Artem Sokolov, VC, Serial entrepreneur, Founder and General Partner at Startup studio SKL.vc.
On the wave of global technologization b2c startups strive to reach the audience by hyping on new tech trends. That’s a relatively easy way to hook customers, but in pursuit of sales, business owners overlook another important metric — customer retention. And after the hype goes down, they risk losing all the clients.
This happened to Clubhouse, which gained over 10 million users in 8 months and exceeded the valuation of $100 million but was eventually forgotten. There was a similar situation with Google+, and now there are the same risks for the new Meta’s app Threads.
Both Threads and Google+ gained the audience primarily due to the brand power. New startups have to rely on hype technologies. For now, all attention is drawn to Generative AI, and hundreds of startups are racing for a place in this market — in January, there were already 135 Gen AI startups in Europe alone.
However, as companies attract users with the opportunity to test a new feature, they must remember the long-term customer needs they will cover. So, knowing how to retain customers after a surge of hype is essential.
Catch consumer needs
The critical factor of customer retention is a product that solves the long-term needs of the audience, and marketing tools only work with it. One CB Insights research reveals that 53% of respondents attributed their company’s failure to product-related issues (mistimed, poor, or lacking market need).
A case in point is the mobile streaming platform Quibi, which died six months after its launch despite $1.75 billion raised and 5.6 million subscribers. The service was set to watch “quick bites” of shows for smartphone users. Founders targeted busy young generation people with no time for full movies and series episodes. At the same time, 5-10 minutes of original content was enough to watch during short breaks, such as in a line, on a subway, or on a coffee break.
In the first 3 days of its life, Quibi got 910,000 users, but only 72,000 of them extended the subscription after a 3-month free trial — which is about 8%. Finally, the founders preferred to shut down the project and return the money to investors rather than take risks and lose even more. As the founders assumed, the pandemic lockdown could have killed the project. Stuck in their homes, people no longer required on-the-go content. But even before COVID-19, there were doubts about the success of the Quibi sustainability. As Tien Tzuo, CEO of the subscription-management company Zuora, pointed out, “Quibi made the classic mistake of getting too wrapped up in a product vision and forgetting about the customer.”
Quibi’s example also shows that investors’ assessment doesn’t always mean actual project value: there is always a risk of mistakes. Conversely, sometimes the market underestimates the idea. That happened with fintech company Klarna, a leader of the “buy now, pay later” market. Before launching the project, founders pitched their idea at a Shark Tank-style competition in Stockholm. The judges dismissed it saying “it would never work”. Klarna is an international company with 150 mln consumers and 500,000 retailers across 45 markets. It allows customers to make purchases and pay for them later, in multiple equal payments and usually without interest.
By the way, the initial startup idea was different. In the early 2000s, many people were wary of online shopping as it was considered unsafe. This problem was evident for Sebastian Semyatkowski, a future co-founder of Klarna, who worked in sales then. So he came up with the idea of paying for the order after delivery. Since then the concept has been changed, but the core idea to make purchases simple, safe, and smooth is still relevant.
Klarna’s success is mainly due to the founders’ ability to meet consumer needs and explore a new market. But in most cases, relying only on your insight is not a good idea. To ensure that your product meets the interests of consumers, you need in-depth market research, a target audience, a competitive environment, and technologies you will use.
Be different
The following important user retention factor is the distinction from competitors. If similar products are already on the market, you should know your unique advantage and whether it’s enough to poach clients.
If you followed the news about the new Meta’s app Threads, you know what I mean. In early July, the app skyrocketed amid backlash against Twitter policy changes. In 5 days, 100 million users joined the new platform. But after 2 weeks, the number of daily active users dropped to 13 million, and by the end of the first month — to 10.3 million. It’s about 79% less than the July 7 peak, when the app had more than 49 million users. The average time users spend in apps has also dropped from 19 minutes to 3 minutes. Meanwhile, Twitter (now X) is still stable and has about 200 million active users daily who spend 31 minutes on the platform. The attempt to gain an edge through the app’s policy failed. So now Meta constantly adds new features to the app to retain users.
To avoid falling into the same trap, you need a large-scale competitor analysis and research of your target audience. It is essential to understand why users choose this brand’s product, identify its weaknesses, and decide how to use them to your advantage. But this analysis shouldn’t be a one-time deal before a product launch. History knows a lot of cases where ambitious new startups outpaced once-successful companies. To take advantage of this moment, you must constantly monitor the competitive environment.
There’s another reason to keep your finger on the pulse: users’ needs are constantly changing. The market, technology, and trends are always on the move, and if you don’t adapt, you will inevitably be outdated. It means that you always need to do analytics: both internal indicators and market ones. So you can spot potential red flags in advance and then update your product or business model to fit the market.
An excellent example is a business striving to catch up with changing trends and escalating competition but ending up in a dramatic downfall. I’m talking about the Jawbone company, which is called one of the most spectacular failures in startup history.
Jawbone started by producing Bluetooth headsets, which quickly caught on. But then headsets started to be outpaced by wireless earbuds, and Jawbone decided to diversify its product lineup. The company first introduced the Jambox speaker and then the UP fitness tracker band. Both products repeated the fate of the headset: they quickly drew the spotlight and just as quickly lost it. This is mainly due to the emergence of new competitors with a more successful business model. For instance, UP’s fitness band lost out to Fitbit company. While Jawbone strived to stuff the band with various features, Fitbit offered practical and affordable devices. The latest blow to the company was the introduction of the Apple Watch.
As a result, despite raising $984 million in funding during its 17-year lifespan, Jawbone was forced to shut down. The company should have focused on one product and adapted it to the changing market landscape rather than constantly chasing new niches. Jawbone was killed by its excessive flexibility.
Not sufficient, but necessary
Undoubtedly, customer retention is a necessary but insufficient factor of startup success: one of the reasons behind Jawbone’s downfall was due to excessive funding. But while business failures can result from a multitude of factors, without the ability to retain customers, it is inevitable.
And the main thing to maintain interest in the product is its relevance to the audience. This is not to say that the other customer retention methods don’t play a role. But they are secondary because neither marketing, discounts, nor the best service will save a product consumers do not need.
