Masters of monetization:
The membership economy
Podcast episode 54
We hear it all the time: companies wanting to become “The Netflix” of their industry. As they look for new business opportunities, how can communications service providers (CSPs) evaluate these new models? And how do you master monetization without losing customers? Author Robbie Kellman Baxter says that the focus needs to be on the member, not the model.
Below is a transcript of this podcast. Some parts have been edited for clarity.
Michael Hainsworth: Companies today are looking to pivot to a subscription model. We hear it all the time. They want to be the Netflix of their industry. But for Robbie Kellman Baxter, the author of the books The Membership Economy and The Forever Transaction, becoming a master of monetization requires more than just a buzzword. She tells clients in software as a service, media and consumer products that the focus needs to be on the consumer, not the recurring revenue that comes from them. And she tells me there's a big difference between membership and subscription.
Robbie Kellman Baxter: The word subscription really points to a pricing tactic. I think one of the things that organizations often miss when they want subscription revenue is all the other pieces that go with it. Most importantly, that member mindset. And so I use the phrase membership economy to remind organizations that what they're really doing is treating their customer like a member, investing in a long-term relationship and building trust, which in turn gives them permission to ask for subscription revenue.
MH: Then it's important that we talk about a term that you use quite frequently, and I suppose we're going to use it more than once in this conversation. So can you define the forever promise?
RKB: Yeah. Forever promise is the promise that an organization makes to its members that justifies a forever transaction. Forever transaction is that moment when a customer takes off their consumer hat, puts on a member hat and stops looking for alternatives, and you need to make a promise that justifies that kind of a relationship. It usually goes something like this. As long as you have this particular ongoing problem or this particular ongoing goal, our organization will continue to evolve and improve our offering to help you achieve the goal or solve the problem. So it's really about aligning what you do with that ongoing need of a customer rather than anchoring to your particular product offering.
MH: And you feel this makes a company disruption proof.
RKB: Yeah, absolutely, because by focusing on the customer's changing needs and by making a commitment upfront to continuing to evolve your offering to stay relevant and to help solve an increasing portion of that ongoing problem or achieving that ongoing goal, you have the opportunity to see what it is that's missing, how it is that your customers are using your products and services, and you can both evolve your offering to stay relevant and keep the relationship tight. And in addition, because you've established this ongoing relationship, your customer is probably not out shopping with your competitors. Their mindset is to stick with you unless you do something that drives them away. So a subscription model is so appealing and that's actually why it's so highly valued by investors. Because it's so predictable, because it's so disruption proof, investors have realized that subscription revenue is more valuable than more episodic or transactional revenue.
MH: So then is there a corollary to the forever promise in the title of your latest book, The Forever Transaction?
RKB: Yeah, absolutely. People want a forever transaction. That's what companies come to me for. They say, "We want our customers to subscribe and to keep paying us forever." And what I want to remind them is that at the heart of that is a promise that they're making that justifies that forever transaction.
MH: So how does moving to a membership model ultimately drive loyalty? Is it just a function of the gym membership model where now that I'm with you, I'm disinclined to leave you?
RKB: Gyms are much maligned in the world of membership and in the world of subscription. There are some very good gyms out there, but you're right. A lot of gyms make money by people signing up for something that they never use and forgetting that they signed up. That is exactly not what I'm talking about. What I'm talking about with membership is earning that trust by delivering on the promise. So in the case of gyms, that forever promise is as long as you come to my gym, I will do everything I can and continue evolving my offering to help you get and stay fit because that's why you came in the first place. So if I'm doing my job, that might be Jazzercise one year, it might be Zumba the next year. We might move out the steppers and move in the bikes, change some of the machinery out, but we're always tinkering and improving it so that you keep coming back.
That's really what's at the heart is treating you like a member, focusing on your ongoing goals, trying to make an impact on that and going beyond just the features; we have a bike, we have a class, and making the connections. What's going to bring you back? What's going to make you make this a habit? What's going to make you come to that gym three times a week? Because if you're getting value from your membership, you're definitely going to stay.
The converse is if you're not getting value, you might pay for a few months where you're not coming at all, but at some point you're going to realize that you're wasting your money and you're going to feel taken advantage of, disappointed, and like you don't trust that gym. I think a lot of people have a kind of an adversarial relationship with gyms where they feel like they need to game the system like, "Oh, I get a free month here. And then I'm going to not sign up and I'm going to go somewhere else, or I'm going to keep a real close tab on when I'm allowed to cancel." That is not the kind of relationship you want. You want a relationship that is so good that the customer doesn't want to leave. They relax into the relationship and they trust you.
MH: I can imagine as well when you move to a membership model that drives loyalty, it creates the network effect. You're receiving a lot of information as the creator of that membership model about your customer, about what they're doing with your product or service, and that's what helps you expand your model.
RKB: Yeah, absolutely. Because in a lot of businesses, if I walk into a store and I buy a candy bar and I walk out, they have no idea who I am, if I'm ever going to come back, how frequently I eat candy bars, what else I eat, what other products I use. But if I subscribed to that store-
MH: Oh no. You're creating candy bars subscription models? This is not a good thing for my thighs, I'm telling you now.
RKB: Michael, they're already here. They're already here. There's candy bar subscriptions, there's snack subscription boxes. There are people who are saying, "I never want to miss out on an opportunity to try a new candy bar, or I never want to run out of candy bars when I need them." In fact, I think about many, many years ago when I was starting my career, I worked at a big consulting firm and one of our clients was the world's largest salty snack manufacturer. Their mission was to keep salty snacks, which are potato chips and the like, within arms reach of every man, woman and child on earth at all times so that you never run out. And that's really in some ways what membership is about is making sure that the customer can solve their problems or achieve their goals, get the maximum enjoyment out of what they're doing by focusing on that and understanding their behavior. What happens after the moment of transaction. They buy the candy bar. Do they eat the candy bar? Do they buy a second candy bar? Do they also get a Coke to go with it?
All of that information allows the organization to continue to improve the offering to say, oh, they always buy a Coke after. Maybe I should bundle that. Maybe I should manufacture Cola drink myself because I know that's what my customers like. It's building on what you learn. It's using the data to determine the next steps on the customer's journey. And as long as you're seeing around corners for that customer, they're going to stay with you.
MH: I'm fascinated to read that you describe a successful member of the membership economy as having a convergence of the three Cs: content, community, commerce. And you say the makeup industry is understanding these three Cs.
RKB: Yeah. The makeup industry is a great example of bringing together or layering in value for the customer to solve their problems. If you think about what do I want when I put on makeup, I want to look good, I want to feel current, I want to feel attractive. There are different ways that I achieve that goal. I buy products. I go to the drug store or the department store and I buy lipstick and mascara. That's commerce. I read magazines. I look at YouTube videos to learn how to better apply it, what new trends are emerging, what might look best with my kind of skin and my style. That's content. And then I ask my friends and I ask people I admire who look good what they do. That's community.
What I'm noticing is that organizations that have strong footholds in each of those areas are moving into the other spaces. So content companies, magazines are starting to create their own makeup lines.
Commerce companies are starting to come up with content, and both groups are starting to build communities of their loyal fans and giving them an opportunity both to talk back to the organization and give their feedback but also to talk to one another under the brand umbrella. What they're doing is they're creating more value for that customer and doing a better job of helping them achieve the goal, which is of course to look your best.
I think that's a great example for any organization that has a promise. If you're trying to help your members communicate effectively, think about what are the tools they need to communicate effectively? What's the information they need to communicate effectively? And who can help them, who else is going through this or who else has expertise in this area that could be a friend, a peer, an advisor to help them. But by layering in content, commerce and community, an organization can deepen the trust, the relationship, the loyalty, the engagement with their customers and provide more value, which of course results in the ability to charge more money.
MH: Everyone, it seems, just wants to be the Netflix of, insert industry here. Why is that a bad idea?
RKB: Yeah. It's so funny because I worked with Netflix, over 20 years ago now is the first time I really started talking to them and I fell in love with their business model. A lot of other people did too. These days, a lot of companies come to me and say, "We want to be the Netflix of news. We want to be the Netflix of bicycles. We want to be the Netflix of dental pain management products. We want to be the Netflix of heavy equipment." I mean, you name it and somebody wants to Netflix it. And I kind of understand what they mean, which is we want to build a membership economy with them. We want to have subscription revenue. We want to have disruption proof relationships. We want to have loyalty, all those things.
But the problem with saying we want to be like Netflix is twofold. The first thing is Netflix is its own unique entity. It's about entertainment. So breadth of entertainment, content is really important. It's not mission critical. It's consumer, it's digital only and all of those things make their model unique to them. So if you're trying to be the Netflix of dental pain management products, which is a B2B product that's sold to dentists and then delivered to consumers, all of those things are very different. So the first thing is you don't want to just copy them wholesale. So you don't necessarily want a two week free trial. You don't necessarily want to have a single price. You may not even want to have a cancel at any time clause like Netflix has. So it's not apples to apples comparison.
The second thing is when you're sitting around a table, the exec team, and they all say we agree we want to do something like Netflix, every one of the people at that table I guarantee it is thinking about something different. One person's thinking we need a catalog of offerings like Netflix. Another one says we need all you can eat. Another one says we should charge a single price. Another one says we should be digital only. And so even though being like Netflix sounds like useful shorthand, it means different things to different people.
So what I would advise is look at Netflix, look at other examples of successful membership economy organizations, and then look at your own organization and start with your forever promise, what's the promise you're making, and then think about who are you making it to, and then think about what's the moment that they're going to join and then think about where are we going to take them on their journey and how are we going to engage them? And by starting with a lot of inspiration from other organizations, and then focusing in on the uniqueness of your own organization, I think you'll do a lot better than to just say we're going to be like Netflix.
MH: Is there though a page from the Netflix playbook that startups and CSPs can use?
RKB: Oh yeah, there's a lot that you can use. I think Netflix has been relentlessly focused on their forever promise, which for the last 20 years has been to provide a broad selection of professionally created video content with efficiency and in the simplest way possible with cost certainty. And so it's big selection, professionally creative video content, cost certainty, most efficient way possible. I think other organizations can say, what are we doing? We're providing the best way to communicate for this group, and it could be by region, it could be by B2B, is it for small businesses, large businesses, consumers, families, gamers. Who are you really optimizing for, because Netflix thinks about that. And then how can you continue to improve that offering?
If you said we're helping with communications needs of this audience, if you were starting fresh today, what might that mean versus improving on what you started 30, 50, 20 years ago? The other thing that I think is really useful from Netflix, something that I love about Netflix is they have a cancel anytime clause. You cannot buy an annual subscription to Netflix and they have remained true to that for their entire existence. You can always cancel at the end of every month. Not only that, but recently they announced that if you've been subscribing for a year or longer without logging in, without using the product, without getting value, they're going to cancel you automatically because they say they don't want zombie revenue. That I think is a really bold strategy. But what it does is it creates a very high level of trust when someone's signing up because they know they can cancel anytime and they know that Netflix really only wants to get paid by people who are getting value for what they're paying for.
I think that is a tip that every organization can focus on, which is to make sure that your customers are getting value for what they're paying for. A lot of organizations focus so much on what happens before the moment of transaction, how do we get someone to sign up and maybe even how do we lock them in, but that's not really the important work. Once you get them to sign up, that's when the heavy lifting begins. How do you engage them? How do you deepen the relationship? How do you get them to take off that consumer hat, put on that member hat and say, "I trust this organization and I'm going to stay here for as long as I continue to have the needs that I have." And that I think is probably the single most valuable thing that every organization and certainly CSPs can learn from Netflix.
MH: And certainly gymnasiums as well I can imagine, your point being you don't want to lock people in, but that's exactly what that kind of membership model is all about. If I felt good about the product or service I was receiving, I wouldn't need to be locked in.
RKB: Right. What's really interesting to notice is Netflix has an incredibly high retention rate. People don't leave Netflix. So what's really interesting is a lot of companies say, well, we have to lock people in or they'll leave. If you're in that position where you have to lock someone in or they'll leave, that is not a great situation to be in. You want to be in a situation where they're getting so much value that they wouldn't want to leave. They feel like they're well-treated. I have a lot of clients where the customers say I know I'm paying a premium, but it's great service and I love them and it's worth it to me. So it's not even about having the lowest price. It's about providing value, confidence, certainty, trust. That's really what justifies that forever transaction. And if you do it right, they'll stay. It's like a marriage. You don't want to trick someone into marrying you. That's not going to be a good marriage.
MH: Cancel anytime. You've said that a subscription model has three phases, the launch phase where you try to figure out the business model and the product fit, the scaling phase where you need to put infrastructure around that model that's now working, and then the lead phase. Communication service providers are already in the subscription model and they are already at that third phase. They've put a lot of effort into lowering the churn rate. How do CSPs take the model to the next level?
RKB: Yeah, absolutely. There are some very unique challenges to organizations in the lead phase. A lot of CSPs have been successful for a long time. They've been charging in subscription for a long time. They've had clients for a long time. They've invested a lot of money in the services, the features, the benefits that they provide. What I see in organizations in that lead phase, some of the challenges I see is a reluctance to change, concern about sunk costs. We've always done it this way. We already have the systems in place. Even if it's not what our customers want, we need to force them to use it because we have it. They tend to also suffer, I think, from an aging population. So people that signed up many years ago. They're like, "Those people are really loyal, but the new people are hard to win over and they're not as loyal."
The reason is that the long time customers have made their decision a long time ago and they're not looking for alternatives. So they're very loyal. But you don't want to confuse inertia with loyalty. They just haven't maybe looked at competition. Whereas new customers are still with their consumer hat considering alternatives. So, you want to balance what are the acquisition benefits? What's the reason someone's going to join with those engagement and retention benefits? How are we going to help them relax into the relationship and stick with us for a long time?
It's kind of like you want to use your microscope to look carefully at today's members who have been so loyal to you and understand what they want and need, but also use your telescope and look at the people who are considering joining, who joined and left, who considered joining and never joined, and understand their reasons as well. So, what are the reasons for churn? What are the reasons that you didn't win them? And by understanding all the voices, not just the voice of your current members, you might get a better picture of where you can go next.
MH: For a CSP partnering with a company that's trying to become the next hyperscaler like your Netflix, your Ubers, your Airbnb, what is your advice for how a CSP needs to investigate whether or not this partnering is a good fit?
RKB: Yeah. Oh, there's a bunch of things from a few different perspectives. First of all, you want to make sure that the organization itself is well-run, well-structured and is likely to be around for the future, that they are going to be a hyperscaler and they're not going to be hyper flameout. And so there what you want to do is you want to get pretty sophisticated about understanding their metrics. They might be acquiring a lot of customers, but are they retaining them? And if they're retaining them, is it because the customers are getting value or because they're locked in; because you want, obviously, any partners that you're working with, you want them to have services that are really wonderful that customers love. So you're looking at acquisition benefits, retention, and you're also looking at their engagement, their behavior. How do they use it? Is it going to make them come back a lot and support your model as a CSP? That's the first question is do they understand long-term relationships and are they stable?
The second thing that you want to understand is are the benefits that they offer aligned with the needs of your audience. I talked earlier about the importance in a forever promise of knowing who you're making that promise to and what that promise is. Who are you helping with their communication needs? Who are you helping to stay connected and what does being connected mean to them? What is their journey that they're on? They sign up with you, what makes them sign up? And then what are they trying to do every day and how does that change over time? And you're looking for gaps in what you offer that your partners can offer on your behalf. So you want to really understand who your members are and what they need and what they value.
And then the third thing, I think when I was working with a lot of these hyperscalers 10, 15, 20 years ago, what was really interesting to me is that they looked at these big players, these CSPs, and they were like, they have all the power, how are we going to survive as their partners? They're probably going to copy us. They're probably going to create their own apps with their own app teams and then boot us out. They own the relationship with the customer. We're going to be disintermediated. They have all the cards. But what I see sometimes with large organizations in this lead phase is that they kind of don't see how much leverage they have and often seed a lot of control to these small players. So it's really important to understand what it's going to take to keep the primary relationship with the customer and have their primary trust be with you and not necessarily with these apps or these hyper scaling entertainment and content and service providers.
MH: On Futurithmic, we've been told that we're living now in a post ownership economy and that everything is moving to a subscription based model, from razorblades to car ownership. Final thoughts on that?
RKB: Yeah. First of all, right now, every company, no matter their size, no matter their structure, every public, private, large, small, closely held businesses, family businesses, the largest corporations in the world, nonprofits, everybody is thinking about subscription right now. I guarantee it. Every single organization has some team somewhere that is either launching something or working on a launch or they already have it. And the reason is that those businesses are getting a higher valuation. And the reason that those businesses are getting a higher valuation is because using subscription pricing is a way, a tactic to better align the value they create with the needs of their customers. That is never going to go away. We need to keep aligning the value we create with the needs of the customers and the way we price that value needs to align with the impact that we're making.
Subscriptions are a big step forward for most organizations to thinking in that way, to having a membership mindset, but it's not the only way. So I feel like we're on a pendulum, we're swinging in the direction of access over ownership, but I think we'll swing back. There are some things that people are better off owning. There are some things that we're better off paying for as we go based on usage. There are some things that we might need to pay for and experience one time, but what's really valuable about this moment is that organizations are looking at their relationship with their customers through a different lens, which has an impact on the kind of products they're building, the way that they support those products, the way that they accept revenue. And I think that's what's exciting and interesting for the organizations that we're talking to right now.