Is a Subscription Model Right for Your Business?

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Welcome to HBR on Strategy. Case studies and conversations with the world's top business and management experts hand selected to help you unlock new ways of doing business. Today we bring you a conversation with an expert on the business of subscriptions. Robbie Kelman Baxter she argues that subscriptions aren't just for magazines or Netflix or podcasts. They can help all kinds of companies earn consistent revenue and improve customer loyalty. Subscriptions aren't new. The business model dates back to trade guilds in the 12th century. And with new billing platforms, remote customer support and digital services, it's worth considering what it could look like to make subscription business models work for your company. This episode originally aired on HBR IdeaCast in July 2020. Here it is.

Welcome to the hbr ideacast from harvard business review. I'm kurt nickish. In 1926, a book mail order service debuted a new subscription service, the Book of the Month Club. It started with 4,000 subscribers and climbed to more than a half million of them within 20 years. The subscription eventually became a brand in itself, launching the careers of writers like Ernest Hemingway, Margaret Mitchell, and J.D. salinger. Subscription services are not new. Newspaper and magazine subscriptions were household norms for a century. But more recently, digital technology is fueling a new wave of subscription services, from America Online a few decades ago to Netflix and Blue Apron today, and increasingly even large enterprises like IBM and General Electric are shifting from sellers of durable goods to sellers of subscription services. Our guest today argues that in fact, any business can become a subscription business and thrive because of that decision. Robbie Kelman Baxter is the author of the book the Forever Transaction. How to build a subscription model so compelling your customers never want to leave.

Thanks for having me.

To start. Tell us why you're such an advocate of membership and subscription models.

I love this model. I've loved it for about 20 years and I fell in love with the model because I had started independent consulting and one of my first clients was Netflix. I'm based in Silicon Valley and they were a start nearby, and that was where it really happened for me. I loved it first as a consumer, but I also fell in love with it as a business person. The recurring revenue, the relentless focus on doing one thing really well for their customers, making a forever promise, which I would define as professionally created video content delivered in the most efficient way possible with cost saving. Subscriptions have been around for a long time and memberships have as well. I mean, there were trade guilds in the 12th century. These are not new ideas, but technology is extending the infrastructure that enables these kinds of trusted relationships. Subscription billing platforms, digital support, and the ability to serve content and provide services remotely has exploded.

What about the digital technology made subscription models more compelling? Or was it just the fact that they were able to create stronger, ongoing relationships because of digital technology that a subscription model just lend itself to that?

Yeah, I think that organizations have always wanted predictable revenue, and it's becoming easier and easier. It's more accepted by consumers, and it's easier for companies to bill on a subscription basis and to create offerings that justify subscription pricing, which I think is a really important point if you want to. You know, everybody is creating subscriptions right now. Everybody from, you know, Caterpillar with heavy equipment to, you know, Blue Apron for meal kits.

I just found out that my next door neighbors have a subscription service to an exterminator. They pay them monthly for a service.

Yeah, it's great. We have one too. This guy comes by once a month and he says, what's bugging ya? And then he does his thing around the outside of our house and then comes in and checks in certain places. And the reason this is so great and that any organization can do this is because it's about aligning the goal of the customer with the goal of the organization. So my goal isn't to have the exterminator come and remove the vermin. Right. My goal is to never have the vermin in the first place. So if the organization can do that for me, I'm willing to pay them forever if they promise that I'll never have to deal with any kind of bugs or rats or other things that I don't want in my house.

Well, and in some of these businesses too, you used to just look somebody up in the yellow pages. And now if you do the SEO game or you do your job of getting an inbound customer, then you want to hang on to them because it's just so easy for somebody else to pull them away again.

Yeah, absolutely. If you find a customer, you want to deepen and extend that relationship, and you don't want to have to go find them again or have them try to remember who was that exterminator that I used three months ago. So it's really in the interest of the organization to build that formal relationship with the customer in many cases, not all cases, because there is a problem right now with subscription physicians, but in many cases, it's in the best interest of the customer too, to have that problem fully solved forever.

Predictable revenue is certainly a good thing, whether you're a public company or whether you're a private one or a small business. Right. I suppose that's attractive no matter what level you're at.

Yeah. So certainly predictable revenue is great. It's great for cash flow. So you can manage the money you have and you can plan with confidence for your future. It's great for valuation if you want to sell part or all of your company. Subscription businesses enjoy generally a higher valuation, 5 to 7x multiples of their transactional peers. Most of these businesses are also direct to the end customer. So for many businesses, moving to subscription also means going from working through a third party, through a dealer, a distributor, a retailer, to going direct, which also allows a deeper relationship with the customer there. It also allows you to track behavioral data and understand how your customers are using the products and services that you created, which allows you to continue to both improve the offerings that you have in the future. So it has a big value for the product team. And it also helps you to anticipate when a customer is unhappy before they cancel or call to complain.

Does a subscription service make a business more resilient or more vulnerable in a crisis? I'm thinking of Rent the Runway, right. Where people don't need a fancy work outfit for that big presentation because they're not leaving their houses. And people may not even see how nice the fabric is from the resolution on the video conference screen. Right?

Yeah. Well, so there's sort of two parts of this. One of them is it depends on what industry and what your subscription is. Because if every kind of business and even nonprofits have subscriptions, some of them are going to be negatively impacted just by virtue of what industry they're in. So you brought up Rent the Runway. I don't have any soirees coming up or I'm going to need a fabulous gown. So, you know, they're, they're struggling. On the other hand, there are a lot of subscription businesses that are doing really well right now because in these times of, of great change, people are willing to change habits. So as an example, my mom, who's in her 70s, you know, historically, traditionally, she would get up in the morning, go to her Bikram yoga class, go to the grocery store to buy whatever she and my dad were going to have for dinner and then maybe go to her book club. Now she's been forced to adopt new habits that involve subscription. So she's now subscribing to a service that allows her to do her Bikram classes at home, and she's set up a little studio in the bathroom with a space heater, and she turns on the shower to get the steam going, and she has an electric blanket on the floor under her mat. And then she's using Instacart for delivery of her groceries, and then she's using Zoom for her book club. So this is a moment where she's getting over the friction of adopting new habits. But the likelihood is, or at least this is what she says, that she's going to keep these habits even when she's no longer required to shelter in place.

What are the benefits to consumers of doing this?

There's a bunch of reasons. One of them is there's a move from ownership to access. So when you move from ownership to access, let's say you look at the Porsche subscription for the cars, you can drive a. What do they say? You can drive a Cayenne on Monday and a Carrera on Friday, sort of your convertible on Friday, your SUV on Monday, and you can rotate the fleet of cars without the burden of ownership. So you have greater variety. You don't have to deal with the repairs. There's often a smaller cost associated. It's many small payments rather than one big payment. So that's good for the customer cash flow as well. They don't have to put that big outlay. And this is true, by the way, for B2B as well. We've seen almost every enterprise software company introduce at least some version of software as a service which provides those same benefits of access and smaller regular payments and greater flexibility.

And they're okay doing that, even if the overall cost is higher? Eventually, yeah.

A lot of people are willing to ultimately pay more in exchange for the flexibility to leave when they want. You know, subscription is really just a way of rebundling or repackaging value in a different way that meets the needs, you know, sort of a different set of needs. If I buy a car, right, it's my responsibility when I roll it off the showroom floor. But it's also mine. I can trick it out, I can paint it, I can drive it into the ground. But I don't get the flexibility of having a variety of cars for different purposes. If the car breaks down, it's my problem. I have to figure out where to park it. I can use it anytime, I can lend it to people. So there's a lot of benefits and costs that are bundled into buying a car versus, let's say, subscribing to a fleet of cars like Porsche is doing, or subscribing to a single car like Volvo's offering or subscribing to Uber has a membership model where you can get a discount on a certain number of rides every month, plus no surge pricing. All of those different models offer you at least some of the same benefits, but with different costs and benefits blended in.

I hadn't really realized this before, but as you're talking about it, it almost seems like subscription models are converging somewhat with the sharing economy and the unbundling of value across people. That also. That's a similar model as a subscription model where you're breaking out a product or a durable good or a service over time through a subscription.

Yeah, absolutely. And in fact, you know, I've spent a lot. When I was learning about the sharing economy, you know, I was trying to think, what is its relationship with subscriptions? And I was thinking, you know, some sharing, some sharing economy businesses have subscriptions as a component of it, but the difference is who owns the assets. It's a really. There's definitely some overlap and some similar goals that both are trying to achieve, which is unlocking stored value in underutilized assets and giving people greater access and greater variety as a result.

What are the ethics of a company that gets somebody into a subscription service and then doesn't use it, but also doesn't turn it off?

Yeah. So Netflix just announced that if you have a subscription to Netflix for 12 months or more and you haven't used it, if you haven't used the Netflix subscription for 12 months or more, they will automatically cancel it for you. And I think that is a beacon of change for a lot of organizations, sort of setting a new stage standard. And it very much aligns with what they've always done, which is cancel anytime and only pay if you're getting value. And I think other organizations might consider moving that way. What Netflix has seen time and time again is that the easier they make it for people to cancel, the more people come back to them. So the better they are able to win people back and the better their word of mouth is and the level of trust they have with their. With their subscribers. There are still a lot of bad actors out there who hide the cancel button. You know, it's really easy to join, but if you want to cancel, you have to do it on Tuesday and you have to come in person or call on the phone.

Right. And we'll keep you on for an hour trying to bring you back with extra offerings or.

Yeah, exactly. And, you know, now when I tell somebody that I'm a subscription expert and that I Work in this space, in the subscription space. A lot of times the first thing someone says to me is, XYZ company made it so hard for me to cancel. I hate subscriptions.

I just wonder, how are consumers getting more sophisticated about, I don't want to say seeing through subscriptions, but looking at subscription offers and figuring out what really works for them. Like how. How are they part of this, this learning curve?

Right. There's. There's definitely subscriptions. So there's so many subscriptions. And that rise of subscriptions has made consumers cynical and sophisticated. The good news is they're willing to subscribe. They understand what a subscription is. The bad news is they understand the difference between what a subscription should, you know, and I have that in quotes should do versus what they actually do. So, for example, it should be easy to cancel. I should be able to cancel at any time. I shouldn't have to give my credit card if I just want to experiment with it and see if I like it. And so as a result of this kind of cynical sophistication that consumers have, they're often pushing back. Like you said, they're trying to protect themselves. They're seeing it as a game. Using gift cards to pay, using different email addresses for every subscription so that they can. There's a. One of the challenges that a lot of my clients face is people who sign up for the 2 week free trial 10 times to watch the one thing they want to watch. Yeah. And then they come back and trying to figure that out. I mean, a big part of it is that consumers aren't distrusting because they've been burned so many times by bad actors. So what that means for the organizations is that they have to expect that consumers are going to be a little cynical and a little jaded that there are services now like Trim and truebill and Wells Fargo has, I think it's called Control Tower, all these tools that have been designed to protect you from subscription, that allow you to cancel and they'll go fight for you.

I suppose you can get a subscription to those, right?

Available for subscription. Yeah.

If you look at a company like Blue Apron, which everybody was really excited about, had an IPO based off of what people thought customer acquisition costs were and what monthly recurring revenue was going to be. And that stock just fizzled because the subscription model just didn't pan out. What happened there and can you really rely on it as much as people want to?

Yeah. So I think what happened with Blue Apron, there's some different ways to look at it. One of Them is to say I don't think people looked closely enough at the unit economics People were joining because of a very, very generous sign up offer, getting free meals sent to your house. And they were staying for about, let's say six months. But they didn't get to profitability until seven months. So they were losing money on each individual subscriber. The model didn't quite work. And yet if you looked at the number of people that they were acquiring and the revenue that was coming in, it looked like they were growing really fast. Another way to look at it, which is sort of more logical is to say what would we expect the lifetime would be of somebody to stay with this particular offer and what problem is it solving forever? And when I talk to people who canceled their Blue Apron subscription, there were a bunch of different reasons. Some people said I got tired of the menu, there weren't enough choices. I used up all the value, I used up all the choice. Other people talked about subscription guilt, which I think of as it's a great, you know, when somebody says this is a great model, except it's not working for me because I'm not using all the value I'm paying for. And that makes me feel bad about myself sometimes. I think of this as the New Yorker problem. Like the magazine's so great, there's so much good content, but I can't finish it. And then I feel bad. And so I think a lot of people canceled for that reason as well. It wasn't a flexible enough model to solve the problem for most people.

So if you are a company or a business that wants to explore doing this, how do you go about it?

Yeah. So if you're a going concern, if you're a big organization with a traditional model, so let's say you're Nike. What they did, they set up a small team of experienced people in the organization and gave them some flexibility, kind of like entrepreneurs or intrapreneurs inside the organization to explore subscription. They came up with what I would call a forever promise, which was in their case it was as long as you have children, we will make sure that they always have sneakers that fit. They always have shoes that fit. And they had a fixed price and you could kind of return the shoes and get new shoes and the old shoes would be recycled. They actually used a different brand name. They called it EasyKicks. And then they moved it into being part of the Nike Adventure Club. So it was actually, I don't even think people really saw the connection early on. It was off to the corner. And I think that that's good guidance for other organizations to start in the corner. Pick a very narrow subset of your audience that you can make a promise to forever and then optimize that experience for the long term. So it's a move away from product centric to one that's more about that customer journey and tinker with it until you get it right or until you're confident in not just that people will sign up for the model, but that people will stay for a while. And then once you've seen that you have acquisition, engagement, and retention in a pretty predictable way, that's when you can expand and kind of move more toward the center of your organization and expand.

And is that the same enterprise journey as, I don't know, a company like Siemens that builds wind turbines but also sells service contracts to service those wind turbines for years?

Yeah. So what companies are doing, almost every business is wrapping services around their physical products because the services are recurring, because the services are flexible, and honestly, because the services often round out the value that the customer requires.

Right. And I suppose they're afraid of disruptors or people who could come in and try to just drive a wedge between certain parts of what you're offering.

Right. It smooths. Subscription or services can kind of smooth the relationship between the very lumpy purchases. Right. I buy something this year, you don't hear from me for 10 years, I buy another big purchase in 10 years. What do you do to keep the relationship going? How do you get direct during that time period? But what I would encourage organizations to do is to say what is in the best interest for our customer for the long term? What is the bigger problem they want us to solve, and how can we keep layering in value? So you might start with services that wrap around the product, but over time, you might actually build that subscription into the physical product itself through Iot kinds of technologies, through sensors, through more than just what goes around the product, but actually the way you think about the offering itself.

Gotcha. So if you sell a boiler to somebody to heat their home, rather than waiting for them to call to have it serviced, you can also just reach out and say, as part of your purchase price, we've learned this and we.

Can offer this, or we're just going to offer you hot water instead of a boiler, because that's what I really want. I want to turn on my shower and I want the water to be hot. And if you said, look, you pay us this price and we make sure that you always have hot water, and it's our responsibility. If we think we need to update the equipment, we update the equipment. This is what gyms do. You go to the gym and the equipment, I mean, theoretically, it's always new, right? They're rotating stuff out, they're coming up with new classes for you to take. They're introducing you to new ways to get and stay fit. And you don't have to think about it. I don't necessarily want to be a treadmill owner. I want to be fit.

Yeah. What about, I don't know, a pizzeria? A small business that is selling goods or lower value services.

Yeah. So I think, you know, small businesses can, you know, they're kind of uniquely suited for subscription because they actually often have real relationships with their real customers. They actually know them by name, know what they want, and, you know, to take a step back and say, what do my customers wish I did for them? What is the bigger problem I could solve for them? So for some restaurants that might be around special occasion celebration. For others, it might be around convenience. So, for example, you know, they might decide, okay, we're going to have a program where, you know, if you want to buy your lunch three days a week from us, we'll have the lunch ready and we'll have a table set aside for you. You know, I sometimes joke that, you know, I don't go to the nail salon to get a manicure. I go to the nail salon because I like my nails to look professional. And if there was a pill I could take to have my nails always look good, that's what I would prefer. So, you know, when I walk out of the nail salon and I chip a nail immediately, I would like for the having that nail fixed to be included in the price, to just always have my nails look good. Same thing with car washes. Same thing with, you know, a lot of what you talked about is kind of commodity, local services that people return to over and over again. Smoothing it out and optimizing around the consumer goal is a really easy way to identify new sources of value.

We open this conversation saying that you think every business could be a subscription business. Is there any business that could not?

Businesses that don't depend on sales and marketing to serve customers who have alternatives might not need to consider subscription or building a long term relationship with their customers. So these might include last gas for 100 miles, right. Doesn't matter if the bathroom's dirty, I'm still gonna buy gas there. If I pass through people that have medical products, pharmaceuticals, where it's gonna save my life, you know, if I need to take their medication and there's no other choice and they have a patent, you know, they don't have to build a relationship with me or build trust or have an ongoing program for me and things that are true commodities. So one time I spoke and someone came up to me and said, I run a fleet of fishing boats and we sell whatever we catch at the market for a fixed price each day. What kind of membership could we have? So those are examples where I would say, you know, you may not need subscription if you have a patent advantage, a geographical advantage, a regulatory advantage. That means that you don't compete for customers.

But if you compete, yeah, if you.

Compete, subscription might be a really good way to build a deeper, trusted, formal relationship with your best customers.

Robbie, this has been so interesting. We should have you back like a subscription every year to talk about this. Thanks for talking about it.

Yeah, thank you so much for having me.

That was subscription strategist Robbie Kelman Baxter in conversation with Kurt Nickish on the HBR IdeaCast. Baxter is the author of the book the Forever how to build a Subscription Model so compelling your customers will never want to leave. That episode was produced by Mary Dew with technical help from Rob Eckhart. If you like this episode, check out HBR IdeaCast on Apple Podcasts, Spotify or wherever you get your podcasts. They release new episodes every week. HBR OnStrategy will be back next Wednesday with another hand picked conversation about business strategy from the Harvard Business Review. And in the meantime we have another curated feed. You should check out HBR on leadership and visit us anytime@hbr.org where you can subscribe to Harvard Business Review and explore articles, videos, case studies, books and and of course, podcasts that will help you manage yourself, your teams and your career. This episode of HBR on Strategy was produced by Anne Sanney and me, Hannah Bates. The show was created by Ann Sany, Ian Fox and me. Special thanks to Maureen Hoch, Adi Ignatius, Karen Player, Anne Bartholomew and you, our listener. See you next week.

Sam.