Hi, I’m Zach — I’ve built my app business to $5m in annual recurring revenue. Building a successful app business is really hard. That’s why I write a newsletter about the things I’ve learned along the way. My goal is to help you grow your business and profit. If you want to learn more about the app business, I highly recommend subscribing.
Over the past few weeks, I’ve had some pretty deep revelations about Hashtag Expert. We recently hit $5m annual recurring revenue, but we have a lot of headwinds. The way we were able to get this point was by spending a lot of money on ads. Our biggest problem, however is churn.
Take a look at this monthly recurring revenue movement chart from RevenueCat for the past few days:
New subscribers contribute to MRR growing whereas churned subscribers detract from it. You can see that every day we are adding ~$2000 of MRR, but because of churn, we lose somewhere around ~$1500. So our MRR grows by only a little bit when you account for this difference.
Zooming out a bit further, our churn is relatively high. Though subscriptions apps do have high churn, it’s difficult to build a massive business with the churn numbers that we are seeing.
To build a huge business, you need extremely low churn. The absolute best subscription businesses have net negative revenue churn which is a fancy way of saying that you make more and more money from existing customers over time such that it makes up for customers who leave from the same cohort. This is more common in enterprise SaaS companies of which we are definitely not, but I do aspire to be like this. Enterprise SaaS products are significantly more sticky than iOS apps. For example, we can’t just stop using Zendesk overnight. It’d be a months-long process to fully migrate our customer support infrastructure to a competitor. As our product gets more popular, we pay more for support. Thus, Zendesk makes more and more money from us over time.
Hashtag Expert in its current form is a tool that small businesses use to increase their reach on social media through hashtags. After diving deep into our metrics, I kept coming back to this question—why is our churn so damn high? If we could reduce that by any double digit percentage, we’d start growing like a rocket ship.
In the past month, I also took back over running our performance marketing. This meant I was knee deep in building new creative, looking at click through rates, choosing audience targeting, and managing all the related shabazz. I started looking at our top performing creatives - you can see them here. From watching our ads, these are the messages we are using to sell our product to future users:
Hashtag Expert is a tool that can help you blow up your social media
Pros are using Hashtag Expert to manage their hashtags
Hashtags can be a hack for growing your social media
Hashtags can blow up your social media reach
I started thinking about that. As the creator of a hashtag app, I know that hashtags alone cannot deliver on this promise. Say we had an algorithm for generating hashtags that took in every little piece of data about your business and then synthesized the universe’s absolute best hashtags possible. If that were true, our app would still not be delivering on that vision/message we sell in our ads. Why? Because hashtags are just one small piece of the puzzle for growing/managing social media. This is why our churn is high. We’re selling a vision that we aren’t / cannot possibly deliver on. Sure, lots of people still find our app really helpful, but to reduce churn, we need to build a product that goes from helpful to irreplaceable.
Build More Apps or Fix Churn with Your Existing App
So what’s next? For a while, I thought the way to continue building a subscription app company was by building … more apps. This is what many big players in the space do. They build apps that charge somewhere between $20-40/year and run crazy effective performance marketing where their CAC is slightly less than the LTV of their customer. Then on year 2 or year 3, they might lose 70-80% of their subscribers, but they made some sort of marginal profit from each of them from the arbitrage/game of running ads. Then, they build more and more apps and keep repeating this strategy, but it’s a slipper slope. At some point, the chickens come home to roost and the high churn becomes an enormous drag on revenue growth as we are currently experiencing.
Alternatively, if instead of losing 70-80% of subscribers after year 1, you only lost 10-20%, then your LTV for users skyrockets. With higher LTV, you can afford a higher CAC so you can spend significantly more on advertising. If you are able to get churn very low, then lots of your headwinds for revenue disappear.
I like to think about it like filling up a bathtub with water. If you added 1 gallon of water to the bathtub every minute, but simultaneously 80% of that gallon went out the drain 1 minute later, it would take you a long time to fill the bathtub. If only 10 or 20% of that water drained out in the same period of time, the bathtub would fill up significantly faster.
How Do We Reduce Churn?
Now, the question is how do we reduce churn? I think back to that disconnect between what our advertising messaging is selling versus what our app delivers. We need to close the gap. So we’re going to launch tons of new features and services within Hashtag Expert. Inside the app, there will be a new page that is almost like a mini app home screen. We’re going to look at common apps that our users are also paying for and start offering them at no additional cost for subscribers.
Hashtag Expert will be rebranded as a hub of resources, community, and tools to help businesses grow through marketing. Subscriptions will be rebranded as Memberships.
I got a lot of inspiration from Amazon Prime for this repositioning. Prime subscribers understand that they get access to tons of services/products for their membership. Music, TV shows, better shipping/delivery, discounts at Whole Foods, etc. In a vacuum, is Amazon Music the best music streaming service? Hell no, Spotify is way better. But I bet for a lot of people, it’s a pretty good reason to keep paying for Prime. The same is probably true for Prime Video. In a vacuum, is Prime Video the best video streaming service? Hell-no, Netflix is way better. But I bet for a lot of people, it’s a pretty good reason to keep paying for Amazon Prime.
That’s my thinking with the Hashtag Expert membership. We’re just going to cram so much freaking value into the product that it is an absolute no-brainer for small businesses. We’ll offer features that other apps charge for at no additional cost. And so much more. I don’t want to fully reveal our roadmap, but I think we’re on the cusp of something incredible.
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