358: The Membership Economy, with Robbie Baxter

The membership economy is focused on teaching people how to create their own. At the same time, it includes some deeper marketing and human behavior principles that are useful to know in other contexts.

We have Robbie Baxter, Founder of Penisula Strategies, author of The Forever Transaction and The Membership Economy, with us on this edition of the Conquer Local Podcast.  Robbie coined the term membership economy to describe a massive transformation in every organization, from nonprofits and associations to the most profitable of companies. Which of the following companies do you think uses the subscription revenue model: Netflix, NBA, eBay, Oracle, Electronic Arts, or Microsoft? Trick question, they ALL are. We learn how an SMB can establish a subscription revenue model, the best way to target your audience, and why recurring revenue is the holy grail.

Robbie Kellman Baxter is a consultant, author, and speaker. She is also the author of The Membership Economy and The Forever Transaction and hosts the podcast Subscription Stories. Robbie has more than 20 years of experience providing strategic business advice to major organizations, including Netflix, Fitbit, Microsoft, and Consumer Reports. She has been focused on subscription and growth strategies for the past decade. Baxter has been featured in the Wall Street Journal and on CNN. She earned her MBA from the Stanford GSB and graduated with honors from Harvard College.

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Introduction

George: How would you like to learn about the subscription economy, or the membership economy, or monthly recurring revenue from one of the experts in the space? That’s what we have for you this week on the “Conquer Local” podcast. Robbie Baxter is the founder of Peninsula Strategies. She lives in California. She’s written two books over the last 10 years or so, “The Membership Economy” back in 2015, and “The Forever Transaction” in March this year. She is an expert on subscription, and where she became an expert at subscription is working for a few companies you may have heard of. Netflix, the NBA, eBay, Oracle, Electronic Arts, and Microsoft to name a few. Over a million miles every year when she can fly, traveling, consulting, speaking to organizations around the topic of her books, and the passion that she has for this subscription, or membership economy monthly recurring revenue. We will speak to Robbie Baxter in a moment here on the “Conquer Local” podcast. Robbie Baxter, the founder of Peninsula Strategies joining us on this week’s “Conquer Local” podcast. Robbie, it’s a pleasure to have you on the show.

Robbie: Oh, it’s great to be here, thank you for having me.

George: You know, two books, and let’s go back 2015 where you wrote the first book around the membership economy. And then recently you have your new book, which is “The Forever Transaction.” And we can’t forget about the podcast “Subscription Stories.” I’d love to talk about your pedigree, and the companies that you’ve worked with on subscription, and the subscription model. Can we go back in time and kind of give the listeners a bit of an overview of what makes Robbie Baxter tick?

Robbie: Well, so for me, my subscription journey, well, my subscription journey really started with the Columbia House Music Club, when I was about nine, and I found this awesome deal to buy 13 CDs for a penny, and didn’t read the fine print. So that’s the beginning of my subscription journey, but the professional part started about 20 years ago. I was consulting and asked to do some work for Netflix. And as a young mom, I had already fallen in love with Netflix as a consumer. Three DVDs out at a time, always have something to watch, never have to run out and return something, no late fees, but as a business person it just blew my mind. I really fell in love with the model of recurring revenue, of the idea of subscription of how powerful that was, and how Netflix was doing one thing really, really well, which I describe as providing a broad selection of professionally created video content delivered in the most efficient way possible with cost certainty. And over the years, they’ve evolved how they do that, right? It used to be three DVDs out at a time. Today it’s streaming. It used to be other people’s content. Today it’s their content, but the promise has stayed the same. And as I was falling in love with Netflix, everybody else was, and I started getting calls from other organizations that wanted to be like Netflix. Survey Monkey, Oracle, lots and lots of news organizations, music companies, dental, pain management companies, bicycle distributors. I mean, you name it, somebody wanted to be like Netflix. And 10 years into that I wrote my first book to explain this massive trend that I was seeing that every kind of business was using this same framework, and I wanted to help people connect the dots, and see how this model worked, and start to explore how it might work for their organization. So five years ago, I was just trying to explain to people that it could be relevant for them. Today, as I’m sure you know I don’t have to explain to anybody why subscriptions are so powerful. The challenges now are really about how you do it. And that’s what I’m really focused on right now.

George: I love that backstory and thank you for sharing with us. I’m a big fan of “Powerful” the book by Patty McCord around how they built the culture inside Netflix.

Everyone wants to be in a Membership Economy

George: I watched the movie here on Netflix about Netflix here just last week that was released. Thank you for the cassette. No, you said CD. When I think of the Columbia Music Club, I think of cassettes, so I’m going back even further, but subscription economy is something that was there. And I remember eight years ago when I arrived at a little tech company, where I still am today, we were working with folks in the IYP and the newspaper business at that time. And they invented subscription. Like that’s how you got the daily newspaper was the local paper boy or lady came by, and sold you a subscription to the paper, but then they weren’t able to make that move to monthly recurring revenue on digital products and services as they brought them in. So as much as I think people really understand the model of subscription, I find myself every day beating people over the head of why are you over here selling advertising, which is episodic, and up and down, and it’s 13 week, when we could be helping solve these problems that need to be solved every day, And they have that monthly recurring revenue, or that subscription model. So how have you overcome that as you’ve went out to profess the power of the membership economy as you call it in your 2015 book?

Robbie: Yeah, it’s such a good point that you bring up. So five years ago I was fighting that fight. Trying to explain the risk of an advertising driven model both the fact as you say that it’s episodic, transactional, arms length, and you’re always trying to win the next deal. And the fact that it puts you at odds with your readers, right? The readers are the product, and how if you actually created content that readers were willing to pay for, you’d have a much more powerful business model. Today the issue is I think a lot of organizations want the subscription revenue, but they’re not ready, or they’re afraid to give up the advertising revenue, which puts them kind of at odds with themselves, trying to figure out what kind of model are we optimizing for the advertisers who want lots and lots of eyeballs, and don’t care as much which eyeballs they are, or do you want to optimize around your readers, which might mean a smaller audience willing to pay a lot more per person. So what I always say is it’s really important to know who your customer is and to optimize around them. And then if you’re going to optimize around them, don’t just optimize around today’s pain point. Optimize around going on their journey with them, and helping to remove all the barriers you possibly can to achieving that goal. And then there’s room for that ongoing revenue.

George: You know, the only way that you get ongoing revenue, and you know this, but I want to reiterate it for our audience is if you deliver value that supports the chart. And we probably have had this happen over the last few months because I know that in my household, and I know in our company COVID caused scrutiny. We’re looking and we’re going what is this subscription that’s $2.49 that comes out every? Well, that’s my Google Drive that I forget about because it’s once a year, but when we look at the logo that you brought up earlier, the Netflix experience that you had, we’re not talking about a lot of money. And has that been part of the reason for the success? Like we just forget, I don’t even know what it is. I know it comes off my card every month, but I’m not the detail-oriented person looking at that line-by-line, but is it the fact that the subscription is smaller that we don’t even think about it, and we could see the value to the fee amount? Like what is it that’s causing these membership models, or subscription models that work really well to have that sort of effect?

Robbie: Yeah, well, so much to talk about here, such a good example. When you think about Netflix, which is somewhere depending on which subscription, and at what time somewhere between eight and $20 a month. It’s a small enough amount as you said that it doesn’t raise any red flags when you see it on your statement. And so part of this is about making smaller payments, which is easier to get somebody to join. And it’s less likely for them to say, wow, this is the one thing I’m gonna stop paying for. So it’s easy to make it into a habit. If you only pay episodically, once in a blue moon, and you pay a much bigger amount for ownership, it’s a harder decision. There’s more friction to joining. Now the risk for the organization is that easy come, easy, go, right? I sign up and then I look at my bill and I say, hey, I didn’t use Netflix last month I’m gonna cancel. If you’re in the software as a service space, right? That happens you look at it and you say, well, it was easy to sign up. It was easy all we had to do was configure it. We didn’t have to customize anything. We didn’t have to buy it. And if we don’t like it, we’ll just cancel. So it becomes the responsibility of the organization to engage you and give you value every month, otherwise, you can always get out of it. And something that Netflix has done that I really admire is it’s always month to month. You can always cancel at any time, and maybe even go so far as to say, if you haven’t used your subscription in the past year, they will cancel it for you because they don’t want zombie revenue, which shows the level of confidence they have that they’re always providing value.

Product Led Growth – Apple Fanboy

George: I want to pivot a little bit and talk about product led growth because it’s so important in the software model lots of companies are adopting this approach. I’m gonna use the example of last year, Apple came out with Apple TV Plus, or whatever the heck. I can’t even tell you what it’s called, but I am an Apple fanboy. So I’ve got Macbooks, and I’ve got iPhones, and I’ve got Apple TVs, and so they just gave it to me. And there wasn’t a lot on there. I think there was like three shows, but the thinking being, we’ll give it to you. We aren’t gonna charge you for six, eight, 10 months. I don’t even know what the offer was again, but it was this example of taking the installed user base that they had on their hardware and other services, and now they’ve rolled it in where I can buy this Apple one thing that is everything Apple that I have. We’re seeing where you’re able to use it to acquire a customer in the first motion, but you’re also able to take existing customer sets, and expand the subscription that you’re getting from them with an expanded product offering. I’d love to get your lens on as we see, this is a massive thing, we see it across all sorts of organizations. We’re seeing more of it, though, inside that existing customer base recently.

Robbie: So what I love about Apple is that they were a membership economy company before they ever introduced subscription pricing. So I always say a membership economy business has a member mindset meaning that they’re thinking long-term about the relationship they have with each customer. So even when all Netflix, I mean, when all Apple was selling was hardware, right? There were these Apple heads, like you said, Apple fanboy, where they’d go into the Apple store and say, okay, I have your desktop, I have your laptop, I have your phone. You guys don’t sell printers, what am I supposed to do? Tell me what printer to buy, and I will buy that. Almost like you tell me what to do and I will do it, right? And the deal was their forever promise was buy only from us, and we will make sure everything works together seamlessly, right? And it’s a beautiful, elegant experience. They never had subscription pricing which I always thought was weird because most of the time people try to get subscription pricing without having a member mindset. And this was a case where they already had the member mindset, which allows them and gives them permission to have a subscription. And yet it took them until the past few years to really recognize the power of subscription, but now that’s really where they’re moving. And it’s been a very easy journey because people are already used to doing everything through Apple. And if Apple tells them to do something new, we try it. And so they have been able to kind of rollout Apple Plus in the Trojan horse of their existing products. You buy a new laptop you get a year of Apple Plus, and then rolling it up the next level to Apple One, where basically everything you’re spending money on with Apple you’re being rewarded for your loyalty, which is what this membership economy is all about.

George: So one of the correlations that I think is a bit of a struggle when we talk about Netflix and we could use Disney Plus, and we talk about Apple, there’s all sorts of big logos that we could talk about that have employed this type of technology, or this type of motion to go to customer, but how do I relate that to the local hardware store, or how do I relate it to the local baker, or how do I relate it to the local coffee shop that they may have the ability to have this subscription as well? How have you phrased that?

Robbie: Yeah, so any business where your customers have other choices to solve their problems, or achieve their goals is ripe for being part of this membership economy. The only businesses that I think don’t have to think about this, if you have a regulatory advantage, a patent advantage, you’re the last gas for 100 miles, you have a geography advantage. You have the only medicine that keeps me alive. I don’t care how you treat me I’m gonna still buy from you, but if your customers have choice then you have an opportunity to take a step back, and look at their goals through their eyes, and say what can I do to help them achieve their goal more successfully? So example, nail salon, right? I go to the nail salon. I don’t go to the nail salon because I like to get a manicure. I go to the nail salon because I want my nails to look good. And if instead of paying by the manicure I paid to always have my nails look good, and if I broke one they would fix it for me, or even better if they gave me a pill that I could take that would make my nails turn pink and grow long, and always stay the same length I would pay even more for that because it’s that outcome I want. Somebody that’s done a really interesting job with this is car washes, right? Same thing, nobody wants to go to the car wash. We just want to have a clean car. I spoke at the International Carwash Association a couple of years ago, and what was sort of shocking and annoying to me was how interested all these manufacturers were in these brushes make the car wash 9-1/2 minutes instead of 10 minutes, right? And this kind of water pressure makes it an eight minute car wash, and I was like, nobody wants to go to your car wash in the first place. We just want our car to be clean. There are car wash services now out here in Silicon Valley that come to your office parking lot, and they’ll wash your car while you’re inside, or they’ll come to your house in the dead of night with their truck and they’ll wash your car while it’s in your driveway, right? Because that’s what you want. You just want your car to be clean.

George: Right, I don’t even want to drive to the car wash.

Robbie: Right.

George: Right, like why?

Robbie:  Right, I don’t want to drive to the car wash. I don’t want to wait 10 minutes, or eight minutes, or six minutes. Here’s another interesting little car wash story for you. A lot of car washes have subscriptions now where you join, and then you have unlimited car washes, and it maybe costs the equivalent of two car washes, and you get unlimited car washes for the month. So anybody theoretically who gets more than two car washes a month should like it, but they found that there were some people who were only getting one car wash a month who were signing up, and the reason was they didn’t want to have to talk to the person at the car wash, and if you were a member you got a card, and you could slide it through, and just cruise through, like I’m willing to pay the equivalent of two car washes, or three car washes a month in order to not have to talk to anybody. So it’s really important to know your customer, and understand how you can maximize value for them.

What has Changed?

George: So in your new book which you released in March, “The Forever Transaction” we’re now five years past the first book. When I go to your website, you’ve been all over the world, speaking at some of the largest companies on the planet around this idea of the membership economy. And now you come out with “The Forever Transaction.” What’s the difference between those two stories after the five years of experience?

Robbie: Yeah, so the first book, there’s a bunch of things that are different. The first thing is I wrote “The Membership Economy” to say, look, this is a massive transformation. And whether you’re a hardware store, or a Fortune 50 company, whether you’re a nonprofit, or a for-profit, old economy, new economy, these principles will apply to you, and help you get greater revenue from every customer, right? And I was just trying to convince people like do you see what I see? This is a big deal. Five years later, I don’t have to explain that to anybody, but companies are struggling to make it work. So now organizations are really into this, the nitty-gritty of it, and they’re saying things like, my subscription used to work, but it’s not working anymore. Maybe young people don’t read, or maybe young people aren’t joiners say the associations, or I’ve had this business I’ve been selling, fill in the blank, makeup, bicycles, hotel rooms, insurance, forever, I want recurring revenue, but I don’t know how to transform my business. Like what are the technical issues? So I wrote this book. Launch, scale, lead, three parts to help organizations wherever they are in their journey toward building subscription revenue.

George: It’s interesting you say that because we come back to what we talked about off the top. I think that we get it. We need to get there. There just has been maybe this trial and error where maybe we tried it and it didn’t work. What do you think are some of the things that are really stopping people from being successful with a program like this, or are there too many to list?

Robbie: No, I mean, well, it depends on where you are, but if you’re just getting started so let’s say that you’re the neighborhood hardware store, and you say I want to have some recurring revenue to give me better cashflow to help me manage my business better. The first thing that I would say to them is who is the subscription for, right? And a lot of times they try to make the subscription for everybody. And what I would advise is pick the audience that is most likely to get value from you, and most likely to have an ongoing relationship with you. So in the case of a hardware store is that a construction worker, or a contractor who does hardware related stuff as a job, or is this your neighborhood, the residents of your neighborhood, right? Very, very different subscriptions you designed for each group. So you really need to know who you’re designing for, and you have to play for the long-term. When COVID started and everybody was freaking out about where their revenue was gonna come from, I got a lot of calls from organizations that said, “How can we get some quick subscription revenue?” And that’s like saying how can we make the golden goose lay more eggs? I think that’s one of the biggest challenges is that if you want to have recurring revenue it doesn’t all come at once, it’s recurring. So you have to be willing to invest for awhile before it really starts paying off. So I think one of the most important things that an organization needs if they want to move to subscription is a little bit of patience.

George: And we touched a little bit on product-led growth. Are you seeing that as one of the key tenets, when people are trying to build up that monthly recurring revenue going with a try it before you buy it model delivering value before you ask for the dollars?

Robbie: Yeah, absolutely. You have to build trust with the customer in order for them to be willing to pay on a subscription basis. Like that’s something that you have to earn and the product, people talk a lot about product-market fit. And a lot of times product people think about product-market fit as being what’s going to get them to buy, to sign up for the first time, but in a membership model, or if you have subscription pricing, what really matters is are they gonna buy and stay? You need them to make it a habit. So that moment of transaction becomes the starting line, and not the finish line for the relationship. And as a result, product engagement becomes way more important, not just to the product people, but to the marketing people, to the support people, and to the bottom line.

Subscription Stories

George: Well, we’re excited also to have a listen to the podcast that you have been hosting called “Subscription Stories.” Tell us what our listeners might find if they were to subscribe to that podcast.

Robbie: Subscribe to “Subscription Stories” that is so meta. When I finished writing this book I had so many stories that I couldn’t fit into the book. And so many people that I wanted to talk to in more detail. So “Subscription Stories” is in-depth conversations with practitioners in the world of subscriptions across a pretty broad range. So I’ve interviewed people from Weight Watchers, Hewlett-Packard, solopreneurs, experts on pricing, just a really wide range of people because I want subscription practitioners to understand the learnings that can come from across different industries, and different organizational structures, and also so that they can see the dirty parts, the hard parts when you’re really trying to figure out the subscription model it’s not always obvious. And in hindsight it seems so easy.

George: One of the questions I really wanted to ask was what’s been one of the hardest transitions for you to take one of your clients into this world where they were we’re doing this old school thing over here, and we want to come over. Is there one that sticks out that was just bloody hard?

Robbie: Oh boy, well, I mean, they’re all hard in their own way. I mean, one story Electronic Arts, whose actually been pretty successful at building subscription models. They make boxed games, right? 60 bucks a game. You play the game for hours and hours and hours. And one of the big challenges that they faced was they were generating a lot of revenue from the individual game titles, and they’re structured as an organization by franchise right? So there’s FIFA and there’s “The Sims,” and all of the other games, and each game has its own fan base and its own staff. And so then suddenly you’re going horizontally. So it’s a really big cultural shift to rethink how you design the games. And also there’s a risk that what if somebody who buys two or three games a year now is only subscribing to the subscription, which is 100 bucks, and so instead of paying $60 a game, and buying three games, now they’re only paying $100. So there was a lot of fear and there was also a lot of worry about what if the people don’t want to play the other games, and what if they don’t play my games that my team is building? So one of the things that I think is really important is understanding the culture of your organization, setting expectations for what the new metrics are going to be, and proving a little bit at a time to build the trust of your colleagues. I think that’s a lot harder. Most people just focus on the strategy. Like let’s have this product that’s subscription, but you have to bring the entire organization along, and you have to manage both the perceived, and actual risk of this transformation.

George: Robbie, one of the items that producer Colleen highlighted in the notes was where you’ve taken a loyalty program, and turned it into a premium subscription program. I was very interested by the backstory behind how you were able to do that because loyalty program that’s I spend money at the business, I’m a loyal customer and now I got to pay for this thing?

Robbie: Yeah, well, it’s a totally different thing. So most organizations might even keep their loyalty program, and layer in a premium loyalty program, or what they would call a membership program. A lot of the airlines have done this. You keep accruing your points because points, the problem with points is that it’s like another currency. So like I fly 100,000 miles a year on United during normal times. And I expect in return for that a certain number of free trips, and first-class upgrades and free drinks. I mean, not free, included, I would have to say. They’re not free at all, but that’s like almost its own little economy, right? I earn that through my frequency and depth of purchase. I get some discounts. A premium program, I pay up front, I get their credit card, what have you, and that gives me privileges immediately. So it’s much more about my intention. I want to use your service a lot. So I’m gonna pay a little in advance so I get a better experience. This is what Amazon Prime is. This is what all of Costco is that you can only enter if you’re a member, but also like CVS, Restoration Hardware, a lot of organizations are moving toward this model of rewarding people who commit upfront to using your store more than other places.

Conclusion

George: Well, thank you for that. Some great insights on the membership economy, and your new book, “The Forever Transaction,” and this whole idea of subscriptions. We’ve been speaking today on this edition of the “Conquer Local” podcast to Robbie Baxter, the founder of Peninsula Strategies, the host of the “Subscription Stories” podcast, and those two books. And we’ll put the links for “The Forever Transaction,” and “The Membership Economy” in the notes from this episode. Robbie, thanks very much for joining us, and we really appreciate all the insights.

Robbie: Oh, thanks so much for having me.

George: Some great learnings from Robbie. You can tell that she’s done a number of these transformations over the years, and definitely understands where you’re going to have success and where you’re not. And I love the last piece that we covered, where we talked about the loyalty program. No, you’re not replacing the loyalty program. You are one-upping the loyalty program with a super loyalty program. See, I fell for that, I’m an Amazon Prime member. I actually probably fall for that on pretty much anything that I buy, and find value from where they’re able to articulate a story of greater value, but then we have the challenge that I asked Robbie about a number of times throughout the broadcast where we have organizations that are used to selling one or two or three things very well, but they’re not recurring, they’re episodic, and they go up and down, and this could be something as simple as website design. You feast when you sell the website project, and you starve while you look for the next one, and that ability to layer in some products and services that are continually there adding value, and then allowing you to extract a subscription fee for that value is what we’re referring to. And we’re using very, very large organizations. I think we had some success there in getting Robbie to bring it home. I loved the nail salon one. And I loved the car wash one where you’re right. Nails, I don’t care about that, but cars, yeah, I just want the thing clean. And if I don’t have to drive across town, and it’s gonna come to my driveway at three in the morning, as long as the pressure washer is quiet, I think that we could get away with that. So we’re seeing a lot of this. And I think that some of the concepts around subscription, and membership economy have not even been thought up yet. And that’s hard to believe when there are new software companies being built every day. Everybody’s a software company now, but I’d really like to challenge you, our listeners. Think about the way that you may be able to change the value that you bring to your raving fans into a subscription, into something that just pays you every month as long as you continue to bring that value. And remember what she said about Netflix. You can cancel at any time. This is one of the reasons why I believe some organizations have not been successful in moving to this type of a model is in order to get the subscription they’re asking for a 12 month, or a 24 month commitment before they’ve delivered any value. So having that product-led growth, and proving that there’s value there, of course, I want the discount if I’m prepared to make the commitment. I think that that’s an important piece, but if I don’t know you from anywhere, and you’re telling me that you’re gonna change my life with this 39.95 subscription. Why not put your money where your mouth is for a period of time and prove it to me, and then be more than happy to turn over the credit card to you. And you can just keep banging that thing until whenever oblivion, and maybe even get some premium upgrades, too. Wouldn’t that be great? Thanks to Robbie Baxter for joining us this week. And if you’d like to carry on the conversation with Robbie, or any of our amazing guests, you can do so at the Conquer Local community. We also have the Conquer Local Academy. And I don’t talk about it as much as I should, according to producer Colleen, so let me give you that right now. The Conquer Local Academy is an amazing, scalable way for you to learn about everything when it comes to conquering local. And we have a number of new ninja courses coming very, very soon to the Conquer Local Academy. And we have more contributors bringing us more content as we speak. So if you’ve been to the Academy maybe you’ve even been certified as a Conquer Local Academy certified digital marketer. You might be able to find some new courses in there because we are continuing to bring new content all the time. So “Conquer Local” the podcast, the Academy, and the community all there to help you the conquerors. Well, you know, Conquer Local. My name is George Leith, I’ll see you when I see you.