Using the membership model to scale startups with Robbie Kellman Baxter

Robbie Kellman Baxter, one of the foremost thought leaders in the space of the membership and subscription economies deep dives into how organizations can use this model to scale their businesses.

Robbie Kellman Baxter is an expert on the subscription economy. She’s most renowned for her books, The Membership Economy, and another book, The Forever Transaction. She also hosts a podcast called Subscription Stories — Through Tales from the Trenches. Her clients include industry giants like Netflix, Oracle, Electronic Arts, and eBay. Robbie gave us a primer into the membership economy including how companies can pivot to this model, what the advantages of this model are, and the importance of focusing on retention while continuing to acquire new customers.  Edited excerpts.

Q. Let’s start with what you call the ‘Membership Economy’ and how it differs from the traditional ‘Subscription Economy’

A. I call it the membership economy because I think it’s important to emphasize that in order for a subscription to work, the organization needs to treat their customers like members and that’s characterized by four major shifts – From ownership to access of whatever the product is; from a single one-time anonymous transaction to many smaller transactions; from an unknown relationship to a known relationship and from one-way communication where I speak as the marketer, through my loudspeaker to not just two-way communication, where the customers and prospects speak back, but multi-directional communication, as a community under the organization’s brand.

The membership economy has massively transformed the landscape with companies ranging from software to hardware, to consumer packaged goods, to retail, to hospitality. Everybody is trying to figure out what I call a ‘forever transaction’ which is the moment when a customer takes off their consumer hat and they put on a member hat and say, ‘I’m going to trust this organization to solve my problem forever’. 

Q. How has this landscape changed in the time between the publication of your first book ‘The Membership Economy’ and your second book ‘The Forever Transaction’?  

A. Five years ago, when I published The Membership Economy, I had to publish it, to explain to people that this was a fantastic business model that gave you recurring revenue, predictable cash flow and for having an ongoing relationship with your customer, that allowed you to improve your offerings and plan for your product roadmap.

By the time of my second book, I didn’t have to explain to anybody the power of subscription revenue anymore. What people are struggling with now is- how do I actually do it? Whether I’m launching a business or whether I’m trying to scale that business, how do I maintain my leadership position? 

A lot of companies are moving into this space like Disney and Apple. Even the less cool kids, the Burger King’s and the Caterpillar heavy equipment companies, they’re also investing in subscriptions. It really is taking over the landscape as a powerful business model for nearly every kind of industry.

Q. What are some of the benefits of switching to a subscription-based model? Which kind of companies would find it difficult to switch? 

A.The benefits of a subscription business and subscription pricing are recurring revenue which gives you a predictable cash flow. It also gives you higher valuations, it gives you a disruption proof or a harder to disrupt relationship with your customer because you’re touching them on a regular basis, you become a habit and the customer builds you into how they get their job done, how they achieve their goals and how they solve an ongoing problem. 

We just saw, about eight months ago, when, COVID became a pandemic, the businesses that seemed to be most resilient were the subscription businesses and it’s because there’s that trust already there. 

It requires a good amount of work to transform your business. If you already have an enterprise software company or a transactional business, where you rely on individuals and think about things like transaction size or quarterly revenue, as opposed to things like monthly recurring revenue or customer lifetime value, moving to that different mindset can be really challenging for the organization. I believe that this cultural piece is often overlooked. This changing of mindset and changing of metrics is key if you want to justify that pivot. 

Q. Let’s assume I’m a lawnmower company and I want to make the switch, How would I go about doing that? 

A. If you’re a lawnmower company and you want to switch to a subscription model the first thing that I would ask you to do is to take a step back and look at who your customers are and understand why they’re buying lawnmowers from you.

What is the bigger goal they’re trying to achieve? Are they trying to make their home look lovely? Are they trying to run a successful gardening business? What is the reason that they came to you? And remember that your lawnmower is just a small piece of how they’re solving that problem or achieving that goal. Think to yourself, what else do they wish I could provide them that would make it easier for them to achieve the goal.

What I’ve seen with a lot of durable goods companies is that they start with services that wrap around the product. For example, buy the lawnmower and we’ll come out and maintain it, maybe we have some sensors on that lawnmower so we can tell you when it’s time for you to swap out parts or bring it in for service. Maybe we’ll benchmark your lawn mowing use compared to people like you so you know if you’re using it correctly and getting the most value out of it and then over time, I might even have you subscribed to the lawnmower itself. So instead of having to buy the lawnmower and have that CapEx expense, you can just subscribe to the lawnmower and you pay a monthly fee and you get all the services and the hardware bundled together. 

A good example of this is Peloton, right now you buy the Peloton for about $2,400 USD and then you’re automatically required to subscribe for one year. That subscription gives you access to a whole bunch of services, including a lot of classes, access to a community, ability to track what you’re doing and how you’re improving and after the first year, you can cancel your subscription, but why would you want to, if you just spent all this money to have a smart bike you’re paying a premium to have that great bike so why wouldn’t you continue to subscribe.

Many of us have bought bikes, and they end up being clothes hangers, you never use it anymore. The Peloton, because it talks to you because your friends are there and your community’s there, you’re much more likely to use it.

What worries me sometimes with companies is that they’re very focused on what I call the headline benefit which is what gets somebody to sign up in the first place and they don’t spend enough time thinking about the retention and expansion benefits.

For example Disney Plus, their acquisition headline was, ‘we have Hamilton’ and a lot of people signed up for Disney Plus because they wanted to watch Hamilton with every intention of cancelling right after they watched it. The responsibility that Disney Plus now has is – how do we take these people who came in to watch Hamilton and show them the value of staying with us? How do we get them to make Disney Plus part of their habits? It’s really important if you’re just starting out that you don’t over-focus on customer acquisition and you think really hard about that onboarding sequence to help your brand new subscriber, make your subscription a habit.

Q. How do you see pricing play a role in convincing the customer to come through the door and then having them stay back? Particularly the role of a free trial and a freemium version

A. The only time you want to have a free trial is if your customer doesn’t understand what you’re offering or they don’t believe it’s as good as you say it as. If those are not your problems, if those are not the reasons that your model is not optimized, don’t give away a free trial.

If a free trial is a tiny taste of the best thing you have to offer, your fillet mignon freemium is hamburger forever. It’s not the best thing you have, but it serves a purpose on an ongoing basis. The only reasons to use freemium is if you have evidence that customers that join as freemium, eventually convert to paid, or there’s a viral component, meaning that each person that joins brings in other people who will join whether or not they’re paying i.e. there’s a network effect, meaning that those freemium customers are either the product or they’re creating the product. If those are not the reasons that you are struggling or that your business isn’t optimized, don’t give anything away. 

In terms of pricing itself, there are so many great technologies that allow you to bill in the most creative ways you have, tiered pricing, you can have pricing based on usage, you can have pricing based on features. It’s very tempting. To make your pricing complicated, but what I’ll say is this the more complicated your pricing is, the less your customer is going to trust you because you’re requiring them to become experts on your pricing model and you’re effectively telling them if you don’t become an expert on my pricing model, you might not be getting the best value for you. In other words, you can’t trust me, you have to keep your wits about you. I always encourage organizations, especially when they’re starting out to keep their pricing as simple as possible. One of the best practices that I’ve seen is attributed to Amazon. They always have an empty chair in their meetings that’s for the customer. They think if the customer were here, would I still be suggesting this? I think that’s a really important test to see if you’re really operating with the customer’s best interest at heart.

Q. As a startup what could I do to attract more subscribers? What could be some of those elements that I bake into my sales and marketing strategy?

A. Pay attention to who your best customer is. Who is it that you’re optimizing your membership or subscription for and what is their goal, That you’re helping them achieve.

A lot of organizations just focus on the moments when the customer touches their product as opposed to looking at the bigger journey that the customer is on. If I buy a white blouse for a speech that I’m giving, my journey is not the journey of buying the blouse, that’s not very important to me. That’s a very low-interest purchase for me. The high-interest journey that I’m on is looking and feeling my best professionally. If the organization that sells me, the blouse understands that it opens up the door for all kinds of additional features, all different kinds of products that they can offer me.

They could regularly update my closet, they could give me a make-over, they could help me with other things relating to being a speaker. There’s always room to layer in more value if you know who your customer is and what they’re trying to do. Those are some of the things if you’re just getting started is to really understand your customer and their journey, and then optimize specifically for them. Don’t try to be all things to all people and don’t fall in love too much with your own product. Stay in love with your customer, not your own product.

Q. Some companies like Adobe or EA Sports shifted to a subscription model and a lot of users were disappointed that they could not own the game or software anymore. How do you recommend companies deal with this? 

A. Adobe and Electronic Arts are two really interesting examples. Adobe has a lot of products and software apps for marketers, designers and graphic designers. They moved from box software several years ago to creative cloud and they just shut down the box software vertical. There was a small group of people that were very disappointed and very vocal, and these were mostly hobbyists, weekend graphic designers who were doing this at home for their friends, like making wedding invitations, or restaurant menus.

They were frustrated because they liked buying the product once and using that same piece of software for 10, 15 years and not upgrading it. Adobe as an organization knew that this was not their best customer. Their best customer was a professional graphic designer or marketer working inside either a large company or an agency and so they optimized the subscription for them. The company (Adobe) was willing to take the pain of losing those angry customers because they understood that their future was with this particular segment of professional designers.

In contrast, EA has not stopped selling boxed software. You can buy a video game title for about $60 per game, whether you buy it in a box or digitally. They also have several different subscription offerings where you get access to different titles on a particular platform whether it’s a gaming console or your PC. They’ve left both side-by-side so you can still choose if you want to own the games outright or if you want to subscribe. So one company took the rip off the band-aid approach and the other company took the side-by-side to let the customer have a choice approach.

Q. Churn is described as the cancer of subscription-based businesses, you’ve also advised companies not to hide the cancel button. How do you look at churn, how can it be managed?

A. A lot of times, especially in startups and fast-growing companies, they’re so enamoured by their new logos or their acquisition numbers, that they don’t pay enough attention to retention and to the leading indicators of retention. Which are the engagement metrics of- recency, frequency, depth, and breadth of usage.

They’re spending all this money to acquire new customers who are coming in and then they’re leaving in a month or a year and the company doesn’t expand. I’m a big proponent of investing in onboarding for engagement.

Making sure that when customers are in their first seconds, minutes or days after signing up with you, that you’re helping them to form habits and reinforcing the wisdom of their decision to sign up with you. This can be done through a customer success team in a SAAS business, but this can also be done through emails or within the product itself.

Hiding the cancel button is the last resort of retention. If you’re at a point where somebody wants to cancel and the only reason they can’t is they can’t find the exit. First of all, they’re going to find it, secondly, they’re going to tell all their friends about the terrible experience that they had with your organization and thirdly it’s just bad karma.

Q. Can you expand a bit more on how critical a customer success team is for retention? 

A. Customer success is critical in the world of recurring revenue. The salespeople will do a good job of acquisition, they get this new customer to buy, but you’re not going to be profitable with that customer. That customer’s lifetime value will be low unless they actually use the product.

It’s important to move beyond the buyer, to all the users and also to help them reinforce the wisdom of their decision. 

I worked with one company, with their customer success team and we were trying to figure out retention. We were trying to understand why we were having churn and we made a list of all the companies that had stayed and expanded and all the companies that had either not expanded or who had actually cancelled after the first year without ever really implementing things fully. We had the leadership team look at those two lists of all the companies that love us and all the companies that are kind of fading away.

The customer success leader noticed that group on the left (the ones that stayed). Those were all the really difficult onboarding customers and what we learned was that the ones that stayed and expanded in this particular company were the ones that were really difficult to onboard because there were a lot of people involved in the onboarding.

They had a lot of questions and they were pushing really hard on both the product and on the customer success team, because, and this is really important because they were taking it really seriously because they wanted to make it part of their habits.

So what we learned from that was that if customer success is just a box check you’re missing a huge opportunity to start building those habits, to start planting those seeds in the customer’s mind. 

Q. Have you had instances where someone’s bought the product and you’ve got some features which are not shipped but it’s probably in the roadmap, the customer really wants those features. How do you deal with those requests?

A. The first thing is, did your sales team promise something that is not ready? So that’s just dealing with expectations. The flip side of membership is that if they’re subscribing to you, they have a relationship with you and they expect you to honour your commitments and you have to deal with that. Longer-term it’s really important that sales and customer success teams collaborate and stay in contact and of course that they stay in contact with the product team as well. So that everybody is singing from the same sheet of music and you don’t think of those as being discrete and separate functions, but rather as parts of the same organism.

Q. If you were to advise a startup, which is just beginning their journey now, what would be the single biggest piece of advice that you would give them?

A. Number one, know who your best customers are and know what your forever promises that you’re making to them is. As long as you know this, continue to evolve and to provide it to them in the best way, most efficient way.

You want to optimize for their journey, not for just a particular moment in their journey. The other thing that you need to do is to make sure that your investors understand that building a subscription model takes some time before it becomes profitable. It’s all contingent on retention. 

Q. Do tell our listeners how they can reach you and where they can find all the content that you’ve put out.A. I’m at robbiekellmanbaxter.com, I also have a podcast myself, it’s called Subscription Stories, which you can get anywhere that you get your podcasts.

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