Jacques Mattheij

Technology, Coding and Business

Life Cycle

Like just about every other item in the universe, accounts in a freemium product have a life cycle.

If you ever hear a freshly minted freemium product owner say ‘we’re growing at 50% monthly, we will be rich!!‘, you know they haven’t yet worked out what their product life cycle is.

And - make no mistake - that life cycle is always there and when you hit the inflection point where sales no longer outstrip deletions it can cause a world of trouble if you are not very well prepared. And everybody hits that point eventually, if only because there is a limited number of potential customers that you can sell to.

Some numbers to illustrate this:

Imagine a website that rents out widgets by the month, for every widget rented out a user has had to make it all the way to the bottom of the sales funnel (or to that inland goal from the ‘funnel’ page). Initially, for every new user the numbers seem to increase dramatically. In the first month the widgets company sold to 10 new users out of 10,000 visitors, one sale every 3 days, each widget sells for $50 per month and turnover that first month is a cool $500. Infinite growth! (0 -> 500).

In the second month, they do it again, magically, they get a 100% increase in turnover and they go from $500 to $1000. $500 from the customers signed up the previous month, and $500 from the new ones.

In the third month, they find that sales are down a bit, maybe they’ll sell 6 subscriptions, but of the first batch 4 customers cancel and, much worse, 1 charges back the two charges already made citing ‘unsatisfied with product’.

So, that’s $800+$300-$100, or another $1000. And a > 1% chargeback rate!! (now you’re in trouble).

And it started off so well. This example is over-simplified, but it has all the components in it that will help you figure out how you’re doing, all the KPIs (key performance indicators) are there.

What are they?

  • conversion rate (1 sale out of 10,000 visitors)

The conversion rate is the number of sales divided by the amount of total visitors to your website in a given period. In this case 110,000, or 0.01%. Not fantastic ? No, but I’ve seen worse. Much worse.

  • retention (the time that customers on average remain subscribers to the service)

Retention is, besides the conversion rate one of the most important figures in the freemium business model, it determines how long you can on average count that your users will stay with the service. A typical sale can be multiplied by the average retention in order to figure out what you will be earning on a customer. This in turn can help in figuring out what budget is available for customer acquisition and for the operation of the service.

  • refund / chargebacks

These are a measure of the satisfaction of the customers that you’ve got as well as an indicator of how good your fraud control measure are working. A high chargeback rate is absolutely lethal because it will cause the credit card company to annul the merchant contract. Make sure you keep plenty of leeway between your allowed chargeback maximum and the actual rate, all it takes is one shitty month service-wise or an over-agressive marketing campaign to suddenly not be in business any longer. It’s much better to refund an unsatisfied customer than to have the customer charge back.

  • saturation

As you get larger you will see that the number of visitors to the site that is new decreases and if they didn’t buy your product last month then they’re unlikely to do so this month. Typically this manifests itself as a reduced number of sales with a level (or even increased) number of total visitors. So the conversion rate will drop after operating the service for a while, all other things being equal.

  • cancellations

At some point cancellations will balance the number of new people buying the product and total membership remains steady unless you take some action. Typically action includes product development, marketing and AB tests to figure out better ways to sell to your existing customer base.

If you’re clever (and not lazy, like me) you start doing this before you reach the point where cancellations match new subscribers.

As long as you have not yet reached the point where you can pinpoint your retention with some accuracy it may seem as though growth will continue, but it is very important to note that because chargebacks from the past are rated against the current sales volume that any contraction of sales combined with an increase in chargebacks can be fatal. This is known as the ‘coffin point’, a term borrowed from aviation, it means that to outrun destruction by chargebacks some companies will have to keep growing at a fixed rate, whatever the cost. This is why you sometimes see crazy affiliate rates where companies will pay you $50 for a $20 membership. The $20 membership gives them one more sale in their bucket to dillute the chargeback rate.

If your chargebacks are low, count your blessings, you can market more aggressively, if not tread very careful, and as long as you do not know your chargeback rate assume it is high.