc1101?te=W3R5hFj4cm2zwW4cQKtC3KcLnYW4hLZp03ZVbTxW1JB0ML1--tKxW20ZTw51-YpBFW1W_jBk1ZmvHBW21j9tt1-_j_TW1Vnkcj1V3fMvw1V21pC4kr2&si=7000000001348012&pi=6174bab6-7009-4402-a497-3d6f867fbea1) *Have someone in your life who would benefit from this newsletter? Feel free to forward this email to them, or better yet, give them a gift subscription*💖 Sincerely, Lenny 👋