Maximizing Customer Retention with John S. Kim

0:01Boom! Shake the room, Fire Nation. JLD here and welcome to Entrepreneurs on Fire. Brought to you by the HubSpot. podcast network, the audio destination for business professionals with great shows like Business Made Simple. Today, we'll be breaking down how to maximize customer retention. To drop these vibe bombs, I brought John S. Kim into EO Fire Studios. John is the co-founder and CEO of Sendbird, the world's number one conversation platform for mobile apps, powering 300 million plus people every single month. In today's foundation, we'll talk about terminal, ARR, carrying capacity, the calculation formula, and so much more.

0:42And a big thank you for sponsoring today's episode goes to John and our sponsors. The Next Wave, your chief AI officer, hosted by Matt Wolf and Nathan Lance, is brought to you by the HubSpot Podcast Network, the audio destination for business professionals. Matt and Nathan are leading AI creators in your guiding light in the AI and technology frontier. AI technology is transforming the way we do business and the media landscape is fragmented. The Next Wave strives to be the leading podcast on AI technology and how you can apply it to growing your business. Listen to The Next Wave wherever you get your podcasts.

1:16Are you looking to start or grow a successful business? Attend the world's highest rated and most reviewed business growth workshop taught personally by Clay Clark and football great Tim Tebow at thrivetimeshow.com slash EOfire. Again, request life-changing tickets today at thrivetimeshow.com slash EO Fire. John, say what's up to Fire Nation and share something that you believe about becoming successful that most people disagree with. Ikigai in life is finding purpose in life. And a lot of people try to fit themselves into the latest trends in the market. Something like, oh, you know, crypto is hot.

1:58AI is hot. I got to do something about that. But I do think ultimately, is really having more deeper introspection of yourself, your own personalities, what you're drawn to, something that you think will not change about yourself 10, 20 years from now, and really going deeper into your authentic self and finding what you want to do for the next 20, 30 years. I think that's a great starting point to finding an opportunity that will hopefully make you successful and also deeply happy. That is the key thing, is that it can make you successful, Fire Nation, but also enjoy the journey, the process.

2:35Because at the end of the day, it's not the end goal, the end destination. It's how happy were you? How enjoyable did you find that process along the way? And that's why we're talking about maximizing customer retention today, because that really plays in to everything we're going to be talking about. And you do talk, John, a lot about terminal ARR, annual recurring revenue. So what exactly does Terminal ARR mean and why is it so critical for long-term success? Yeah, I think there's a pretty famous article that a lot of startup founders, especially in the B2B space, referred to, was a written article written by a Better Ventures partner called triple, triple, double, double, double to becoming a unicorn.

3:23and what a lot of founders and also investors get surprised at is when they invest in an early stage startup, the company's growing really rapidly, tripling, doubling, or sometimes even quadrupling on an annual basis. But that growth rate starts to slow down pretty significantly as time passes. And a lot of people sometimes attribute that to like, oh, it's an execution issue, It's a leadership issue. But sometimes it is defined by the value proposition and the fit with the market, but also overall kind of market size. So having more of a view or method to understand the overall growth dynamics of a startup and also understanding when will the company grow fast and when will the company's growth start to slow down and how to navigate the risk around that.

4:16And the whole of that concept, I think, can be borrowed or actually learned from existing fields of studies like engineering and science. So, yeah, we can talk certainly more about that. But terminal AR value or that concept actually came from a concept called the carrying capacity, which is, again, widely used in biology, engineering. So maybe we should dig deeper to learn more. That is something I want to dig deeper into because you use the word carrying capacity. I really want to know how does carrying capacity actually represent a system's value? Let's talk about that specifically. And then, of course, how this can be applied to both business growth and just as importantly, revenue stabilization.

5:05I think the concept of carrying capacity, obviously, there's a little more complex formula around it. To simply understand the concept, you can think of it as a volume of a bucket of water in a bucket of water or even a pond or a lake, or sometimes a concept like a population. So if you think about how the lake sustains itself, usually there's some rainfalls, there could be some snow, and also there's a natural churning of water that may get dissipated or sift throughout the ground. So if you think about how the total volume of lake stays pretty stable, usually there's an influx of volume of water that gets added to the lake over time.

5:49And also there's a percentage of water that gets sipped out of that lake. So once that finds equilibrium, the lake stays pretty flat, like the Lake Tahoe here in the Bay Area. But also something equally can be said about population. When a population of a nation becomes pretty stable, there's usually newborns and immigrations and also people who just die over time, also people who move out of the country. So once you understand what is the amount of population that gets added to the country and the population percentage of people that leaves the country, you can kind of understand where the population will stabilize around.

6:30And that this same kind of concept can be applied to understanding the total growth potential of a startup and actually when the startup will grow fast, but also when it will slow down, reaching that equilibrium. Now, we did talk about terminal ARR and exactly why that's important. But what are specifically the two metrics that we as business owners need to calculate terminal ARR? The terminal AR sounds pretty, maybe even something like too negative because it feels like your company will ultimately get stuck around this AR. But it really also gives the founders the lever to be able to grow and change the total potential or growth potential of your business.

7:14And really, you only need to know the two metrics. Just like how I explained the volume of water at a lake or population, you only need to measure two things. One is the top of the funnel or like the gross new revenue, gross new AR that you're generating for the business divided by the total churn and downsell percentage over the same period of time. So usually if it's AR, you're going to measure it on an annual basis. So if you simply measure those two metrics, you'll be able to understand where your business will ultimately get stuck. So maybe for one example, a simple simulation is, let's say you're an early stage startup, maybe C-State, Series A, you're adding about a million dollars of new AR each year, which is pretty common among a lot of early stage B2B SaaS companies.

8:08And let's say you're retaining about 90 % of your customer base or revenue base on an annual basis. Then if you divide that 1 million of gross new ARR divided by the churn and downsell, which should be 10 % because you are retaining 90%. So if you divide 1 million by 10%, that gives you$10 million. So initially, when you have a million-dollar business, next year you're going to be doing$2 million in revenue. So you simply double. So the investor will be like, oh, my God, you're doubling. You're an awesome business, so let me invest. but by just simply knowing this formula, you know that your business will probably stall around 10 million in AR unless either of those gross new AR or churn and downsell percentage.

8:55If those two numbers don't change, initially it will look like you're growing really quickly but it will also look like you're going to slow down very, very rapidly around 8 to 9 million AR. So Fire Nation, there's a great quote by Peter Drucker that I love which is, what gets measured gets improved. And if you're not measuring the numbers that matter in your business, they're not going to get improved at the level they could be if you're focusing on the right things. These metrics that John's talking about fit in that category. So before we move on, can you just give us a real world example? Like I do love the numbers you just shared.

9:31Like that really paints a picture of like how we could apply that to our business. But what's an example of a business, maybe yours, maybe another one that you've looked at or studied or researched that really show out the importance of this? I have been doing angel investing and early stage investing for the past probably 10 years. Personally done about 50. A handful of them became unicorns. Also wrote or invested into another 50 companies through a venture capital fund. that I operate. So I've seen a wide range of startups that are breakout companies that are growing really, really rapidly, become unicorns, but also there are a handful of companies that get stuck pretty rapidly.

10:16And what's very common, especially in the early stage companies that are targeting, whether it be consumer or early stage, like small startups, is that they call it, you know, charge$29 a month or even$9.99 a month. And in the early stage, they're growing very rapidly. So recently, I was talking to a founder CEO, they were growing from a million dollars to three,$4 million in AR this year. So they're very, very excited. Obviously, it's still an estimate, but their current growth trajectory, you know, shows all the evidence that that company will grow at that rate. So obviously, some of the early stage investors are very excited.

10:57They're, you know, tripling, quadrupling this year. But and then so I was asking, oh, so what does your annual retention look like, what does your net dollar retention look like? I mean, it's an early-stage startup, so it's kind of early to tell, but the company has been around a little bit more than a year. So they were able to start to measure the cohorts. And these users were, you know, the dollars were being retained around 60 % on an annual basis. So, and it was very, very clear. The founder was very excited about the total growth rate, not about retention. But if we simply apply the same math, let's say this company was going from a million even to more than, you know, put up a million.

11:35Let's say it was adding$4 million a year, right? Then that would give you the gross new AR of$4 million. But if you're retaining only 60 % of users, that's, you know, 40 % churn and downsell. So, again, if you divide four, divide by 0.4, that gives you$10 million AR. So what I told the founder was like, if you go from a million to, you know, call it four or five million this year, fantastic. But guess what? If you're either of those numbers to change, especially your retention rate, your company is going to flatten out at 10 million. And that's going to happen a year or two from now. And it's going to be very, very tough to fix it then because you will already have hired a lot of overcapacity in whether it be product and engineering, go to market.

12:17So you may have to do a layoff. and you start to look at the founder's facial expression change. His eyes are dilated. He's like, what are you talking about? So I kind of walked him through how to think about business. It's very clear that he was only thinking about the growth in the AR, not the churning down cell. And what's the hidden factor that's super important is that the sensitivity to retention for terminal AR is very, very big. So if the founders don't think about the customer retention early on, their business will get stuck very, very quickly. And then that is like, we just talked about this maybe like a week or two ago.

12:57So I recommend all the early stage start founders to also think about customer retention. I mean, Fire Nation, knowledge is power. And when you really understand the power of retention, then you can really see where this is going in a very exciting way. We're going to be talking more about this topic. when we get back from thanking our sponsors. We all know that starting a business is hard, but there are tools out there that help make it easier. HubSpot is one of those tools. And just one way HubSpot makes starting a business easier with their all new entrepreneurship kits. This all-inclusive kit gives you step-by-step guidance and frameworks to help you crush every stage of starting a business.

13:37I'm talking project management, professional email, and skill development templates, in addition to an entire solopreneur guide and freelance pricing worksheets. So next time you have a question about which step to take next, HubSpot's kit will have your back. Ready to get up and running fast? HubSpot is on a mission to help you do just that. And the best part is HubSpot's entrepreneurship kit is free. Starting a business doesn't have to be so hard. Go to clickhubspot.com slash ENT to download the guide right now. Are you looking to start or grow a successful business this year? Are you looking to learn the proven success systems that have been used to create thousands of millionaire success stories?

14:17See thousands of success stories and testimonials from real people just like you, who Clay Clark has mentored and coached into prosperity at thrivetimeshow.com slash EO fire. Clay's proven business coaching program is month to month and it costs less than hiring a minimum wage employee. Yes, it's month to month and costs less than hiring a minimum wage employee. schedule your free personal 13 point assessment with clay clark himself today at thrivetimeshow.com slash eofire because clay only takes on 160 clients and only allows 300 attendees to each business conference you will interact with clay directly see thousands of real success stories and learn about attending the thrive time show two-day in-person workshop featuring football great and entrepreneur Tim Tebow today at thrivetimeshow.com slash EO fire.

15:08Become the next success story. Schedule a free consultation and request tickets to join Tim Tebow and Clay Clark at the next business conference today at thrivetimeshow.com slash EO fire. So John, before the break, you know, we were talking about this calculation formula. I mean, you gave us that example where a startup adds a million dollars in new ARR annually with a retention rate of 90%. But I really want to dive deeper into the calculation formula. Talk to us about that. Just to recap, you know, terminal AR has a very simple formula. You divide gross new AR dollars, the absolute dollar coming in.

15:46That's going to be new accounts, upsell accounts. So you add those dollar amounts at the top. That's a numerator. And then you divide it by churn and downsell percentage on the same time period, usually measured over a year period. So if you divide those two things, you'll be able to calculate the terminal AR value of your business. Basically, another way to say this is where your growth will stagnate and ultimately converge towards. So one really good example of a later stage company, let's say, and just to highlight the importance of customer retention, let's say you're generating, instead of a million, a$10 million on a new AR basis.

16:28So grossing AR, you're adding$10 million a year. Fantastic. Congratulations. You're probably raised, have raised Series B, potentially Series C. Your investors are excited. But let's say your retention along the way, you attracted some wrong customers because you weren't focused on the targets, ICP enough. So let's say you began as a 90 % annual retention business, which is fantastic, right? If you're doing 90 % annual retention, generating$10 million in gross new AR, if you divide $10 million by 10 % churn and downsell, which is, again, equal to 90 % retention,$10 million divided by 10%, that gives you$100 million AR business.

17:09So if you're just adding 10, retaining 90 % of customers, over time, your business will reach$100 million in AR, which is, again, fantastic business. but because you are not focused on your ICP, because you used to attract a customer from different segments, different verticals, that retention went from 90 % to 80%, which seems like, okay, well, we had a 10 % dip. It's okay, we're going to fix it. But it's really hard to fix retention. But if it just simply dropped from 90 % to 80%, your terminal ALR have just dropped from$100 million to$50 million. Now your investors are not going to be happy anymore, right?

17:48Because your business was growing quickly to$100 million AR, all of a sudden it started to slow down very, very rapidly. Now you're stuck at$50 million. What does that, how does a founder navigate that? Again, it's a sensitivity to the customer retention that really, really matters. And a lot of founders overlook. Because when the capital was cheap, guess what? People were just spending money to grow, grow, grow, just increase the top line, grossing AR. the retention was a second or even like a fourth most important metric, not the most important metric. And that's where a lot of even the later stage companies get stuck.

18:25So how does this work on a long-term perspective? It comes down to re-understanding the underlying total growth potential of your business. So if you're starting to see your gross new AR kind of stagnate, your gross revenue retention, again, is very hard to fix. Thankfully, through SEMBER, we actually did the opposite. We looked back at our customer base because it takes 12 months and even potentially longer to influence your gross revenue retention or your customer retention. Because you're signing 12-month deals, 24-month deals. You only know about your retention really 12 months down the road plus.

19:02So, for you to start influencing your gross revenue retention, you've got to start early. So plan 12 months out, 24 months out, how you're going to actually structurally improve customer retention. And it's not just about, okay, let's talk to customers more. Let's hold on to them a little bit better. Let's send them nice gift cards and cupcakes. That's not it. It's really understanding the structural defensibility, the mode, the value proposition, competitive landscape of your business. And you have to start early. Again, a minimum of 12 months timeline. But usually you have to have two to three years of roadmap on how you're going to structurally change your revenue retention over time by targeting the right customer, moving up the market, assigning longer term deals, adding more, obviously, functionality to your business.

19:52But you have to have a holistic strategy on this. Now, that's one angle if you have one existing business, a singular product business. But usually when this company is doing$50 million,$100 million,$200 million, you're starting to look at becoming a multi-product company, potentially a solution or platform company. That's when you have to think about stacking the S-curve. So your initial business, the first product will have a terminal value of, call it$100 million. Then you have to think about when to start building out the second product that will add another, call it$50,$100 million of terminal AR.

20:29So you're really stacking and creating a portfolio of products so that when the growth rate or that terminal AR value starts to slow down for your first business, your second business has already is on the rise. The second kind of the curve of that growth factor. So as you stack this up like a cake, you have this continuous stacking of the next terminal value, next terminal AR value. So ultimately, each of the business will stabilize around a certain revenue number. But because you're continuously snacking through new products and new innovation, you can continue to grow your business. John, we talked about terminal ARR, carrying capacity, the two metrics that we need to calculate the terminal ARR, the calculation formula, the long-term perspective, like so many value bombs.

21:18What do you want to really make sure that our listeners walk away with from this conversation today? What is that key point? The key point is kind of taking a step back. Where is our total growth potential of the business and having that intellectual honesty with yourself as you're assessing your business? Because when your company is growing quickly, people tend to lose the track of this concept of terminal AR. So we get bogged down by, oh, demand gen campaigns and generating more pipeline through inbound versus outbound. and then maybe some customer retention tactics, but really taking a step back because a lot of these metrics are really, really hard to change as your company grows.

22:02So think really deeply about what is truly the value that your customers are using your business for, how are you retaining your customers, and how are you going to structurally increase the growth of your business, whether by expanding into adjacent markets, introducing new products. So all of this requires a very long-term thinking that spans usually well beyond 12 months, 24 months timeframe. And as founders and CEOs, it is your job, your responsibility to look into the future, think really long-term about how you're going to continue to build out the portfolio of your business. Because again, those growth rates, that terminal AR will come at you very, very quickly, the faster you're growing.

22:44but if those underlying metrics don't really change, then you will feel like your business is coming to a grinding halt and you may feel really confused. Like, why is this happening? We're growing so quickly. Guess what? Your underlying business have not changed. Then that's where you get stuck in your terminal AR. So have a long-term thinking as one of those core things that founders should care about. John, if Fire Nation wanted to connect with you, learn more from you, what is your call to action for our listeners today? Yeah, please check out Sember.com. But you can also find me on Twitter or X at Dosh Kim, D-O-S-H-K-I-M.

23:25And also you can just drop me a note, John at Sember.com. Fire Nation, you're the average of the five people you spend the most time with. You've been hanging out with JSK and JLD today. So keep up that heat. For links to everything we talked about, visit EOfire.com. type John, J-O-H-N, in the search bar and the show notes page will pop right up. And again, check out sendbird.com. John, thank you for sharing your truth, your knowledge, your value with Fire Nation. For that, we salute you and we'll catch you on the flip side. Thank you for having me. Hey, Fire Nation, a huge thank you to our sponsors and John for sponsoring today's episode and to Fire Nation's successful entrepreneurs accomplish big goals.

24:06That is why I created the Freedom Journal to guide you in accomplishing your number one goals in 100 days, and we're talking step-by-step. So visit thefreedomjournal.com, and I will catch you there or on the flippity-flip side. The Next Wave, your chief AI officer, hosted by Matt Wolf and Nathan Lanz, is brought to you by the HubSpot Podcast Network, the audio destination for business professionals. Matt and Nathan are leading AI creators in your guiding light in the AI and technology frontier. AI technology is transforming the way we do business, and the media landscape is fragmented. The Next Wave strives to be the leading podcast on AI technology and how you can apply it to growing your business.

24:46Listen to The Next Wave wherever you get your podcasts. Are you looking to start or grow a successful business? Attend the world's highest rated and most reviewed business growth workshop taught personally by Clay Clark and football great Tim Tebow at thrivetimeshow.com slash EOfire. Again, request life-changing tickets today at thrivetimeshow.com slash EO fire.