An adapted excerpt from The Forever Transaction: How to Build a Subscription Model So Compelling, Your Customers Will Never Want to Leave by Robbie Kellman Baxter (McGraw Hill, April 7, 2020)
When I first started writing about the Membership Economy in 2014, many people didn’t get it. They could see how the Membership Economy applied to gyms and Netflix, but not its relevance to their business. I spent a lot of time explaining to software-as-a-service (SaaS) businesses that subscription pricing in a vacuum wasn’t enough, and to physical product manufacturers that they could benefit from direct, recurring relationships with customers.
Today, we’re having different discussions. Through thousands of conversations with leaders of organizations, nonprofit and commercial, big and small, in more than 20 industries in a dozen countries over the past several years, I’ve had a front-row seat to the changes in the Membership Economy.
Here are the trends I’m seeing:
Trend 1: The Expansion of Membership from Digital to Physical Goods
A few years ago, most examples of forever transactions came from digital businesses. The rise of new technologies (always-on devices, tools for creating and distributing user-generated content, declining costs of storage, big data analytics, trusted platforms for recurring payments and digital community, to name a few) creates an infrastructure to extend trusted relationships beyond face-to-face.
Today, businesses in the physical world enthusiastically and proactively build forever transactions with the people they serve:
- Consumer packaged goods (CPG) companies offer subscriptions for replenishment (making sure you never run out of your favorite candy, shampoo, or socks) and discovery (subscription boxes). CPG companies also experiment with software-driven services to enhance the product usage, build loyalty, and, in some cases, drive incremental revenue.
- Retailers are getting creative about building value with their customers. Le Tote and Rent the Runway led the way with Netflix-style clothing “rentals.” They have been imitated by traditional retailers like Ann Taylor, NY & Co, and Vince.
- Ridesharing services like Uber and Lyft offer memberships for active customers, using different approaches to build deeper loyalty and ultimately to change behavior. Lyft offers a bulk purchase of rides for a fixed monthly subscription, while Uber’s Ride Pass is an inexpensive ($15–$25) membership card entitling the member to discounts and no surge pricing.
There are multiple ways for manufacturers and providers of physical experiences like retail, transportation, and hospitality to create ongoing streams of value after the moment of transaction. Many organizations are blending physical and digital benefits to create better experiences for the people they serve. It only takes imagination.
Trend 2: Mature Businesses Are Learning from the Startups
Between 2000 and 2015, venture capital firms poured money into digital natives. Venture money can be patient—many VCs don’t expect to sell their shares for seven years or more. With a longer time to reach profitability, entrepreneurs can invest in building strong relationships that pay off over the long term. That gives them a major advantage over public companies against which they often compete. Most public companies have to hit quarterly numbers, even if it hurts their long-term viability.
Startups aren’t the only businesses embracing the forever transaction. Established public businesses are transforming themselves as well.
To stay relevant and keep their spots on the Fortune 500 list, companies need to continuously evolve. In light of the attention that subscription-based digital natives like Netflix, LinkedIn, and Salesforce have enjoyed, the boards of many traditional public companies have told their leadership teams to go direct to the customer and build a recurring revenue relationship. More businesses are using customer lifetime value (CLV) as their most important metric.
Traditional companies are making the transformation to a forever transaction strategy. Some are changing through acquisition. Unilever bought Dollar Shave Club for $1 billion, and Under Armour bought digital apps MapMyFitness, Endomondo, and MyFitnessPal.
Electronic Arts has added a subscription offering to complement its boxed video game offerings, and Nike incubated EasyKicks, a kids’ shoe subscription, and has invested in a Nike membership as part of its commitment to a direct relationship with the people it serves.
Experimentation is happening everywhere—retail, consumer products, airlines, even manufacturing.
Trend 3: Rewards Programs Transition to Premium Membership
Every business has unique attributes that can be incorporated into a model that creates the right kind of forever transaction. Now is the time for all of those quick serve markets, department stores, theme parks, and hotels to step back, articulate their goals and the goals of their best customers, and build a new kind of loyalty model that attracts, engages, and retains those best customers in a mutually beneficial way.
Features of the Amazon Prime model can serve as inspiration, but wholesale copying won’t work. Points-based rewards programs are being replaced by premium loyalty memberships. These memberships aim to do more than sell more stuff through discounts and “gifts.” Instead, they incorporate better experiences, emotional benefits, and financial incentives. Consumers subscribe to join these premium memberships, paying for access to a higher tier.
Costco is another example of premium loyalty, which predates Amazon Prime and has a stricter model. With few exceptions, you need a membership to shop at Costco. Members pay an annual fee of about $60 and get access to the deals in the store. Some even spend more to be an Executive Member and receive 2 percent back on all Costco purchases, which drives tremendous loyalty. Costco focuses on delivering great value in every product it sells—claiming it doesn’t make a profit on product sales. It makes money on membership fees, remaining neutral on the products in the stores. Its forever promise is clear—amazing deals on a range of products from vacations to computers to ketchup to tank tops and diapers. Part of its promise is about value and part of it is discovery—you never know what you’re going to find.
Sephora is greatly admired for its multi-pronged membership strategy. Recently, Sephora introduced a subscription box specifically targeting its subset of customers who love to experiment with the latest products. For $10 a month, Sephora Play subscribers get a box full of samples, access to beauty tips and videos, and in an elegant cross-pollination, Insider Beauty points.
Sephora is a great example of getting out of the “one size fits all” mentality of engagement and personalizing benefits for different kinds of customers.
Other organizations are using paid memberships to deepen relationships with customers who value more than discounts:
- Outdoor apparel and supply company REI charges just $20 for a lifetime membership that goes beyond discounts to include classes and a sense of being an insider.
- Restoration Hardware eliminated coupons outside of its membership program, which costs $100 a year and offers 25 percent savings on full-priced items as well as design and concierge services.
- Six Flags’ membership option awards more benefits to guests of its amusement parks who are thinking beyond the current season— lower pricing and greater flexibility after the first year.
The benefits, experiences, and emotional connection to each of these brands differs, but the goal is the same—to build stronger ties and improve customer lifetime value by focusing on the customers likely to get the most value from, and be the most willing to pay for, an ongoing relationship.
What These Trends Mean for You
While you may be focusing on your direct competitors, they probably won’t put you out of business. Disruption is coming from across the globe, or from a company with a totally different business model. It’s as if you’re running a race and checking behind you for the closest challengers, but other competitors are dropping in from above or outside the track.
Making this shift is important whether you’re leading your industry or just starting up, whether you’re a car manufacturer or own parking garages, whether you sell flooring or plumbing services. If you don’t put the customer at the center of what you do, you will be beaten.
As long as customers have choices, organizations must prove they understand their customers’ changing needs. We’ve seen so much change in the past few years as everyone from the smallest sole proprietor to longstanding Fortune 500 companies strives to rebuild their offerings around the ongoing needs of the people they serve. More change is certainly yet to come. The forever transaction is global. It’s digital. And customers expect it everywhere.
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