Twitter’s Quitter Problem

Most of us swore we’d never fall under the dot-com spell again after the bubble burst, but the irrational exuberance has returned for a number of Internet startups, not the least of which is Twitter. Now Nielsen Online research analyst David Martin has taken a hard look at the company and his conclusions should have Twitter’s VC backers worried.

“Currently, more than 60 percent of U.S. Twitter users fail to return the following month, or in other words, Twitter’s audience retention rate, or the percentage of a given month’s users who come back the following month, is currently about 40 percent,” Martin writes in his report. “For most of the past 12 months, pre-Oprah, Twitter has languished below 30 percent retention.”

Martin goes on to say:

“To understand why this poses a problem for Twitter, check out the chart below. By plotting the minimum retention rates for different Internet audience sizes, it is clear that a retention rate of 40 percent will limit a site’s growth to about a 10 percent reach figure. To be clear, a high retention rate doesn’t guarantee a massive audience, but it is a prerequisite. There simply aren’t enough new users to make up for defecting ones after a certain point.”

Martin’s report rings true to my personal experience. I signed up on Twitter a couple of months ago and have posted a few times, but the truth is that I rarely use it. I’m much more inclined to post to my “status update” on Facebook than I am to Twitter.

Could it be that Twitter’s popularity is just a fad and that the company’s service is yet another interesting feature for a larger collection of services — not the foundation for a standalone company?

Some serious questions to consider for the VCs that have pumped $58 million into Twitter: Benchmark Capital, Charles River Ventures, Institutional Venture Partners, Spark Capital, Union Square Ventures and Amazon.com CEO Jeff Bezos’ Bezos Expeditions.