What can we learn as entrepreneurs or leaders from Amazon Prime?
Amazon Prime and large membership-based companies like it, have dominated with consumers. Building a recurring relationship with customers has allowed these companies to continue to serve (and profit!) from their members and give great benefits in return. But how can a small or midsize company implement memberships for its audience? Is it worth it to get in on the booming membership economy?
Robbie Kellman Baxter is the Founder of Peninsula Strategies, a management consulting firm, and she originally coined the term “the membership economy.” She's the author of The Membership Economy: Find Your Super Users, Master the Forever Transaction, and Build Recurring Revenue, a book that's been named a top five marketing book of the year by Inc.com.
I recently interviewed Robbie, where we spoke about the upside to starting a membership-based company and how it should be approached. (The interview below has been lightly edited for space and clarity.)
Kevin Kruse: What's the big idea of your book, The Membership Economy?
Robbie Kellman Baxter: The big idea of The Membership Economy is that there is a massive shift happening in virtually every industry as organizations look for new ways to build long-term relationships with the people they serve. It's about access over ownership. It's about relationships, known relationships over anonymous transactions. It's about recurring revenue as opposed to single big lump payments. It's about community, the people you serve connecting not just with the organization, but with one another under your umbrella. When you use those different levers, you can create totally new ways of engaging with your customers.
Kruse: Can you give us an example? Any companies out there that you think are driving the membership economy?
Baxter: Amazon, LinkedIn, even American Express. Those are three different examples, but what they share is a focus on the long-term relationships. You look at Amazon. Probably many of your listeners use Amazon Prime, or are members of Amazon Prime. Amazon Prime is a way of bringing people under the Amazon umbrella and changing the behavior of consumers so that it's the first place you go and it becomes your habit.
Kruse: Amazon Prime membership became important because as a consumer I can now get benefits. Why is this so important to them?
Baxter: Because, first of all, they get revenue just from the Prime membership, but they spend that on the free shipping. What it does for them is it changes our habits as consumers. We go there first. We buy almost everything there, increasing amounts of stuff, which allows them, number one, to get a bigger share of our wallet; number two, to learn a tremendous amount about our preferences and how we buy. They have great information, which is power.
Then the third thing that people don't always think about is that it's kind of a Trojan horse for Amazon because once we're using them as part of our daily routine and they become a habit, when they introduce new products to us as part of the Amazon Prime membership, like storage, video, music, the whole Kindle and digital book world, it changes our behavior in one industry after another. They win. Music I get through Amazon; video I get through Amazon. I store all of my work documents with Amazon, my photos with Amazon. They're actually building a deeper and wider relationship with us and also creating a moat between us and any other competitor that wants to get between us.
Kruse: If I were to cancel my Prime membership and try to go somewhere else, I would lose a lot of advantages. I'm incentivized to stay with them.
Baxter: Absolutely. It's a true forever transaction. Switching costs aren't super high, but changing your behavior is hard because now you probably have your shopping lists there. You know how to use Echo. You've learned the language to speak to Alexa. It makes you stop looking for alternatives.
This is the really important thing about the membership economy. Once I take off my consumer hat and put on my member hat and go to the next item on my list, I cross that one off my list. Amazon handles all of my product needs, all of my music needs, whatever. Now I'm going to go work on the next thing that I have to get done. With my member hat on, I am no longer looking for alternatives.
Kruse: We are so time-starved, too. Once I've got a solution, I'm going to spend that time and energy thinking about something else.
Baxter: Exactly. To the extent that a company can solve a problem for you forever, it's true with gym memberships, it's true with LinkedIn as being your place to connect with professional relationships. Once a company does that, you stop looking elsewhere. That is a powerful, powerful advantage.
You also brought up a really important point around you can grow by acquiring new customers or by selling more or by having a deeper relationship with the people you already serve. That second on, retention and engagement and deepening of relationship, is way more profitable because acquisition costs can be high and you often acquire, just like if you went fishing with a big net, you sometimes acquire the wrong people and then they leave. You've spent all the money to bring them in and then they're not profitable customers and they realize they're not a good fit and they leave, whereas the ones you already have are probably your best customers. Providing more services for them is going to be way more valuable than trying to attract that next new person.
Kruse: With these advantages, what do you see in terms of valuations for companies that have a subscriber business model versus those that don't?
Baxter: It's many multiples, 4 to 7X what it is for transactional businesses. A funny thing in my world is that companies come to me and say, “We need to be a subscription business.” They've never been one before. I say, “Why? Why do you want to do that?” They say, “Because we want to get a better valuation.” I say, “What does it mean for your customer?” They're like, “I don't know. I haven't really thought about that.”
Kruse: If you've got a business out there, or an entrepreneur, it's good to think about this when you start out. You will have 5 to 10X the value of your company if it's a subscriber company.
Baxter: I love subscription models and SAS businesses, the great thing about SAS business for the companies that buy from them, is that you get all the benefits of membership. You get access, no burdens of ownership. You get to benefit from the learnings from your peer companies so the product keeps improving. You don't have to make a big cash out at the beginning. You have the opportunity to leave if you ever want to. There is a lot of benefit, but I just wish that organizations would think about, “What is it that we're really doing for the customer and are we consistent across all of the parts of our organization in the way we serve them?” That ties into your valuation because that does lead to more customers staying longer and ultimately a higher valuation.
Kruse: It really is a mindset and a relationship with your members.
Baxter: Yes, exactly. It's a mindset. I love that you used that word. It's a mindset within the organization to say, “How are we going to take care of our members? How are we going to think long-term about them?” If I have a subscription to something, I'm not thinking about, “Do I need to upgrade? Do I need to buy something else? Do I need to add something on?” I'm counting on you to anticipate my needs and adjust. I would guess that your software company, your SAS company, you were constantly thinking about, “What new features? How do we improve? How do we make this better? And how do we do it in a way that doesn't interfere with our customers' day to day routine?”
Kruse: In fact, a term I like to use is ‘co-creation.’ We create the next version of things based on customer requests.
Baxter: Absolutely. Those super users, those people that are your best customers that go beyond just being good customers and actually give back to the organization with feedback, with advice to other organizations, referrals, those are really the people that you want to get close to because they can really, like you said, co-create and help your organization to thrive.
Kruse: You can attract customers and ask, “How can we do this better? How can we save time? How can we serve you better?”
Baxter: Yeah, because as long as the people you serve have alternatives, which they definitely do inside of companies, if you don't like your lawyers in your company, you can go and find an outside counsel and say, “Hey, our inside team isn't that good.” If you're an employer, your employees can find another place to work if they don't feel like the promise that you're making to them is good enough.
Any time that people have alternatives, there's an opportunity to build a long-term form relationship thinking of membership and how you would make these people really feel like they belong and what your forever promise is to them.
Kruse: How would a small or midsize company begin? What are some starting steps?
Baxter: The first thing that I would do is I would get really clear on what is the promise you're making to the people you want to serve. What problem are you solving, hopefully, forever? What opportunity are you helping them to realize? Let's say that you want to start a gym. You would say, “The forever promise is I'm promising them health. I'm promising that they will be healthy.” Then you say, “What does that mean to them?” To use that as your guide point rather than, “I'm in the business of having stationary bicycles and three classes a day.”
If you think about a manicure, a nail salon, we don't go because we like going to nail salons. We go because we want our nails to look well-maintained and nice. Instead of thinking about it as, “I provide manicures,” you say, “I help people's hands look polished, professional, attractive.”
Maybe it means that you can pay a monthly fee there and you can go back as often as you want to get touch ups because that's really what I want. I don't want the manicure. I want the good nails. I don't want to go to a carwash. I want a clean car. When you change the way you think to focusing on the problem you're solving as opposed to focusing on the product you're creating or the service that you have a good process for delivering, you start to see all these new ways to layer in more value for your customers. That really provides you that differentiation that gives you an advantage.
Kevin Kruse is a New York Times bestselling author, host of the popular LEADx Leadership Podcast, and the CEO/Founder of LEADx.org, which provides free world-class leadership training, professional development and career advice for anyone, anywhere.