Subscription Business Models Are Great for Some Businesses and Terrible for Others


How to tell the difference.

Source: Subscription Business Models Are Great for Some Businesses and Terrible for Others

Today it seems like everyone is rushing to join the digital membership economy. Two of the most popular tactics are online communities and subscriptions.

For example, you can now subscribe to razor blades, underwear, groceries, clothes, toiletries, even dog toys. Or you can join a premium community for advice, guidance, and connections with like-minded people on topics ranging from healthcare to entrepreneurship to art lessons.

Lots of companies would love to implement a subscription model, especiallyone with a sticky online community component. This allows firms to build long-term, profitable relationships with customers – seemingly the perfect solution to the era of digital disruption.

But for every LinkedIn or Amazon that’s pulling it off, there are dozens who have failed. What separates the leaders from the stragglers?

Leaders…

Make sure they have a market/service fit before investing in on-boarding customers. Start at the bottom of the funnel. Before investing a nickel in developing your message or turning on the loudspeaker, you need to be sure that once target buyers try your offering, they will love it and will want to continue paying you forever. Until you are confident in that fit, focus your investment on designing the right offering.

Identify the right metrics. In the transactional economy, the most important measures are new customer acquisition and sales. In the digital membership economy, the metrics best apt to indicate success are more likely to be around member churn and engagement. In other words, how long they stay is more critical than how many walk through the front door.

Invest in building a culture of membership. Subscription is a pricing structure. Membership is a mindset. Successful membership businesses focus on the long-term relationship. This has implications across the organization.

  • For sales, the moment of transaction is the start, not the finish line.
  • For finance, short-term revenue gains do not justify poor treatment of members.
  • For product development, the offering needs to evolve constantly to meet members’ needs – changes only every year or two won’t cut it.

Love their members more than their products. When I joined Netflix, it was for three-DVDs-out-at-a-time. Today, streaming is a more efficient way for me to access professionally created video content, and Netflix provides me with streaming. And they are using what they’ve learned about my behavior and preferences to actually create much of the content that I watch. I didn’t join Netflix because I wanted DVDs. I joined Netflix for access to great content in an efficient way. Netflix isn’t in the DVD business, although for some period of time they will continue to offer DVD subscriptions.

I don’t join a gym for a specific class or workout machine. I expect my gym to provide me with a range of equipment, classes and learning opportunities to optimize my fitness. This means that they need to swap in better offerings as they emerge. No one piece of equipment or delivery platform is as important as the overarching goal of your members. It’s the members’ mission that should be your guiding star, not your products, whether you offer DVDs or workouts.

You have to be willing to sunset the old and bring in the new to honor your side of the bargain.

Stragglers…

Create a membership model just because they want recurring revenue.Organizations sometimes move to membership purely to generate more revenue. They aren’t thinking about the value-add for members. Kate Hudson has a lovely line of yogawear available through subscription, which is great, but some people thought they were buying a single outfit and were surprised to find themselves being auto-charged. Not everyone needs a new outfit every month. In building a formal long-term relationship, trust is critical.

 Let the members determine the direction of the business. While you do need to put your members at the center of everything you do, you can’t let them (or their online discussions) drive your strategic direction. Often, today’s members are less likely to be willing to transition to the new. As a result, they might send you in a direction that doesn’t appeal to incoming members.

Let’s say you run an online community. By default, the longtime members are comfortable with your web interface. And switching costs might be high. So it might seem like you don’t need to invest in new platforms. But new members, who are in evaluation mode, might be more likely to want a mobile app option, and may not join without it. Inertia can keep members from canceling, but don’t fall into the trap of confusing it with love.

Inertia isn’t love, and feedback isn’t strategy.

Some members’ input may be more valuable than other’s depending on their vintage (i.e. the future over the past) but preferences are their domain and strategy is yours. Listen most to the members who are most representative of your future, but remember to spend some time studying the market and prospects as well in order to get a full picture.

Give it away, hoping to make it up in volume. I love freemium, the idea of combining a premium paid membership with a free membership that provides value forever. But freemium needs to work in service to a larger business strategy. Freemium works best in three scenarios:

  • As a means of trial. Many people who have a free subscription to Dropbox get all of the online storage they need. But for others, as they make Dropbox part of their daily routine, they find they need more storage and greater functionality. As a result, they upgrade to the premium service.
  • To create a networked effect. Each new member that joins LinkedIn for free creates additional value for the recruiters, salespeople and jobseekers paying for LinkedIn subscriptions. And if no one used the free version of LinkedIn, there’d be little reason for those people to pay at all.
  • To serve as a marketing channel. Some people never pay for a SurveyMonkey subscription, because they only need small surveys sent to a few people, with limited analytics. But when those people send out their surveys, they are advertising for SurveyMonkey to everyone who receives the survey. If one of those survey recipients subscribes to the premium offering, the sender (who’s a free member) becomes a marketing channel for attracting and converting new members.

If you aren’t using your free subscription for one of these purposes, there is no reason to offer your membership for free. And note that it is very hard to charge for something that used to be free, as What’sApp, Napster, and many other companies have learned the hard way.

As long as your success depends on connecting with buyers who have choices, you can differentiate your business by joining the digital membership economy. But success depends on more than just changing your pricing structure. By changing each piece of your business model to focus on maintaining a long-term relationship rather than on quick acquisition of new customers, you can enjoy higher profitability, more predictable cash flow and customers who are your ambassadors.

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