I feel a lot of founders, especially when they are running their first company, don’t have their priorities straight when growing a company.
Let me start with an example. When losing weight, you create a calorie deficit. You have two options to do it; you can either burn more calories or intake lesser calories. For wealth generation, you can increase your earnings or reduce your expenses. And for your business growth, you can increase your users, or reduce the number by which they are leaving your business.
Most first-time founders focus on increasing the user-base as a way to grow their business. It shouldn’t always be the top priority. In fact, I believe the top priority should be to reduce churn. Let me give you another example to explain what I mean.
Suppose your business generates $100,000 in annual recurring revenue and your churn rate is 50%. It means every year your business will need to replace $50,000 worth of customers in order to achieve the growth rate of 0%.
A lot of businesses continue to focus to add more users. They would focus to add 50% more users every year. They would spend a lot of money for this much customer acquisition and in the end achieve a 0% growth rate.
The right, easier and cost-free strategy requires working on cutting down the churn rate. If you’re able to bring the churn rate down to 25%, you only need to add 30% more users in order to see a 5% growth. You would spend lesser money on customer acquisition and will eventually achieve a steady growth rate.
We always have two options, and we often focus on the wrong one.