Robbie Kellman Baxter - the author of The Membership Economy, brings over twenty years of strategy consulting and marketing expertise to Peninsula Strategies. Her clients have included start-ups and mid-sized venture-backed companies as well as industry leaders such as Netflix, Yahoo!, Oracle and eBay. Over the past ten plus years, Peninsula Strategies has advised nearly one hundred organizations on growth strategy.

In your book The Membership Economy : Find Your Super Users, Master the Forever Transaction, and Build Recurring Revenue you coined the term “membership economy”. Can you please explain the term to our readers?

The Membership Economy is a term I coined to describe a massive trend I was seeing. Organizations were moving away from anonymous transactions and toward known and ongoing relationships with their customers or members. In addition, the trend is often characterized by a move from ownership to access, from one-time payment to recurring automated payments and by a more open communication, both between the organization and the member and among the members themselves, under the umbrella of the organization. I first started thinking about this idea several years ago when I was consulting at Netflix, and fell in love with their business model. I loved how they were so focused on their mission, and yet willing to evolve delivery—moving from three DVDs out at a time to streaming to contracting for their own content.

What are the main profitability drivers for companies which joined the Membership Economy club?

In the Membership Economy, the most important metric is retention. While new customers is still important, often acquisition costs are high enough that without retention, organizations are actually losing money for the first few periods. Engagement is a leading indicator of retention. If the subscriber is using the service on a regular basis, if it has become part of that person’s habits, it is unlikely that the person will cancel the subscription. Often organizations that don’t track engagement closely enough and then are caught off-guard by churn. It’s important not to confuse inertia (I haven’t canceled yet) with loyalty.

Do you think the future belongs to this model? Is it suitable for all brands?

I have been astounded at how widespread this model is. People are subscribing to services for transportation, software, digital content, community, and even consumer products. As long as your business requires sales and marketing, that is, you aren’t leveraging a monopoly or a highly limited and fixed audience, the Membership Economy can help you build a stronger long-term formal relationship. Organizations love subscription pricing because of the recurring revenue, which makes it easier to plan for the future, often has higher margins than transactions, and ultimately can lead to a higher valuation in the capital markets. But what’s more interesting is why consumers like membership. Everyone has the same basic needs, as outlined by Abraham Maslow in his Hierarchy of Needs. We want to mitigate risk, feel like we belong and to be recognized for our contributions and accomplishments and even ultimately achieve our full potential. Membership models, with their emphasis on the long term achievement of the members’ goals, are much better suited to these core needs than anonymous transactional models.

What would you recommend to entrepreneurs who are planning to take advantage of the Membership Economy? Are there any barriers they should be prepared for?

If you’re just starting out, focus on the problem you’re solving, the reason that people will be signing up for your service and not the product itself. There’s a concept called a “forever transaction” that I describe in my book, and it’s that moment when a consumer decides that your organization is the one that is going to help them achieve their goals and that they no longer need to consider alternatives. They move from being a consumer to being a member, and with it comes the assumption that they will stay with you for as long as they have the same goals. What you want is for them to feel like you are going to take care of them. In exchange, they give you loyalty.

If you are competing against other subscriptions, it can be hard to attract members away for this reason. Once a consumer becomes a member, they stop shopping for alternatives, so it can be hard to get their attention. The best moments are when the existing options are failing to evolve their offerings to meet the changing environment. Technology is resulting in declining costs of tracking data, connecting consumers to one another and managing large assets, which enable new business models. For example, organizations that provide education, community and connection have historically done so through live (expensive) events, but new organizations are providing the same kind of value and educational experiences digitally for less cost and hassle. Coursera is disrupting universities and training companies alike, for example. Amazon subscribe-and-save has traditional retailers on the run.

While the barriers are low (and that’s why there are so many new subscriptions and subscription boxes available), the trickier thing is managing the demands of existing members with the needs of new prospects. Often organizations listen too much or too little to one group or the other, resulting in a lopsided business.

Which resources (books, podcasts) would you recommend to our readers who want to succeed in today’s business world?

Besides my book?

Lisa Solomon, the author of Moments of Impact, has a new book coming out Designing Better Businesses—I have an advance copy and think it’s fantastic. It’s a highly visual book which brings design thinking to business model creation.

I’d also recommend From Impossible to Inevitable by Aaron Ross and The Automatic Customer by John Warrillow.

And for anyone struggling with what to give away for free and what should be charged, Chris Anderson’s classic Free is one of my favourite business books and one that shaped my own thinking.

Thank you for the interview.