Pitfalls off startups: Active Users – The right measure of “customer base” for a startup

Pitfall

Techcrunch has lots of good articles, but at least in my opinion the ones that talk about the “unwritten” rules of startups and the tech industry are the most interesting. One recent article in particular hit on a critical grey area in how startups compare themselves to other startups; The number of users of their service. http://techcrunch.com/2010/11/10/dear-tech-press-lets-cut-through-the-nonsens…

As an exec at New Relic (www.newrelic.com) we see this all time from others but try diligently to avoid that pitfall. The article points out several cases where startups count every user to ever sign up for their service as a customer. In reality this metric shows only one thing: How well the marketing team has done at driving people to the offering. What it doesn’t show clearly is the real viability of the offering. To me, the viability of the offering includes not only the excitement the value proposition of the startup’s offering has created (Buzz) but also whether or not people find it valuable enough to continue using over time. This durability (continued use over time) is critical to the health and success of software offering…and especially a Software as a Service (SaaS) offering like New Relic RPM where customers purchase monthly subscriptions and in effect have the ability to cancel at any time. If cash is the lifeblood of a company (and it is…don’t let anyone tell you anything different…no cash=no company), then cash flow from subscriptions becomes critical in a SaaS environment. A customer that signs up and pays for one month and then cancels is only just slightly more valuable to a company than one that never signs up at all. In addition to the revenue lost from Churn, more money must be spent on customer acquisition. A customer in hand really is worth two in the bush. A customer in hand, one that finds a viable product and uses it for the long term, is one that will continue to expand its use of the product. It will continue to pay more over time for the offering. And it is a customer that you don’t have to acquire, and expensive proposition.

At New Relic, we often tout our 7000 customers. But what you may not know is that these really are customers. 7000 accounts that are actively reporting data to our service. These are real customers who find our service interesting and make our business viable.

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