82: The Membership Economy, Subscription Services, Robbie Kellman Baxter

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It's my pleasure to welcome Robbie Kelman Baxter. She is the leading expert on subscription pricing and membership business models. She's founder of the consulting firm Peninsula Strategies and has been providing strategic business advice to Silicon Valley companies for over 20 years. She's the number one best selling author of the Membership find you'd Super Users Master the Forever Transaction and Build Recurring revenue and her new book, the Forever Transaction. How to build a subscription model so compelling your customers will never want to leave. Robbie, welcome. How are you?

I'm good. Thanks so much for having me.

It's good to have you on the show. And of course we've got a few slides up that you were gracious enough to share with us. So if you're watching on YouTube, you can see the visuals. If you're just listening, you're okay because we'll make sure we try and explain them really well. But after you listen to the episode, if you're audio only, you may want to go back and look at our YouTube channel and see the slides there as. Anyway, you're located in Menlo Park, California, is that correct?

I am, yep.

Good, Good stuff. Great to have you. Well, this slide that we have has a whole bunch of corporate logos, names we all recognize, everything from Costco to Amazon to HBO to Hulu to the Financial Times to cbs, Netflix, Spotify, neighborly Facebook, Nordstrom kind the kind protein bars. Really? Okay. Nest, Harry's Peloton, and some of these obviously we know are subscription models. But tell us about some of the maybe businesses that we might be surprised are subscription based.

Yeah. Well, I'll tell you, I was surprised when Burger King announced their subscription model.

Which is for unlimited coffee for $5 a month. Panera Bread followed shortly thereafter with a much more expensive coffee subscription of I think $8.99 a month. But if you had told me five years ago that Burger King was going to be a subscription innovator, I wouldn't have believed you.

Me neither. That's amazing.

Same thing with Caterpillar. Caterpillar heavy equipment company Threshers and crushers and cranes. They have subscription model and they've actually publicly said that they're moving away from the ownership model of having to own the crane toward a model where you would subscribe to get both that piece of Equipment to use when you need it, and also all of the software and data around it on a subscription.

Well, they actually, that's really interesting. Now that you mention it. The automobile companies are kind of some of the new players that are trying to make a splash with this. And honestly I was just reading something about Volvo's subscription model this morning and the lease on my BMW is coming up and I'm thinking maybe I should do a subscription. But to me it just seems like a warmed over lease. I mean, big deal. I had my assistant look into all the high end auto companies offering subscriptions. Porsche, Mercedes, Volvo, several others that I can't think of at the moment. And it's spotty as to where they're offering it, state by state and so forth. But a Volvo of any of the companies seems to really be going after this model. And in reading about it, it's a two year commitment. So what's the difference between that and a two year. Yeah, but you can change your car every. Well, you can change it after the first 12 months, get a different model, but then you have to annie up for another two year contract. So I don't know, the auto thing doesn't seem that substantial to me. Am I missing something?

Yeah, well, you're not missing something, but I think Volvo is, to be honest, the concept of having a subscription is it's a different way of packaging value that allows it to focus more specifically on a particular type of person and what it is that they want. So for example, Portia, you mentioned their model. They actually give you access, you subscribe. Much more expensive than the Volvo models.

It's $2,000 a month. Yep.

Yes, it's a lot.

It's expensive.

They give you access though to their fleet of cars. So in other words, you could have a Cayenne on Monday for toting around the kids and you can have a sports car for the weekend. And so for people who want to have a variety and who really enjoy new cars, that's a good deal.

Sure.

So another subscription option is Uber has a subscription where you can, I think it's $200. Again, it's spotty because all these companies are in the launch and they're still experimenting, but they allow you to for, I think it's $200 a month, you get 20, $15 rides. So that's already a savings if you use Uber a lot. And then you get no surge pricing. So the pricing stays constant so you get some protection from those high prices at peak hours. And so for somebody I thought the.

Only surge protector was the one that I have my TV set plugged into and my computer is. But okay, it's a new kind of.

Surge protector, a different kind of surgery.

I just thought of their next ad campaign. Anyway, I hope they give me credit for that.

Yeah, I love it. So in the world of cars, there's a lot of ways to be creative where people are saying, you know, I only need a car on the weekends or I need this kind of car during the week and this kind of car on the weekends or I want to be able to have access. There's another company, Turo, where they, and they're on this, on this Ichart somewhere where they allow you to actually borrow someone else's car. So let's say you have a house in the country and you only use it on the weekends, or you only use it in the summer, but there's somebody who lives there during the school year, you can rent it to them, give them access to your car for when you're not using it. So sort of a sharing economy membership. So that's for people who are saying, you know, I don't need to own the whole car, I'd like to share my unused value with somebody else who can use it. So the idea of this whole concept of, you know, how to think about your subscription model is focus on someone's long term goals, think about what you can promise them that they can't get elsewhere, that they're going to need for a long time, and then design the offering around that value instead of around owning the product.

Okay, good. I see the Starbucks logo on here. I didn't know they had a coffee subscription.

Yeah, well, I think they have a coffee subscription where you can access new coffees on a regular basis like a replenishment model. But they also, I wrote about them in my first book because of their loyalty program. I see loyalty programs that retailers and hospitality organizations do. This is like your airline programs and your hotel programs and your punch cards and your I'm a special member of Safeway Supermarket or whatever. They took it to another level in terms of the benefits. They gave you access to music, they gave you access to free refills on your coffee when you have the card. So by being part of their community, you get access to these special benefits. It's not about points, which is what most people think about with loyalty programs. And it's really about a sense of belonging and being recognized when you go into the stores.

It is truly amazing how big the subscription economy is. Are there any Numbers on the size of. I'll call it the subscription economy. Maybe you call it the same thing, but any numbers on this?

Well, it's like doubling year over year the valuations of companies in the membership economy. Generally, they enjoy a valuation of five to seven times traditional businesses. And the average American, I believe, has somewhere between 15 and 20 subscriptions.

Very interesting. Okay, let's dive in a little deeper. Take us to the next slide, if you would. Okay, so when we look at the way to have a successful subscription in a business, you've outlined seven steps here. And why don't you take us through? Just give us the overview first and then maybe we'll do a deeper dive into individual steps.

Sure. So in the Membership Economy, which was my first book, I outlined these seven steps as being a way that an organization could optimize their entire business model for this long term. Like what I call a forever transaction. This long term relationship with their customer. It starts in the middle with product market. Traditionally, product market fit is about having an offering that triggers somebody to buy it. Where they say, that's what I need, I'm going to buy it. You know who's going to buy it, you know what the product is. Boom, you have product market fit. But now it goes a step further where it's not just about the headline benefit that gets someone to buy. It's about features in your offering that get them to stay for the long term. So you have to think about product market fit, not just for the moment of transaction, but forever. And that's at the core. Customer is always at the center. Then, having a subscription pricing model requires changing the way your organization is structured. You need different skill sets, you need different functional areas, and you need different metrics. Metrics like monthly recurring revenue, like Churn, which is how many customers every month leave your business, cancel their subscriptions. You need to track for lifetime customer value instead of just tracking overall revenue. So that's organization. You really need to change how you think about it. The funnel. So we talk a lot about the funnel. You build awareness in your audience. You give them something to try, so they try your product and then they buy and then you're done. That's the bottom of the funnel. In the membership economy, that moment of transaction is the starting line, not the finish line for your financial relationship with the customer. It only expands after that. So it's a different way of thinking about marketing. You have to market after the customer's already bought from you. Pricing. If you're building a subscription model, you want to Keep your pricing as simple as you possibly can. It's very tempting to add all kinds of, well, if you're this big and if you need these features and if you want this support and we add bits and bytes all over the place. The more complicated your subscription pricing is, the harder it's going to be to build that trusted relationship, because they're going to feel like the customer is going to feel like I have to understand.

How they price so that I don't get taken advantage of. And if that's what they're thinking about, they're not going to trust you. Freemium number four is the concept of providing some of your customers with a free subscription forever. This is what, for example, SurveyMonkey does this. LinkedIn does this. Spotify does this. Some people get something free forever. Other people get, let's say, no advertising, access to special features. And that's in contrast to a free trial. A free trial is a taste of the best that you've got because they don't understand what it tastes like or they don't believe it tastes as good as you said. So you say, here, have a bite. Now you understand. Now you believe me.

Okay, so a distinction there. Freemium is a low grade form of the service that's free forever. Especially with software companies. We see SaaS does that all the time versus a free trial where you give them a higher level, but it's for a short time. Any thoughts on which one of those is more effective or why a business should choose one over the other?

Yeah, absolutely. So a free trial you give if your problem, like if you said, the reason we're not converting our prospects into customers is because they don't understand what we're offering. Like, especially with software. They're like, I don't get it or they don't believe you. If I said I have a new source of news that provides more valuable news that is better than any other news you can get for free or for a low price.

It sounds too good to be true. We've got to prove it to them.

Yeah, okay. Yeah, prove it. Freemium. So if you don't have those two problems, I'll just say it right now. Don't offer a free trial. There is no other reason for a free trial.

Okay, so the reasons are the I don't understand or they don't. Either it's too complicated without using it or it's not believable. The claims.

Yep. I don't understand or I don't believe you, if that's what you're hearing from your prospects, consider a taste.

Okay, so give us an example of the companies that like, you know, SurveyMonkey does a freemium. They don't do a trial, but usually they have the SaaS companies at least have a trial on the upgrade. Sometimes, you know, sometimes you've got a freemium forever and then upgrade it. You can try it for 14 days.

Or something because somebody says, I don't understand. This thing is fine. The freemium model is fine. I don't understand what is so great about paying. And you say, well, try it and you'll understand the difference and you'll never want to go back. So some organizations can have both, if they have both issues at different points. The reasons to do freemium are number one, to change behavior. So for example, if you move to digital news and people say, I'm not going to read very many articles, so I don't want to pay for it, you say, great. If you're not going to read very many articles, up to 10 articles a month is free. And then you keep bumping against the paywall because you're reading more than 10 articles and one day you say, you know what, I'm actually using this, I should just pay. That's a good reason for freemium. I another good reason for freemium is if it works in your business model. So if there's a network effect, for example, LinkedIn, most people don't pay for LinkedIn, but if none of us freeloaders were in the LinkedIn community, it wouldn't be valuable to the recruiters, it wouldn't be valuable to the recruiters, the salespeople, the job seekers who are the ones paying.

Sure, sure. You've got to have. If you can invoke Metcalfe's law of the network right, then, then it becomes worth having the freemium people in there because it makes it more valuable to the non free.

Yeah, okay, exactly. And then the last reason is if the people who are getting your product for free are influencing others to buy. So they're your marketing channel. So for example, let's say that you're trying to sell to end consumers, but they're being advised by their accountants whether or not to buy your software, you might give it away for free to all have a free service for accountants. Because you know that if the accountants like it and they tell their customers, their clients to use it, the clients will have to pay, or vice versa, you give it away.

And usually that's the other way around. They'll get the business to pay. But yeah, got it. Okay.

Yeah. So that's freemium. So the next one is onboarding. So when you bring a new customer on board, you really want to choreograph their experience, and you want to do three things. You want to make sure that they know that they get the value they're paying for right away, so give them what they came for. Second thing is, you want to reinforce the wisdom of their decision. And the third thing is, you want to show them how to get all the value they're entitled to, helping them to create habits so that they don't cancel customer success. Number six on my circle is onboarding giving people value for what they're already paying for for the rest of their time as your customer. In contrast with customer support, which is, if they tell me they have a problem, I will fix the problem. It's making sure that your customers never have a problem, because often the moment when they have a problem is the moment they cancel, and then it's too late to save them. Then the last thing I have is. Number seven is technology. What I'll say there is that almost any business that is using subscription pricing probably needs to start to think of themselves at least a little bit as a technology company. And the principals, the founders, leadership, somebody in the organization needs to start thinking really strategically about how to incorporate technology more thoughtfully into the organization.

So we have finished all steps. Is there another one of those steps that you want to dive into anymore, or did we cover that pretty well?

I think we covered it pretty well, unless there's something that you think your audience would find especially useful.

Organization, funnel pricing, freemium onboarding, customer success, technology. Good stuff. Let's jump to the next one.

So five years ago, I was trying to convince entrepreneurs and executives that thinking of your customers as members and using subscription pricing was a great business model for almost any kind of organization. And that if they move to that model, they would enjoy recurring revenue, better data about their customers, ability to evolve more nimbly, and higher valuations in the public markets. And people didn't get that. That's why I wrote the first book. But five years later, 2020 people, everybody wants to have a subscription business. So I took all of the research I've done and all of the work I've done with over 100 companies. And I mapped out a framework so that wherever you are in your subscription journey, you can anticipate what the challenges are going to be and understand what the steps you need to take are. And I divided it into things you need to do when you're getting started, things you need to do as you scale your business and things you need to keep doing and not forget about if you want to maintain a leadership role.

Okay, good stuff. So launch, leverage, lead. Let's drill down on those a little bit more.

So when you're getting started, if you're an entrepreneur and you want to build a subscription business, you certainly need to gather resources. You also need to set expectations among your investors and certainly with yourself, that it's going to take a little while before you figure out the product market fit and revenue starts coming in. Also, in general, if you're coming out of a world where you're very transactional, so you sell a thing to somebody and you get a big spike in revenue, and then you have a dead period and then you sell another thing and you have a spike. Subscription is great because it smooths that out, but those numbers are smaller at the beginning. And so you need to be patient.

And then you need to be well capitalized.

Yes, you need to be well. And that's why so much of the subscription innovation first came out of Silicon Valley. Because here in Silicon Valley, we have often five years, six years, seven years before our investors need us to actually start making a profit. So we have a nice long Runway to build that forever transaction with our customers and start establishing that subscription cadence. So moving on in that early phase, you want to figure out who you're designing this for. You need to be really focused on who your best member is, and you need to find product market fit, minimum features, a minimum viable product. What are the features that are going to get someone to sign up, and what are the features that are going to engage them? So you want to track recency, frequency, depth and breadth of usage. What are the features that are going to get them to use your products regularly and well for the foreseeable future? And once you have that mapped out, you're probably ready to move on to stage two, which is really leveraging. So if you're a solopreneur or a small business owner, this is when you start growing, you start hiring people, you maybe invest in a technology platform instead of doing it on your own with spreadsheets. It's when you start thinking about the culture for your organization, what are the metrics that you're going to have on your dashboard. Then you just continually are evolving your offering to make it better and better and layering in more value to bring in new members and to continue to engage your existing members. Then finally, once you're in a leadership position. These are companies like a lot of newspapers, professional associations, Some of the older SaaS, companies that have been around for 20 plus years, they start to run into the problem of aging with their cohort. In other words, the executives in the organization are getting older and the best members are getting older and new members are not joining. And a lot of times people have said to me, oh, that's because young people aren't joiners or young, young people aren't readers or young people don't like going to gyms. None of that is true. What's true is they come and they look at your offering and it looks a little long in the tooth because you haven't evolved your offering. And the reason you haven't evolved your offering is because your existing members who aren't looking for alternatives don't push you to innovate because they're happy with the way things are. But when a new prospect looks at it, they're like, well, that looks really shabby and old fashioned. I'm going to try to find something else.

Sure. But I mean, are you, of course you're talking about the look and the design and the kind of, the look and feel of say, if it's a SaaS product, you've got to update things. But there's obviously more to it than that, right? I mean, it's sort of maybe just the general culture or. Can you put your finger on that anymore?

Yeah, yeah. So here's some other examples. Professional associations. So these are like your American Marketing association, the aicpa, the CPA Society of Chartered Public Accountants. They do all their training for the most part. It's changing now, but they do it in person. So if you want to get your credits so that you can stay current, you have to fly out to Washington D.C. or wherever and take the class. And you're probably thinking, if you're a young person, like, why can't I do this online and I don't have to fly and it would be a lot cheaper and I have no social skills.

So, you know, I got to do everything I want.

But anyway, the point is, you know, most people would think that the current way of doing it is with technology. Another example would be newspapers, right? Newspapers that come out once or twice a day. But I'm used to getting my news from Twitter and it comes out, you know, in the nanosecond. The event happens. And why doesn't the newspaper make use of this new technology so that I can get my news when I need it? So what they're saying Is I see, if I'm a new person just graduating from college, looking for a way to get news, I might say, well, newspapers, that's not the best way for me to get news because I can get news for free and I can get it faster in other ways. So you have to, if you're a long time business, you have to keep in mind how this looks to your prospects and why you lost the people who canceled or chose not to go with you. And you have to use your telescope in addition to your microscope. So you have to look out on the horizon and see what new technologies are available and what other companies are doing to solve the problem that you claim to solve. And they might not be your direct competitors. Like, you know, I think that the whole financial world was blindsided by PayPal and then blindsided again by Venmo because those aren't financial services companies, they're tech companies. But they solve the problem of how do I transfer money to people who I owe money to.

It's going to be really interesting going forward. This very significant move, I think, away from banks, millennials and Gen Z. I don't know that they view needing a bank, having a banker having that relationship anywhere near the way prior generations did, that's going to see a giant change. And I look at all the real estate these banks own in terms of all their branches, especially the crooks at Wells Fargo, you know, I mean, wow, do they have a lot of branches? I mean, that's just a lot of real estate that will probably become a lot less necessary. Not to mention current events, of course, which are, you know, even more significant. So what is maybe one or two of the best retention models? The membership economy, the subscription economy is largely about retention, right? A lot of companies are good at getting the customer, getting the business, but some customers, they don't adopt, they don't use the product. So when they see it on their credit card next time they dispute the charges or they cancel. Any thoughts on retention? I'm sure you have many, but just a couple.

So many thoughts on retention. So first of all, retention is everybody's responsibility. New York organization. So I worked with a streaming video content company. They called me in because they said we have a retention problem and our retention team's not very good. This is what they told me. So we come in and we bring all the different leaders from across the organization together. And here's what I learned. We talk about why, what are people saying when they cancel? So number one, the technology glitches. In other words, I'M watching the soccer match and all of a sudden the screen goes dark and so I canceled. Is that the fault of the retention team? I don't think so. Another issue they were the marketing team was saying, join our subscription because we have the world championship soccer match. Right? So guess what? People signed up in the two week free trial. They watched the soccer match, the world champion soccer match, and then they canceled before ever paying.

Right.

Is that the fault of the retention team? No. Those people never intended to come. They were the wrong customers. So those are just a couple of examples of how the retention can be driven by almost anywhere in the organization. The first thing I would say is before you invest in acquisition, before you invest in marketing, make sure that you understand how to retain your customers and which customers retain. Then once you know that you want to optimize all the parts of your business to attract the kind of people that you can retain and to teach them the habits that are going to result in them staying. So, for example, you want to onboard new members for engagement in the world of streaming content. Again, that might mean I get it on my phone, right? I get the new HBO Max app from my phone. They're going to immediately, I can guarantee it. They're going to onboard me to encourage me to connect my phone app to my smart tv because if I'm watching on my smart TV I am less likely to cancel because it's more fun to watch on the big tv. They're also going to encourage me if I come in because I want to watch. I can't think of what a good HBO show is, but I want to watch some HBO show. That's just one time. They're immediately going to try to introduce me to content in other areas. So if I'm on for a drama, they're going to introduce me to comedy. If I'm watching a TV show, they're going to show me documentaries. So you want to really understand how to onboard people to get them to stay. You also want to track. Everybody talks about tracking churn. Tracking churn is kind of very high level for the health of your business. But the leading indicators of churn are usage, recency, frequency and depth of engagement. So you want to track frequency, depth. Okay, so recency is when was the last time. Frequency is how often do they come in and depth is how many features do they use and how long did they spend when they come. So you know, a lot of software products that software manufacturer thinks of as an enterprise solution or a total solution, customers might think of as a point solution, like they're only using one feature and that makes it more likely that they're going to cancel because they're not getting the full value they're paying for.

Sure. Good stuff. Robbie, I think you have a special offer for our listeners and viewers. Do you want to share that with them?

I have some goodies if you go to my website, which is robbiekellmanbaxter.com audience I've got some slides, these slides that we've seen today and some other ones. And I have the Membership Economy membership manifesto. And then I have chapter eight from my new book, which is the chapter about culture, building the culture to support subscriptions.

Excellent. What is the manifesto? Tell us about that for just a moment.

The membership manifesto explains why this is such a massive trend, what's driving it, both from the customer side, from the human nature side, and also why it's good for businesses and what are the guiding principles that can help any organization go there. So this is really something. If somebody's saying, I don't know if it's for me or I don't think it's relevant to my business or I don't get it. I don't get the subscription frenzy. This is what you need to read.

Excellent, Robbie. Kelman Baxter, thank you so much for joining us.

Thanks so much for having me, Jason. It was fun to talk to.

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