What is the Magic Moment for your Startup?

Early on, after Facebook launched its Feed feature, the product team at Facebook was trying to understand how to engage and retain users. What the product team noticed is that IF a user got to 10 or more friends in 14 days, there was very high likelihood of this user sticking around for a while.

The team had a hypothesis that 10 friends collectively generated enough interesting activity to populate the user’s feed and to keep him or her coming back. For Facebook, 10 friends has literally become a magic number, because, while the exact mechanism behind it wasn’t clear, users with 10 or more friends after 14 days didn’t churn.

CAC vs LTV

Before we dive into the Magic Moment, and why it is important, we need to talk about two other concepts—Cost of Customer/User Acquisition (CAC) and the Life-Time Value (LTV) of a customer/user.

In very simple terms, CAC is related to the costs of acquiring a customer, and LTV is related to how much money the business can make per customer.

To build a viable business, a startup needs to prove that it can acquire customers as inexpensively as practical, and retain them for as long as possible.

There is a set of formulas and calculations establishing the fact that for the business to be attractive, it is important to pay back CAC within 12 months, and that LTV needs to be at least 3x of CAC. Read this awesome post by David Skok to understand the details of these calculations.

Things get tricky quickly though, because not only do you need to acquire customers, you need to retain a lot of customers.

Many startups are able to sign up users but not retain them because the product isn’t compelling or sticky enough. Customers sign up, but quickly churn. In this situation, Life-Time Value of the customer is too small to offset the cost of acquiring the customer. So the business can’t be profitable, and it can’t survive.

The Magic Moment

The “Magic Moment” helps solve for business sustainability.

Here is how you can think about it: A customer performs a sequence of actions from signing up to using the product in various ways. Each combination of actions defines a path, and puts the customer into a specific state.

The Magic Moment is a very special state—once a customer reaches that state, the probability of the customer churning in the future is dramatically lower. To put it differently:

An average customer that hits the Magic Moment will stay a customer for a long time, will have high LTV, and will be profitable for the business.

If this seems like a backwards definition, it really is.

The idea is to work BACKWARDS from the desired state— a RETAINED, LONG-TIME, HIGH-LTV CUSTOMER, and to understand the path to get there.

fb.png

Take a look at the diagram above. In the case of Facebook, a user would sign up, then do a whole bunch of things, and then eventually, within 14 days, got to 10 friends. That happens to be a Magic Moment for Facebook, because an average user who makes 10 friends in 14 days does not churn for, say, 3 years. Getting users to friend 20 people guarantees a viable business for Facebook.

Next, let’s consider Netflix. If a user signs up, but doesn’t watch any movies, sooner or later she will cancel the service and churn. We can guess that for Netflix, the Magic Moment has to be a function of number of movies watched per unit of time. For example,  if the user watches at least one movie a month for 3 months, he or she will stay with the service for 2 or more years.

Magic Moments apply equally to all kinds of businesses, including Enterprise Software. For B2B, the Magic Moments are a lot more complicated. A sale is just a prerequisite to a Magic Moment, but it doesn’t guarantee it. For example, if a company buys a security solution, but doesn’t see clear ROI, it will likely cancel the subscription. Ongoing usage and utility are requirements for non-churn in B2B, and should be factored into the Magic Moment.

How to get to YOUR Magic Moment

The trick to finding YOUR Magic Moment is to have a hypothesis of what it is that gets the customers hooked, and will keep them hooked.

To figure it out, you need to be kind of like a scientist in the lab—have an intuition of where you want to get to, but be flexible on how you get there.

Start by building the minimum funnel, where each state progressively gets the customer to what you believe will be the Magic Moment state. Think hard about why you believe this state is the Magic Moment. Figure out why the customer would keep coming back. What is the feedback loop?

mm2

Secondly, think about the funnel over specific period of time. For Facebook, 14 days or two weeks was the time needed to reach 10 friends. What is the right period of time for you? For most services, because the customer’s attention span is so short, first few moments, first day and first week of usage are critical. If the customer is not activated, they aren’t likely to be retained.

After you build your funnel, keep measuring and analyzing it. There is no way to know for sure until you get enough data on your Magic Moment, on the path to it, and on the churn overall. Once you have the data, you should be able to, through the process of experimentation and refinement, to get to the Magic Moment for YOUR business.

Once you figure out what the Magic Moment is, you then need to figure out how to optimize the funnel that gets every single customer to that state. You do that with a set of nudges that moves each customer through the funnel, directing them to take specific actions, until they reach the Magic Moment.

Remember how Facebook kept telling us to find 10 friends, and kept suggesting friends? It was nudging us towards the Magic Moment. Alex Schultz, VP of Growth at Facebook recounts the whole journey of figuring out the Magic Moment in this awesome talk he gave at YC a few years back.

Facebook surely figured it out, and now it is your turn to decide what makes sense for your product and your business.

What is YOUR Magic Moment? How will you get your customers there?

p.s. Special thank you to Laurence Ion for pointing out bugs and inaccuracies in the original post and helping fix them.

 

 

9 comments

  1. Alex, you repeated a phrase in one of the last paragraphs: “Once you figure out what the Magic Moment is, you then need to figure out how to optimize the funnel that gets every single customer to that state”. It’s an important one though, so it shouldn’t hurt 😀

    Liked by 1 person

  2. Also Alex Schultz gave a talk at Stanford’s CS183b and said the magic moment they first discovered was “10 friends in the first 7 days” I believe

    Liked by 1 person

    1. Thank you!! Just made a bunch of fixes 😉

      Like

  3. […] Alex Iskold of Techstars highlights the path you can use to find your product’s ‘magic moment’ to increase customer retention in “What is the Magic Moment for Your Startup?” […]

    Like

  4. Alex,
    Great article and extremely useful. How do we apply this to early stage-startups though since the data points are fairly low? It seems that the hypothesis would have to constantly be evaluated after each customer acquisition. What do we do if a few customers are actually not focusing on our core business and using us for random tasks?

    For example, our company is focused on automation of lean six sigma for asset management but our main source of revenue right now is a customer who is more interested in paying us to do tasks like web development and marketing plans plus some technical consulting. It brings in pretty good paychecks to keep the operation running while we keep developing our original system, but should we keep working with this customer in the long term?

    We have been considering dropping this client to focus on multiple other clients who are more interested in testing our core product but there isn’t any revenue being generated from them currently.

    Now LTV is an interesting concept here because for the paying customer he clearly wants our team to keep helping him develop his business and is willing to pay however working on those projects restricts our resources, mainly time, to work on developing our product which we know is going to be very useful for other clients as they have expressed a lot of interest after seeing our initial prototypes.

    Would greatly appreciate your feedback on this! Thanks.

    Liked by 1 person

    1. It sounds to me like you want to build one company, but is working on a consulting project. Maybe the thing you can do is to take $ from your consulting and focus on building a product that you can sell to other customers.

      Like

    2. Khizer Hayat · ·

      Thank you for the reply Alex. Yes that is what we’re currently doing, dedicating one of our team member to keep working on the consulting side in order to use the cash generated to develop our product for the customers demanding the core product. So far it has been working okay, although it does tie up our resources sometimes.

      Like