The secret to successful subscription businesses

From the neighborhood car wash and nail salon, to the hottest venture-backed tech companies, to F100 market leaders, to thought leaders, authors and subject matter experts, everyone seems to be using subscription pricing to build long-term, disruption-proof relationships with customers.

People have been able to subscribe to everything from newspapers (NYT, WSJ) to software (Salesforce, Microsoft) to content (Spotify, Netflix) for years. But these days, subscriptions pricing is available with virtually every kind of business. You can subscribe to cars (Volvo, Porsche), your fitness equipment (Peloton) or your oven (Brava) and can get regular shipments of clothing (Le Tote), makeup (Birchbox) or dogfood (Chewy).

If you haven’t thought about what subscriptions can do for your business, you’re behind the curve.

But while it’s easy to talk about the power and potential of subscription pricing, online community, and direct-to-consumer (DTC) marketing, actually building or transforming a business to leverage these ideas is harder than it seems.

In the three years since I wrote The Membership Economy, most entrepreneurs and executives have come to accept that this transformation is underway, and that they must understand the implications and possibilities for their own businesses. Today nearly every business says they’re pursuing what I call a “forever transaction” with their customers.

To successfully build a forever relationship with your customer, you must adopt a membership mindset.

It doesn’t matter if you call your customers members or if customers call themselves members. What matters is how you and your employees think about the people you serve, and whether you prioritize their long term success over any one short term goal.

So how do you build a membership mindset? It starts by knowing who your best customers are. These are the people who join, pay and stay, and who get great value in return. They are likely the ones who will have the greatest lifetime customer value (LCV). A simple way to start figuring this out is to identify your best long-term existing customers and compare them to your less profitable, less engaged customers. Another way is to brainstorm the attributes of a best customer.

For example, let’s say you have a gym. Are you optimizing around people who are committed to weight loss, or people who are competitive athletes? While both groups might use the same equipment, there’s greater value if you optimize around one group or the other. You might add dietitians and support groups to one, or bring in former Olympians for special trainings for the other. The members can guide you to create new features. If you tried to serve both groups, their requests and needs might pull you in opposing directions.

Once you know who your ideal members are, you want to optimize everything you do around their long term success. That’s not “getting a workout” it’s “losing weight” or “beating my record”. You need to invest in tracking their progress toward that goal. If you help them achieve the goal, others will follow and you will earn tremendous loyalty.

For example, let’s say the competitive athlete sprains an ankle and isn’t going to be training–you might want to make it easy to pause the membership, even though you will sacrifice short term revenue.

Or if the weight loss member stops coming to the gym, you might think that’s good for your business because she’s paying and not crowding the facility–but if you can call her and figure out how to get her back in, you decrease her likelihood of canceling and increase the chances of her achieving her goal. That builds loyalty!

But let’s say you have a transactional business today–for example, you sell cars and you want to have a car subscription. You need to think through the bigger picture–why would someone prefer to subscribe over owning a car? Maybe for variety. Maybe for cost savings. Maybe so they don’t have to be responsible for maintenance. Figure out who they are and why they would want a subscription…and then build in more elements that support that goal. If it’s about convenience, think about delivery of the cars. If it’s about variety, make sure you have options.

Too many companies focus on the investor value of predictable recurring revenue without considering the cultural change in mindset required. There are dozens (hundreds) of failed software-as-a-service companies, and subscription boxes that can’t retain subscribers past the trial period.

If you want your customers to trust you enough to subscribe, you’ll have to be ready to change how you build your products, how you communicate with your customers, and how your think about service. It’s this membership mindset that will be the north star to guide your business forward.