When I tried to understand the Zillow model last week (Part I and Part II of membership reinvention) it struck me more forcefully than ever before: associations once “owned” the concepts of membership and peer communities. Yet, others outside the sector, like Zillow, have evolved them and recalibrated the concept through technology to reflect the way people define and make use of “community” today. In today’s connected world “community” is no longer a sideline but instrumental to the way people socialize (see Facebook for example); learn, do business, collaborate, access information, establish reputation, create and share value. Zillow is one of many businesses that have made access to the community, itself, their primary business model and competitive advantage. And here is the important shift that has been taking place. If your customers’ value is derived through on-going access to a community of integrated services, peer relationships and resources, they are not just consumers of goods but, in essence, members of that community. This is why business and revenue models in this economy have been increasingly shifting to membership relationships and subscriptions.
This is association territory but with a profound twist. Most associations call themselves membership organizations but are run as commodity sales businesses. Their models are not based on member interaction. For the most part, their membership community is not leveraged in terms of its economics of scale and members' knowledge capital to provide advantages that members could not get on their own (other than discounts). Most associations have not migrated to online community platforms to unlock new dimensions of value and enable new levels of collaboration that other service providers offer their members. Operations and metrics reflect product-based rather than relationship-based management. The subscription economy that is emerging has been developing relationship- rather than product-based metrics that would also apply, in different variations depending on the situation, to non-profit membership organizations like associations. So how would you run a business on the basis of subscriptions rather than fees for pre-packaged benefits?
Zuora’s Brian Bell sums up the difference between product and subscription-based management as follows:
“In a product economy, you are selling units, you look back and you say how many number of widgets did I sell? How many bottles of Coke did I sell? How many iPhones did I sell? That’s how you measure your success, where in a subscription economy your focus is on the relationship. How many customers did I acquire? If you look at and imagine, how many customers came in? How many converted? How many did I acquire? How many have I retained?
Instead of pricing per unit it’s all about service plans, so do we have bundle plans? Do we have a gold, silver, platinum? Do we have plans that are monthly, weekly, or daily, are they based on usage or based on user? How are we going to price the plans? They are not one time orders that are recurring, multiple orders of a life time of a customer.”
According to Bell, these are the metrics that matter:
Retention Rate: How much of your ARR are you keeping every year?
Recurring Profit Margin: It is your annual recurring revenue less churn minus the cost to run a deliver that service, and
Growth Efficiency: How much does it cost you to acquire a new dollar business? These are the three key metrics of this Subscription Economy.
Consultant Lars Lofgren of KISSmetrics.com proposes “The Six Metrics Every Subscription Business Needs to Track:”
- Monthly Recurring Revenue (MRR): the monthly recurring revenue (MRR) is a key metric for subscription businesses and represents the Monthly Recurring Revenue for a subscription, order, or charge. The MRR calculates subscription fees normalized to a monthly value. How many of your monthly bills are subscriptions? If I count HBO, magazines, LinkedIn, Internet-hosting, Netflix, health insurance, gym fees and even utilities, I would say that most of mine are subscription-based. We are accustomed to paying for services this way. Some (but not many) associations have successfully shifted into monthly billing of membership fees. I personally endorse this model. Yet, whether members pay monthly or annually, estimating MRR is important revenue metric.
- User and revenue churn (percentage of people that bail)
- Average revenue by customer (average amount you have already received from customers): this is a key metric for associations that consider new products and members as primary revenue sources. In subscription- and relationship-based models, most growth is achieved by growing average revenue through upselling, cross-selling, bundling services into larger, value-added packages etc. This, in turns, calls for more focus on developing current relationships; innovation in re-packaging existing assets into more strategic and expensive solutions and scalable pricing growing average revenue
- Lifetime value (LTV): while average revenue calculates what you already have LTV estimates what you will get in the future per customer. This calls for differentiation among customers and focus on the most valuable customer. It also shifts completely an organization’s view of the value of its customers—gauging and valuing the larger long-term potential over smaller, short-term gain.
- Cost to acquire a customer: “you don’t have a business until you can acquire a customer profitably.”
- The signup channel: What it takes to become a valuable customer—from first visiting your website or receiving your material, to joining and upgrading? The smoother and shorter the process, the sooner you get to profitability.
These are not just tactical metrics but signify a very different model and basis of competitive advantage. The core game changer is the perspective on customer value. The optimal value of a customer is not realized immediately, through short-term and limited transactions, but overtime, in developing this customer into a repeat and strategic user of increasingly higher levels of service. Retention and continuous member development, then, become more important than mere acquisition. Repackaging, reconfiguring and recalibrating the value of existing products; leveraging, cross-selling and upselling are far more instrumental to growth and innovation than the addition of new programs and members.
Re-energizing associations is not a matter of changing revenue models—dues-based revenue vs. membership-based revenue—but of transforming your relationships to members and the value you provide to them. The shift in business today is from single products to on-going relationships and recurrent revenue streams. Associations don’t need to abandon the membership model but recast it around relationships rather than products and bring it in line with the way value is created and shared in the 21st century.