What Is Negative Churn

What Is Negative Churn?

Today’s episode of Startup Hustle is all about negative churn. Matt DeCoursey sits down with Paul Orlando to discern what churn is all about and how to achieve it. Our guest is the founder of Startups Unplugged, an incubator director, and an adjunct professor at the University of Southern California.

Covered In This Episode

Have you ever heard of negative churn? Did you use it as a variable for your business strategies? If you haven’t, it’s time to learn what negative churn is and its importance to entrepreneurs. 

That’s not the only thing that Matt and Paul talk about. They also share a perceptive discussion about customer lifetime value, brand loyalty, and customer acquisition costs. What are you waiting for? Tune in to today’s episode now!

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Highlights

  • Learning Paul’s backstory (02:15)
  • The meaning of negative churn and what it means for companies (06:30)
  • Paul and Matt’s real-world insights on negative churn (10:16)
  • The formula for CLV calculation (16:55)
  • The importance of knowing negative churn, CLV, and customer acquisition (25:25)
  • Customer acquisition cost and tracking (31:42)
  • Paul’s final thoughts on negative churn, Startups Unplugged, and his book (41:45)

Key Quotes

I’m kind of reminded of the fact that the world often has different solutions or sums to what feels like should be the only thing. Is 2 plus 2 equal to 4? Yes, it does. But sometimes, in the world of startups and business, 2 plus 2 equals fish. Or something weird, which is kind of funny but you’re not necessarily right or wrong. There is actually a variable.

– Matt DeCoursey

If you’re just using a number, and not looking at the different parts, you’re losing something.

– Paul Orlando

Remember, it’s always cheaper to keep the clients you have than to find them.

– Paul Orlando
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Rough Transcript

The following is an auto-generated text transcript of this episode.

00:00.00

Matt DeCoursey

And we’re back for another episode of Startup Hustle. Matt DeCoursey here to have another conversation I’m hoping helps your business grow. There are so many KPIs, stats, and things that we talk about in software startups and the business industry, in general. And one of them that doesn’t get enough conversation is negative churn. So many of you hear the term “churn,” and you know it’s associated with customers, users, and people leaving. What about when it’s negative? That’s exactly what we’re going to get into today. And before I let you know who I’m going to be having today’s conversation with, today’s episode of Startup Hustle is brought to you by FullScale.io. Helping you build a software team quickly and affordably. With me today, I’ve got Paul Orlando. Now, he’s not from Orlando, but his name is Paul Orlando. He is the incubator director and an adjunct professor at the University of Southern California, where I guarantee you it’s much warmer than where I’m at today. He’s associated with Startups Unplugged. You can go down to the show notes and click StartupsUnplugged.com. Paul, welcome to Startup Hustle.

01:11.83

Paul Orlando

Matt, thank you for having me. I love your show, and I’m really excited to talk with you today.

01:18.51

Matt DeCoursey

I’m looking forward to this. This is an interesting topic. And, you know, before we get too far into that, why don’t we just start with a little bit of your own backstory.

01:27.32

Paul Orlando

Sure. So I’ll give you a little extra on that backstory because I think it will tie into some things that we end up talking about today. But I had a startup of my own. This is now about ten years ago. It’s starting to feel like ancient history. But it was a time when I made a ton of mistakes. I figure I made about 95% of the possible mistakes that I could have made in a couple of years. And I became fascinated with just the process that founders go through in figuring things out, or more typically, not figuring things out. So I was kind of in that mix, trying to sort out how we’re gonna make our business viable. Really trying to figure out who our true customers are and what we need to build. As a result, and along the way, I started doing this founder roundtable series. This is in New York City, and every couple of weeks, I get a group of maybe 8 or 10 people together, and it was pretty, you know, pretty conversational. Kind of like your show, I suppose. It wasn’t like a class or anything. It was more like you show up, talk about the issues that you’re dealing with, and get that feedback from others in a similar position. I was doing that for a while on the side, and I just realized I liked that type of work. I liked engaging with lots of other founders. I felt like I had something to add, so I wanted to make it a bigger part of what I did. I ended up scouting around to see how I could either join or end up building a startup accelerator or incubator. Long story short, that’s the direction I ended up going in. In the last, I guess, nine or ten years, at this point, I ended up building and operating four different programs in different parts of the world. We would either invest in companies, bring them in, work with them in the portfolio, and try to help them be more successful than if they were staying by themselves. Back to the university work that I do, I teach at USC Los Angeles. I run the university incubator program that they have, and I got focused on this topic of, you mentioned, negative churn. And this is like, to me, it’s more broadly about unit economics. It’s about lifetime value customer acquisition cost.

04:11.85

Paul Orlando

I got really interested in that because when I was hired, I was looking around. I was like talking to a ton of students when I was just in the door, and I kept asking them. Do you know what’s going on? Well here. What do you wish you had? You know, like a lot of the same questions that helped me when I was first building those early startup incubators, and um, I heard the story from an MBA student who told me, you know I have to take this required marketing course as part of my degree, and he already had this apparel business. He was building. And yeah, they got to take this required marketing course, and I said something, you know, in class about kickstarter, and this is like 2015, you know, I said something about Kickstarter, and you know the professor teaching the class had no idea what I was talking about. So um, I kind of took that as a feedback point. And I was looking around like you know to some others I was thinking about my own experience. So I ended up building a course that I have been teaching since, I guess 152016, which is themed around. You know these topics: unit economics topics lifetime value. How do you figure out customer acquisition costs, how do you figure it out, and um, in that class, I have like the in-class part. That’s, you know, a little bit about using those formulas and trying to understand how businesses deal with this, and then I bring startups into the class and. Students end up working with a startup on some element of their growth where they definitely interact with lifetime value, and you know other known elements of unit economics. So um, that’s a little bit about me and how I got interested in this topic, and you know, ah. But I dealt with it in the past.

06:02.15

Matt DeCoursey

As I mentioned, there’s what feels for startup founders, especially when you’re new. It feels like there are ten million KPI, stats, and things that you need to keep up with and consider and think about and talk about. You know it can be a little overwhelming. I mean, one of the things now you know today’s episode’s all about negative churn. So what is that, and I’ll give ah, here’s the somewhat textbook definition of it so negative churn also known as net negative revenue churn. Or negative revenue churn is when new revenue from existing clients and that’s an expansion of your monthly recurring revenue or something similar is greater than the amount of the revenue you lost from cancellations and downgrades, so you hear these terms, and there’s you know, only 10000000 acronyms to go with them. But if you’re starting a tech company.

06:48.47

Paul Orlando

One month

06:56.26

Matt DeCoursey

So many people are or want to listen to this show. Do you know? MRR is the thing, so that’s your monthly recurring revenue now at my company, Full Scale, and you go to http://fullscale.io to see what we do. We actually, yeah, I made my own acronym for monthly recurring contracts, which is. Similar to ah Mrr because it is still our recurring revenue, but we use the monthly recurring contract value to gauge our growth our slowing of it now with that we’ve had negative churn pretty much the whole time. The companies existed and.

07:29.71

Paul Orlando

Yeah, yeah.

07:32.36

Matt DeCoursey

That’s because we get a lot of orders, so our average client comes in, and so what is Paul? We help companies build teams of software developers, and we’ve got just under 250 people in our office in the Philippines. So. What that means for us is like a lot of our clients come in, and honestly, they kind of tippy-toe in they’re like, hey I’ll try 1 or 2 people at first, and you know I get that, so when you get negative churn, it means that your existing customers are finding value in what they’re doing and they’re.

07:50.21

Paul Orlando

Forever.

08:04.69

Matt DeCoursey

Growing their spend or their account with you So This is to me This is like a real harbinger look at me using fancy words this early in the day, but that’s a sign of things to come, and this is a good thing like you want negative churn Now one of the things that go with it is this also. You know Negative Churn has a big effect on your future projections, and that’s been something for us that we’ve always had to consider because you know we look at like, hey well for Us. We’re not as scalable as a software company because we have to find the right people to do the job, so we have to look at this kind of stuff.

08:24.52

Paul Orlando

We like it.

08:35.38

Paul Orlando

Great.

08:39.52

Matt DeCoursey

Really carefully. We can’t just spin up a new server, or you know, or add more microservices or stuff like that, so we need to make sure that we can take care of the people that we’re already doing business with before we add new clients who have at certain points in our timeline. Yeah, we’re not even four years old yet. And we’ve had to like literally have waiting lists and stuff like that now because here’s the thing I don’t want to kill you don’t want the negative churn for founders and startups is the Golden Goose you don’t want to do you don’t want to kill what you’re doing to get that because you’re on the right.

08:59.19

Paul Orlando

Running motion.

09:10.66

Paul Orlando

Let’s run.

09:14.67

Matt DeCoursey

You’re on the right track. So, you know, as I said with some of that, we’ve been very, very particular about who we’re going to bring into our ecosystem and also making sure we can support the people that are already in it. So I mean, have you found anything about what I just said there?

09:26.94

Paul Orlando

Eight or absolutely, not at all. No, in fact, when you were speaking, I was thinking. Um, so so one part of that having negative churn.

09:33.16

Matt DeCoursey

Rub you wrong in the wrong way, professor.

09:46.90

Paul Orlando

If you know, one part of that is like you are obviously losing people along the way, and so you have to have some comfort with that. Like in other words, you know you should want to be losing those you know, call them bad customers. They’re either the ones that you know. We’re never a perfect fit for you, or they’re taking up too much of your support. You know time is saying in the business that you’re doing um, but it’s leaving you with like the best ones, the ones that really cannot live without your product. So um, yeah, they. When you were speaking, what it was reminding me of is that you have to have some level of comfort with like you are gonna be losing people along the way, that’s all right? You’re probably on top of your funnel. You’re bringing potential customers who were never really a great fit. But you were doing maybe they were on like a trial, or they said okay let me try this for three months or like I don’t know I don’t know what else? Um, um, you know what I should do at this point, and so they sign up for something. Not really a long-term fit. That’s all right, being able to move those people out of the funnel and just. Focus on those best customers. It can end up in a retention-centric business or a SaaS business. Yeah, it can end up with you like certainly making more per customer, and that is you know that is negative churn you know in the end, so it’s great that you’ve got that going already.

11:14.85

Matt DeCoursey

Well, I think you have a good point with the client or user thing. I’m also the founder of http://gigabook.com, and at one point, we went through Gigabook, just typical SaaS. It’s a booking and business tools platform, and you know, at one point, we had. You know, so half of our users are single-seat users, and we used to just do eight bucks a seat all the way up the line, and we realized that there was this huge strain that the single user like they had more support requests and everything. Then all the people that were paying significantly more, so we raised the intro price to fifteen bucks which didn’t seem like a big deal. But I mean, that’s like doubling. It’s literally almost doubling your prices. So if the price of a Honda Accord went from 30 grand to 60 grand, that’d be big.

11:55.70

Paul Orlando

Um, embrace.

12:03.24

Paul Orlando

Here right.

12:06.21

Matt DeCoursey

Ah, big splash. So but with some of it. It was also about, well, kind of like you mentioned. I think you have a great point there, and at Full Scale, some of it. You know, with an early ah young company that was growing as quickly as it did and is finding the right kind of clients like you know you come into these things as a new business. And you think you know who your ideal or Target client is, and then hopefully you’re right? But you’re probably not like that’s just reality, and then you kind of have to adjust to change lands. Hopefully.

12:25.77

Paul Orlando

3

12:38.85

Matt DeCoursey

If you’re not right, it’s adjacent to what you’re at because you know moving over a little to the right or the left or up or down a lot better than having to like take a full right or left turn or you know a one-eighty and so you know now one of the other things that come into this is you can’t really know that you have well.

12:40.82

Paul Orlando

And then. Right.

12:58.69

Matt DeCoursey

Negative churn is going to be a mystery to you if you don’t eventually get your arms all the way around what your lifetime value or customer acquisition cost is in some regards. Like now, those are different metrics. But yeah, so I mean basically when it comes to.

13:06.40

Paul Orlando

Exactly yes.

13:16.80

Matt DeCoursey

You know all of this. I mean, it’s really that the measurement of this stuff is difficult, so I mean as far as by the way I hate undefined acronyms so I’m gonna um, get I always stop to define them when and where we can because first.

13:28.20

Paul Orlando

Let’s talk about it. Yeah, I know I got to say something about that. So um, one of the things that I do, you know, like in my class or even just when I’m working directly with a startup is I ask them how they define these things, and you’ll be amazed at how often. Like, you’ll just get this. You know, really like you know lose you know like you know you know the vague definition of these terms. It can almost mean anything. Um, people do Define Lifetime value in different ways or customer acquisition costs in other ways. I have ways that I like that I found are most useful, at least for what I’m doing, but um. But yeah, like the number of times I found just to be really vague, like if I forced you to write something like a formula down on paper like you would struggle you know to do that. So um, you’re right to get past that definitely because otherwise, we’re talking about different things here. Um.

14:20.10

Matt DeCoursey

Well, well, if you look at life and like, let’s LTV, lifetime value, that and you know it’s okay, so I’m sitting here, and I’m kind of reminded of the fact that the world often has different solutions or sums.

14:22.80

Paul Orlando

But

14:37.78

Matt DeCoursey

To what feels like should be only like one thing. Like, is 2 plus 2 equal four? Because it does, but sometimes in the world of startups and business, two plus two equals fish or like something weird, which is kind of funny, but you’re not necessarily right or wrong. There is actually a variable. So like when you LTV lifetime value.

14:46.76

Paul Orlando

First,

14:56.52

Matt DeCoursey

To me, that could be defined as the revenue or profit because they might be there. I think you can look at them differently because revenue doesn’t always profit, and if I was using that example of Gigabook earlier, I could have piled up like a million. $8 a month, users can very quickly learn that I was just hemorrhaging cash because it was not profitable. So I think there’s not always. Ah ah, not always ah, a healthy view of that and then also customer acquisition cost.

15:17.60

Paul Orlando

Music. Yeah.

15:29.82

Matt DeCoursey

Refers to the expense incurred and the process of convincing the customer to become a paying customer now. This is also like I think people look at this incorrectly. They often just want to look at the ad cost, but you might have a sales engineer or a salesperson.

15:40.55

Paul Orlando

Um, right? Yeah.

15:46.96

Matt DeCoursey

Ah, three support people all this stuff, and this is all this is back to where revenue and profit can have a big gap in between them because you know it’s not. It’s not just always related to how many clicks or how much you pay Google and search results you know.

15:55.36

Paul Orlando

Absolutely not.

16:04.45

Paul Orlando

Right? So those are great points. So um, let me come back to something you said, in fact, like let me tell you the way that I like to calculate LTV and CAC.

16:06.55

Matt DeCoursey

Any of that. And yeah, I think that’s important stuff to remember.

16:20.86

Matt DeCoursey

Placed.

16:21.42

Paul Orlando

And then I want to actually connect it back to something that you were talking about earlier. So um, so I like doing an LTV off of your margins like a contribution margin. It can be trickier when it is a pure software product because, in theory, not always but like yeah. Some software projects. Ah, you know, products have um like ah 100 % you know margin you know it’s like a zero percent you know the marginal cost. You know them or just about, but the way I like um, you doing an LTV calculation is um, a couple of steps. So just the basics. Like there are like three parts to it. You have the price that you’re charging, so you were mentioning, like, you know, $8 and then moving it up to 15, you have the cost associated with that, and for you, in your business, that might have been, I don’t know. Maybe it’s some of those support costs. You know, primarily that. Serving that customer, and then you have, um, some metric around repeat purchases. So like, you’re charging them per month. You know how many months they stay around. There are some like retention metrics. There. Okay, in general, people stay for whatever it is, you know, twelve months, and then they churn away, or you’ve got some. Some you know knowledge of that and what I’ll see people do even when they might be using those three inputs, and they’re not doing it purely off of revenue you know they’re you’re doing it off with like you know a contribution margin. Um, so I asked them what LTV is, and they just gave me a number. It’s you know it’s $100 it’s you know, $500 yeah, whatever it is and that’s when I know there’s probably something you know something a little wrong like they haven’t dug into it deeply enough and what I’m talking about here is so you have not just one LTV you probably have you know. And an LTV like your basic segment for your premium segment you on and on you could also have different LTVs based on the channels of acquisition. So you know LTV that came in from like you know this Facebook ad campaign we had is you $100 from this Instagram campaign it was you know whatever you know? $300 word of mouth. You know, it was like a thousand dollars on and on and then, um, what I like to do to make it even more realistic is you model it out over time so rather than just one number or just one number per segment or per channel, you actually model it out. You know. Choosing whatever period is appropriate month by month or however you’re billing, and then you get this like this series of flows. So like, when I wrote about this in this short book called growth units, I showed all the calculations and all the outputs, and basically, I say LTV it’s like a river.

19:11.13

Paul Orlando

Because you know it might be like pouring rain, and you get this deluge and then it dries up for a while, or it’s like it was like raining somewhere else and like it’s going to take you like months to actually see that water come through and that’s like analogous to like you putting all these marketing efforts out there or something seasonal. Um. But if you model it out as this series of flows, then you can understand it well. Okay, even if LTV is a thousand dollars, do I have to wait like five years to see that thousand dollars or am I getting that, you know, really soon as people sign up. What’s the payback period for customer acquisition cost? Um, are there some customer segments that I actually should be trying to kill off because it’s negative LTV, you know, for them, and I want to just be focusing on like the best customers that I have, um, but yeah, I’m really in favor of modeling this out. Like visually, so you could see how the flows come in without that and just using a single number like you’re kind of flying blind a little bit.

20:15.45

Matt DeCoursey

And yeah, and you know the time frame. The calendar makes a difference now. These things will wildly fluctuate, too, if you don’t have a big sample size and I want to talk. I’ll give a couple of examples. Ah, I want to give a quick reminder that today’s episode, Startup Hustle, is brought to you.

20:26.13

Paul Orlando

Exactly.

20:34.53

Matt DeCoursey

FullScale.io helps you build a software team quickly and affordably. That’s my company. We want to help you build a team and help me build my lifetime value. How about that there you go? So I’ll give you an example of you don’t So if you.

20:43.63

Paul Orlando

Nothing said.

20:50.89

Matt DeCoursey

You know, Full Scale is a tech services business, and we don’t work with hundreds and hundreds of companies because we want to work with the right people. So the thing is, if you look at lifetime value. We have some clients that have been with us since the beginning, like four years ago, and then if we look at someone, say we sign up.

21:02.21

Paul Orlando

Um, you were.

21:08.50

Matt DeCoursey

You know four or five new clients in a month. Those people don’t have any lifetime value past that first month of the invoice. So if you compare people that have been paying invoices for four years with people that just paid their first one, that’s going to create a big difference because it’s just simple. It’s just math.

21:12.17

Paul Orlando

You move.

21:22.58

Paul Orlando

Right.

21:26.17

Matt DeCoursey

You have people that might have paid a million dollars over four years, and then you have some, then you bring in 10% new people that you know have basically paid peanuts, and that’s going to actually that’s what you said like the river can dry up and it can narrow.

21:39.71

Paul Orlando

Um, let.

21:42.32

Matt DeCoursey

But you do have to look at it in segments so you like what’s the lifetime value of the client in this case like we might look at it. What’s the lifetime value of clients? We signed up in 2018, 2019, 2020, 2021, 2022, like stuff like that, and then you also have, you know, and you have things too. It’s like that, and I think the churn rate is.

21:50.20

Paul Orlando

Um, yep, cohort, right.

22:02.30

Matt DeCoursey

Funny because I think so many people are trying to do all this stuff to prevent it from being a high number, but sometimes like churn’s okay, and we’ve even done episodes about that like sometimes you got to fire a user or a client I’ve done that a Gigabook like we’ve had. We’ve had a couple of people along the way, like at one point. We had one lady.

22:09.60

Paul Orlando

Yeah, yeah, that feeling.

22:21.92

Matt DeCoursey

Paid us $8 a month. That was 70% of our service tickets, you know, and I told her I was like I got to give you your I’m giving you your money back. I gave her all of her money back for like, I mean that she had ever paid us and whatever to just go away.

22:29.90

Paul Orlando

Ah, you. Yeah, what? Wow yeah.

22:40.16

Matt DeCoursey

Because like, here’s the thing is people like that are always going to be a pain in your ass and, by the way, out of all those service tickets. It was like there was not something wrong with what we were doing. It was just someone that was a pain in the ass no matter what rather than reading.

22:48.81

Paul Orlando

Yeah.

22:56.49

Matt DeCoursey

Words that were right there on the screen in front of you instead of putting it in a service ticket, and that’s just the nature of people, you know, and then like at Full Scale as we went through a little bit of a cleansing process on purpose because we had some clients that.

22:58.20

Paul Orlando

Right.

23:13.27

Matt DeCoursey

They weren’t necessarily treating our employees or us that great, or they just were always behind and paying us, which for us just really, we realized that means eventually we’re not getting paid. It’s not that.

23:20.76

Paul Orlando

In that.

23:27.68

Paul Orlando

That’s right? Yeah.

23:28.62

Matt DeCoursey

You know, like because I mean it was just a matter of time. So Some of that was like we had the opportunity to maybe repurpose those relationships into others that were a little healthier or more beneficial long term and look, here’s the thing is like you do have to bridge that gap and make these decisions as a business person because, in the end, you know. You know you want to try to help your users find success. But sometimes there are things about your users or clients that just quite honestly aren’t successful like I don’t know there’s a whole that’s almost a whole nother topic. So really, at the end like, but when we look at this like.

23:58.80

Paul Orlando

That’s right. Yeah, they know what they mean.

24:07.15

Matt DeCoursey

You know, super like kind of like scientific or like level of importance like yeah, okay look, you can spend all day creating stats and KPIs and stuff like that for your company.

24:14.68

Paul Orlando

You know.

24:18.34

Matt DeCoursey

And of which, like a lot of them probably won’t matter, and then none of them matter if you’re not like why are you even looking at them or monitoring them if you’re not ready to take action when and where you need to so like Paul why you do? Why do you think entrepreneurs like what they like?

24:23.25

Paul Orlando

Nick yeah.

24:33.26

Matt DeCoursey

Why is everything from negative churn Lifetime Value Customer acquisition cost to me? What’s the real “why” of that? And how did they do something about it when they realize there’s an issue?

24:39.35

Paul Orlando

Um, yeah, well, the real reason for it is, you know, this is how you build a financially sustainable business. Um, and yeah, like the information is not going to be perfect or certainly not at. Ah, small scale or when you’re like a brand new service but going through some effort when it becomes more appropriate and then like digging in into more detail when it’s more appropriate. Um, that helps you build that sustainable service, and then you can go, and you can fire that terrible customer that you had. Where you could say, I’m going to use price as the differentiator or or or I’m gonna use price as the decision that’s going to force my own customers to make the decision. You know their mind about leaving. This is when you like doubling your monthly you know your monthly minimum price. Um, so those are all great things, and you could get um. You know, like 1 of the other points that you were mentioning was, you know, like looking at cohorts like all the customers that joined in 2018 or 2019 or even month by month and you can get some insight into what? Um, like really big companies do about this. So if you look at, think like 1 of the best examples that I’ve seen is if you look at just the annual report of Shopify like they show their cohort um like how much you know they’re earning per cohort over time, and they show this chart like you know like. You know, whatever 15 16 17 18 you know on and on and the customers that joined in each year and then they’re following them year by year, and you see as some of the early years for them. It’s a decline, in other words, like the customers that signed up like whatever it is 2013 or 14 as you move like a year later two years later the margins from those customers are declining like they weren’t the best customers for Shopify the product you know back then wasn’t as good as it is now. Yeah, a lot of things happened in later years, you’ll see, actually. To demonstrate that they have negative churn because you know you have somebody who joins or like that whole cohort of people who joined in 2018 and then your margins from them are like bigger in 2019, you’re definitely losing people bigger than 2020, and you’re definitely losing people like bigger in 2021, so that’s an example where yeah some of them you know, call them like the worst customers are leaving just themselves or their companies are shutting down and they’re not continuing to like you know to use the service but the ones that survive their businesses are a little bigger, and so there’s more you know they’re spending more.

27:31.28

Paul Orlando

Yeah, um, and that’s like ah a great you know place to be in. So um, yeah, a number of things that you could do there from, you know, experimenting with the prices to act as you did just actively moving somebody. You know out and take the cost savings. Um, that you get from that.

27:51.58

Matt DeCoursey

Well, I think another thing that when you look at these numbers increase and Rise, so still using Fall Scale As an example here. So it got way easier to sell when we got bigger because we just looked more established. We.

28:03.95

Paul Orlando

Yeah, right, you can know about yourself? Yeah.

28:10.83

Matt DeCoursey

Honestly, we were getting better at it too. So It’s like it wasn’t just you know everything. But also one of the things with us is a lot of ah air quotes on my audio show here. Bigger ah kind of clients meaning the people that could buy more and want bigger teams and stuff like that. They honestly weren’t. We weren’t really credible enough to do business with them when we had 40 service providers because some of these folks want a team of 40, and there are a lot of companies and operations and shops out there that have that number of people. So.

28:35.50

Paul Orlando

Gift.

28:48.25

Matt DeCoursey

The question is can you scale it and gross so like you know the kind of clients that we bring in on you now are talking. They talk just the conversations are a lot different, and you know, you talk about customer acquisition costs. That’s almost impossible for us to actually calculate, and I say that because we get so much word-of-mouth business and a lot of that comes from Startup Hustle, so we try to attribute it, but it comes from a lot of different things. It’s like people we know and then even like 1 of the things recently is. Ah, we have like a noticeable uptick in people that worked for a company that used Full Scale services, and now they work somewhere else, and they’re recommending us to the new company. They’re at, and it’s like.

29:33.87

Paul Orlando

Ah, that’s good. It’s kind of good.

29:39.49

Matt DeCoursey

You know, and the thing is I actually drove myself crazy a little bit in the fourth quarter last year trying to really attribute like the lineage and the heritage of like where all of our business came from, and it was impossible because it was like.

29:46.39

Paul Orlando

In England with help. Yeah yet.

29:54.35

Matt DeCoursey

Yeah, we had people that had been on the show, people that had listened to the show, people that were referred to other people on the show, and so is that Startup Hustle, and then we had some people that were like multiple things like they already knew us but they.

30:06.52

Paul Orlando

I

30:07.10

Matt DeCoursey

Been on the show, you know, and just like we’ve done very little if any advertising for Full Scale, which is crazy because we did $7000000 in sales last year, so it’s like you know, so it’s you know some of that and some in some cases. It’s hard to.

30:15.27

Paul Orlando

Perfect. Yeah.

30:23.56

Matt DeCoursey

To really trace a lot of that back now if you’re a software as a service company and that’s one thing I think you run into with SaaS as well is like you get just there’s kind of just like you’re just if you’re doing it right? You become the place that people go, and so you’re going to get people that just show up at your homepage. They don’t have it. They don’t have a.

30:38.20

Paul Orlando

Um, yeah.

30:43.52

Matt DeCoursey

There’s no conversion tracking to, ah, you know, an ad click or something like that. So yeah, yeah, yeah, so ah, yeah, so we.

30:46.28

Paul Orlando

Right? And just typing in the domain name because they heard about it from somebody else, and they’re yeah, it’s going directly there. Yeah, that is great. That’s a great position to be in, yeah. Congrats on that.

31:00.62

Matt DeCoursey

We also talked about customer acquisition costs which I think if you can track this is really important, so one of the things that you know everyone usually tries at some point is CPC cost per click advertising, and it’s really easy to get stuck in a mold where you look at. Oh, here I get a lot of clicks on this ad, and they’re really cheap. Okay, do any of them convert because I’ve run into that before? I did when we first started promoting Gigabook. I remember that there were a couple of ads that, you know, I looked at, and I’m like, oh wow, they get a lot of action, and they’re affordable compared to the other one but really in the end.

31:20.89

Paul Orlando

Um, ah, right.

31:36.20

Paul Orlando

Move that.

31:38.37

Matt DeCoursey

I mean 14 ads at 14 ad clicks at a dollar a piece that converts one is the same as a $14 click that converts one, so you really like to be set up and ready to do this.

31:46.51

Paul Orlando

Exactly I mean, you got to match it? Yeah.

31:54.20

Matt DeCoursey

Which can be a challenge for some people at first, and like that’s been a challenge for us a little bit at Full Scale for reasons I just mentioned, so you know I mean I mean but really in the end, so it’s we just hired a new senior marketing director, and he’s highly analytical, and you know. Basically said to me on the first days that we’re not going to start anything new until we have a tracking setup. Thank you, thank you, thank you, you know, thank you for that. totally yeah, so thank you for that

32:16.81

Paul Orlando

No, hey, you know I respect that, I yeah I know I respect that, yeah or you get to a certain point at which yeah, it’s better to try to understand what’s really going on. Um, but you’re right about, you know, you’re mentioning like two radically different, you know um CAC or not CAC’s but two radically different like you know the cost per click. You know, I’ll say, though, in the example that you gave, the CAC really ends up being the same. You know I forgot what you said, like 14 clicks at a dollar each with one customer. At the end versus one click at, you know, $14, you know with one customer, and you know the end is really the same CAC. So um, it’s just, you know, that if you’re just using a number and not looking at the different parts. You’re losing something. But yeah, like the way I do CAC. And I always try to do this on a per-customer basis, just like with LTV. So for CAC, what I do is I call it the cost to get in the door, and I say in the door because sometimes it’s literally like in the door of ah like a brick and mortar. You know, ah shop. Um. Or the door could be the website that you have that you know, um people then from the ad they go there and they learn a bit more about what you’re doing, and then you divide that by the conversion rate so once they’re there, what percent of people end up becoming a customer. Um, and. Yeah, it does become complicated to really track stuff like that if you know there’s been multiple exposures to the business over time and or people just hear about it word of mouth. Um, but if you’re doing something that is, you know they’re coming in direct from an ad, and it’s. More or less a spur-of-the-moment purchase decision. You know, like, they’re not going to have to like having a big committee meeting to decide. How are we going to spend this, you know, $8 a month? You know this is more like okay, do I want this I’m gonna do it now, or I’m going to think about it for like an hour you know and when I go to lunch and then I’m you know gonna do it when I come back. Um, I might be a little more direct in that situation. But there you are, you’re kind of equalizing those channels where you know the clicks are really cheap, but the conversion rate is really low. You know, versus the ones where the clicks are more expensive, but I’m really targeting. An ideal potential customer and the conversion rate is then pretty high. So um, yeah, so like look at the CAC that you get but then match it with what actually happens, and you might not know you know true LTV.

35:06.74

Paul Orlando

You know, for a while, but you could certainly be looking at like a payback period. Okay, it took me whatever it’s $14 to you know, $14 to sign up that customer and I’m paying that you know that $14 back in whatever one month two months um know is another way that you might look at it because you know you typically know. CAC right? Upfront, and it takes you a while to figure out LTV or just to figure out how people are using the service. Yeah, um, how they are staying with you or churning away or how they upgrade. Um. But yeah, once you get all those pieces together. You’ll have you know you’ll have some more clues into how it works in your situation.

35:46.80

Matt DeCoursey

So I want to play a really unscientific game that I’ve never played on the show before, and we’ll probably never play again, all right? So this is just a guess that this is just a guess. So um.

35:52.42

Paul Orlando

Um, ah, this didn’t sound good for the heart.

36:02.31

Matt DeCoursey

How many businesses you’re gonna go and I’m going to go, and we’re gonna have three rounds here, and we’ll just guess a percentage, and by the way, I don’t have an answer to this. That’s why it’s really unscientific how many business owners would you guess accurately know their customer lifetime value. So.

36:17.47

Paul Orlando

So this has been studied by somebody. I guess, um, how many like ah oh okay.

36:20.67

Matt DeCoursey

But I don’t have the answer. No, I don’t have the answer. No, I don’t. I’m just curious like what you’re, what you would guess you know because I don’t think there’s a way to because here’s the thing you’d have to actually ask someone and then make them prove that they were right? So.

36:32.34

Paul Orlando

Exactly yeah, be tough to feel.

36:35.47

Matt DeCoursey

Like I said, very unscientific I’m just curious what your opinion is. I’ve got a couple of notes here on this.

36:42.70

Paul Orlando

How many business owners know their customer’s lifetime value? I’m gonna guess accurately. I’m gonna say 10%

36:44.86

Matt DeCoursey

Accurate accurately or close to accurately. Yeah, I was going to say fifteen. Yeah, yeah, okay, how many do you think? Accurately know their customer acquisition cost.

37:02.93

Paul Orlando

That’ll say it will be higher. You know I’ll um, I’ll say like 30% all right.

37:07.92

Matt DeCoursey

I was gonna go with 25. Yeah, okay, and how many know their negative churn, their negative churn amount like, or if they have it.

37:20.14

Paul Orlando

Yeah, that I’ll say will be even higher because that’s, you know, that’s a special thing. It’s typically like once you’ve got that like there’s some magic happening, so I’m going to say you know that’s you know, like if they’ve got it. You know that they know that they have it. I’m to say that’s like 90%

37:37.57

Matt DeCoursey

I’m gonna say it’s like five cause I’m gonna go. Yeah, I’m gonna go on the opposite side because I don’t think most people pay attention to this at all. I think that it is like this. I mean, I feel like this is a hidden metric that I am rare, and I say five.

37:38.13

Paul Orlando

Really.

37:53.35

Matt DeCoursey

I don’t think people consider this like I don’t think this is like I don’t hear negative churn, and that’s why I wanted to do this episode because I don’t think enough people as I mean for. Well, first off, you have to know what it is.

37:58.11

Paul Orlando

Um, is it rare?

38:04.90

Paul Orlando

Yeah, yeah.

38:06.11

Matt DeCoursey

I feel like if I went up and asked just business owners in general to define negative churn, I feel like no one would accurately define it. I feel like very few, if any, right? Which is better then, right? and then I think if you have to look now, I think if you know what it is and you’ve got it.

38:11.92

Paul Orlando

Most people don’t have it, yeah, but most people just don’t have it? Yeah.

38:23.45

Paul Orlando

Prison. Yeah.

38:23.90

Matt DeCoursey

Then yes, I think you’re probably right because now you’re paying attention to it. But for business owners in general, I Will first off. I would be surprised if a lot of them I don’t know. I just never fail to surprise myself when people just don’t know their shit about their own business in many cases.

38:40.79

Paul Orlando

Yeah.

38:43.57

Matt DeCoursey

And you know, I got to be honest, I can’t tell you my negative churn rate right now. I mean, I don’t figure it out a whole lot. I know it, I know it’s there, but I couldn’t accurately tell you the percentage today. Now could I get to that today? Sure. But yeah, and for us like that’s not a.

38:48.50

Paul Orlando

But you know that you have it.

39:03.49

Matt DeCoursey

Yeah, as I said, we’re a little smaller batch with the number of people we work with, so I don’t get why we look at this stuff like quarterly what we’ll look at is like. For example, the average new client at Full Scale. Their account doubles in size in the first six months, so we look at that, and we’re able to like it.

39:08.42

Paul Orlando

It’s made.

39:18.15

Paul Orlando

Yeah.

39:22.75

Matt DeCoursey

Kind of project where we’re at and moving forward like and we honestly we barely ever lose clients like that is like that has not when we and when we so you look at I think one of the things and you know we’ll kind of move towards the founders’ free sales. And that’s how I like to end my episodes of Startup Hustle. I say my episodes; I’m not the only host. Make sure you tune in weekly with Lauren Conaway, she’s the founder of InnovateHER KC that’s got their five thousandth members. So congratulations to them. And check out the episodes by Andrew Morgans; he’s the CEO and founder of Marknology. They do Amazon, brand acceleration, and e-commerce. I’ll tell you what customer acquisition costs lifetime value. All that set is really big in that world, and you can also tune in for the new weekly episodes with my original Startup Hustle founder and business partner at Full Scale, Matt Watson.

40:02.91

Paul Orlando

Same.

40:14.22

Matt DeCoursey

And getting techy with a lot of people, so we’re like we’re making him talk to CTOs because that’s the language that Matt speaks now, I say, with founders freestyle. So I like to give everyone an opportunity to make a few closing remarks on the way out. You know, like, and I’ll give that mic to you. I’ll let you prepare for that momentarily, but we use the founder’s freestyle as an opportunity to, I don’t know, say anything. We might have forgotten their key points. We might want to reiterate what stood out in our conversation and once again, with me today is Paul Orlando, who’s the incubator director. An adjunct professor at the University Of Southern California goes to http://startupsunplugged.com to learn more about what they’re doing at USC and elsewhere. So Paul, what what? What would you like to mention as we head on out the door here?

41:06.31

Paul Orlando

I’ll, um, I’ll keep it pretty straightforward, so I’ll just mention that so I love this topic. You know, Unit Economics Negative churn everything related if you’re trying to figure it out. You might get value from this short. Really like, you know, straightforward, useful book that I wrote about that which um came out of all my experiences and then like talking to a lot of people but it’s called growth units so you could look that up, and I found it to be helpful for a lot of other startup founders um to talk about. Unit economics. You know, related topics and how to figure them out, and then we go through a bunch of industries. You know everything from rideshare to mattress stores to you know consumer packaged goods to organized crime. So. It’s a fun read, I think, and we’ll leave you with something really actionable for your business. Otherwise, I’ve loved working with lots of founders, and I’ve loved building these incubator and accelerator programs. So um, this is kind of been the focus area that I’ve had since having my own startup and always talking to people about this. So if you know if your company or your organization is, you know, thinking about spinning up a startup incubator or accelerator of some type, I’m happy to talk to you about that I’ve ah you know. Just have a lot of experience in building and operating programs like this over the years, so happy to share. Um, but otherwise, this was a lot of fun. You know, talking with you, Matt, and then also hearing a lot about your work. Um, you know, I’m glad we got to spend some time talking about what to me is. You know, a really important part of understanding how a business actually functions. And yeah, I love being able to dig into some of these topics.

43:08.12

Matt DeCoursey

You mentioned organized crime. Do they figure their lifetime value? You might be surprised. They probably do like that, like in many ways, some people like that are better business people than legit people.

43:12.48

Paul Orlando

Um, so I looked at um, if you have.

43:22.66

Paul Orlando

You know, um, when there’s a lot of money to be made, people are paying attention, I’ll say, or at least the ones that survive for pre-intention. Yeah, um, so yeah, like the case data this case study I looked at in the book was um, you know related to just like the.

43:28.61

Matt DeCoursey

Yeah, that’s the point. Yeah, right, right.

43:41.47

Paul Orlando

Cocaine trade because it’s got, I mean, it’s got a little bit of everything there. You’ve got international production and distribution. You have a product that is, yeah, great. Oh yeah, well definitely yeah, like well um, and both in and the in the literally little ah of your version 2 of your legs. You know, being broken as well. Probably.

43:50.27

Matt DeCoursey

Breakage. Yeah.

43:59.27

Matt DeCoursey

True.

44:00.91

Paul Orlando

Um, and then yeah, you’ve got like ah, you know, a very, you know, highly-priced program. You know, a product that doesn’t really start out like that, you know, at the source. It was pretty cheap. Um, and then also just some things about how you know trying to crack down on that industry drove prices up and. Left the people who were like the best at you know, getting around you know checkpoints and yeah, like you finding new ways to get into like the Us. So um, yeah, it’s ah it’s an um, it’s interesting I don’t know I I think you can learn about business in Like. Just walking around like so like when I’m walking down the street I always find myself thinking like okay this store like okay how much business do I think they’re doing What’s the what I think the margin on like this product is you know how much do I think this you know like yeah, how many people need to be like you working in this organization to you know to really you know keep it going.

44:39.91

Matt DeCoursey

Yeah.

44:59.26

Paul Orlando

Um, I think that’s just a fun exercise, and it kind of just forces your mind to think about how things work. Um, so yeah, cool. Yeah.

45:06.50

Matt DeCoursey

Yeah, I suffer from the same obsession, and it is. It’s an obsession, and my wife’s always like, come on, take a break, dude. I’m like now I think for my freestyle, I think there are a few things here I think that. A couple of things I like to share are always related to my own failure struggles, and you know the longer you wait to start tracking this stuff, the more difficult it becomes to actually track it, and I mentioned that you know if your business is going to grow really quickly as Full Scale did for us.

45:33.84

Paul Orlando

Through enough.

45:41.35

Matt DeCoursey

Um, I’ve had that happen a couple of times, and then what happens is you end up with this ball of rubber bands that you eventually have to unwind, and the further you get away from this revenue attribution and tracking it, it’s not always straightforward. You know, like I mentioned, there’s not a real way. For me, to automatically via stats dashboard imported from Google or wherever to calculate. Um, then you know the customer acquisition cost if it’s related to a podcast or something like that. It’s just a lot. It’s a lot more difficult, and I remember when ah our c o.

46:01.74

Paul Orlando

Now.

46:10.36

Paul Orlando

Um.

46:17.75

Matt DeCoursey

Years ago, he was like, I’m just really trying to calculate the ah ROI on the podcast, and I said, dude, stop, just stop trying because I mean it’s impossible because there aren’t sometimes there aren’t the kind of tools and metrics and you know then another thing that was kind of interesting is last year ah and as a professor and any business program. You’ll so we actually collected more money selling ads last year than we spent on ads because Full Scale owns Startup Hustle. So it’s all under one umbrella, so you know I have always been joking.

46:45.14

Paul Orlando

Um, ah yeah.

46:54.73

Matt DeCoursey

We actually talked about negative churn. We actually had a negative ad spend in many regards if you want to look at it like that because this is part of how we promote the show or Full Scale, and so if I had turned in now, by the way, I dropped out of 5 colleges. So this might be why.

46:55.80

Paul Orlando

Um, that’s great. That’s great. Yeah. Yeah.

47:13.25

Matt DeCoursey

But if ever one of them was a top 10 business school, and if I had turned in something like a business plan or a proposal and it had negative ad spend, I would have gotten that back. There would have been a red circle around it. It would have said, see me, and I would have gone up, and the professor would have been like, dude.

47:22.98

Paul Orlando

Ah, yeah, yeah, that’s the case. Yeah.

47:32.67

Matt DeCoursey

Like, come on. You’re better than this. You’re smarter than this, Matt. You should really know that never is your business going to probably sell more ads than you know than spending. Yes, so, but hey, but you know, so those are those weird things and then.

47:33.97

Paul Orlando

Ah, how are you doing it? Yeah, for new in.

47:49.48

Matt DeCoursey

You know, that’s all. I mean, it’s all variable, and the thing is so much of this comes down to what’s good, and so you mentioned something earlier in the show, and this is what I wanted to go back to. I didn’t comment about it. You had mentioned how long it takes to get my money back, and that’s something in SaaS that I’ve had a bum.

47:54.11

Paul Orlando

You have.

48:03.30

Paul Orlando

Great.

48:07.67

Matt DeCoursey

Um, to people ask me, so you know that there isn’t a right or wrong answer. But if it’s a true software as a service platform where we’ve kind of set that the c grade is twelve months, so I’ve talked to a lot of people about this, so getting that whatever that and so if you’re at eight months or six months or four you’re in like.

48:17.30

Paul Orlando

Soon? Yeah.

48:27.24

Paul Orlando

Ready.

48:27.52

Matt DeCoursey

A plus range as it gets shorter, and if you’re at like a couple of years, it could then it’s like really, it’s not as advantageous now certain things you’ll hear terms that aren’t as defined as customer acquisition cost formulas and are just sticky. So some businesses are totally cool with whatever they spend on acquiring a new user, taking a long time to get the money back because of the lifetime value, but you gotta know it. Do you know? So if you know that.

48:45.82

Paul Orlando

And

49:03.31

Matt DeCoursey

So I was just watching. I don’t like to put dates in these podcasts, but I was just watching the first episode of the Showtime series about Uber and its founders and in the very first one. He’s trying to get a VC, and the guy says well, how sticky this is, and he says if they ride twice.

49:13.68

Paul Orlando

Next? Yes.

49:23.15

Paul Orlando

Oh.

49:23.31

Matt DeCoursey

Have them for life and so and you know you remember like when uber and Lyft and they were there was this like massive battle for market share, and there was only 2 of them, and you know you get back into like others.

49:28.18

Paul Orlando

Yeah, may.

49:38.17

Matt DeCoursey

So if you look into this, I’m going to start dating myself, but like Jack Welsh, the former CEO of GE, sold off all of their divisions that weren’t first or second, and it’s kind of known like if you’re not first or second in an industry, you’re probably on your way out and.

49:43.59

Paul Orlando

Moving Yeah taking a right. And we just.

49:55.60

Matt DeCoursey

So that’s why you see some of these new companies like Uber, which was like a sieve-like literal burn rate that was maybe not even hot enough to describe, but you build up this huge amount and then you like you said you have them for life and so.

50:04.49

Paul Orlando

My heart.

50:11.95

Matt DeCoursey

You know, there’s a lot of brand loyalty with that. You see that with things like Apple. You know, like Apple’s the same way with the iPhone that came out. I look at myself; I bought an iPhone when it came out. I thought it seemed pretty cool. I didn’t really give a shit about Apple at the time.

50:14.47

Paul Orlando

Yeah, yes.

50:26.95

Matt DeCoursey

I liked what I had, and I got used to it, and I’ve had an Apple iPhone ever since. So honestly, I probably always will, and as a result of that, this is where Apple can’t truly figure this metric. I use Mac and iPhone and all these things at my business as well. And in my prior business, I bought hundreds of devices from Apple. So what was the lifetime value of me as a buyer? Because it’s freaking huge. It really kind of just comes down to what you’re doing, how you’re doing it, and can you afford it. 

50:45.74

Paul Orlando

Yeah, yeah.

51:00.79

Matt DeCoursey

Does it make sense? But then, the last thing I want to say is remember: It’s always cheaper to keep the clients you have than to go find new ones. 

51:06.95

Paul Orlando

Great. Great.

51:12.39

Matt DeCoursey

The whole thesis statement around negative churn is exactly that. Paul, thank you for having an intelligent conversation with me. I’m smarter now than I was 52 minutes ago. I appreciate that, and I will catch up with you down the road. See you next time.

51:25.33

Paul Orlando

Matt, thanks. I had a lot of fun. Great talking with you.

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