14 Forever Is a Long Time: Don’t Take Shortcuts – The Forever Transaction: How to Build a Subscription Model So Compelling, Your Customers Will Never Want to Leave

14 Forever Is a Long Time: Don’t Take Shortcuts

In February of 2019, David Heinemeier Hansson, cofounder of Ruby on Rails, launched a Tweet storm about his experience trying to cancel his subscription to SiriusXM with this expletive-ridden diatribe: “Oh f*ck off @SIRIUSXM. I don’t want to ‘discuss my options,’ I just want to cancel your sh*t without the hassle of having to call your f*cking hotline. F*ck.”1 The tweet hit a nerve, prompting dozens of retweets and over 1,000 likes. So many of us have had this experience of not being able to find the cancel button and end the relationship.

SiriusXM isn’t the only company that has drawn the ire of subscribers who feel unfairly treated by subscription businesses. In 2015, Kate Hudson’s Fabletics faced a storm of negative press.2 More than 1,200 consumers complained to the Better Business Bureau. Many of them had taken advantage of the company’s “new VIP member exclusive” offer of an active wear outfit for just $25 without seeing the fine print authorizing the company to bill them for a recurring revenue program at up to $45 a month. Fabletics required cancelation by phone—no digital option was available, making consumers even more angry.

Figure 14.1 David Heinemeier Hansson’s Infamous Rant

It can be tempting to use the structure of a subscription business to shortcut your way to revenue goals. Many organizations are under tremendous pressure to hit quarterly goals, and many executives are compensated on short-term objectives. Maybe you’re thinking about your next role and want your financial results to look good for the next employer. But building your organization on a true “forever promise” means making every decision as if you’ll never sell the business. Focus on the long term, and avoid strategies that directly conflict with forever. Pay attention to the following symptoms of short-termism in your own business.

The “Growth at All Costs” Problem

Subscription models are having a moment. According to McKinsey & Company’s 2018 white paper “Thinking Inside the Subscription Box,”3 the subscription e-commerce market alone has grown by more than 100 percent a year for the five years from 2012 to 2017. Zuora’s Q4 2018 Subscription Index report claims subscription companies have grown more than 300 percent in the past seven years, pointing out “an average company in the Subscription Economy has grown its revenue by 321% since the launch of the index in January 2012, a compound annual growth rate of 18.1%.”4 The report further claims that overall, subscription businesses are growing revenues about five times more quickly than S&P 500 company revenues and US retail sales.

Companies using membership and subscription as key components of their business models, like Netflix, Amazon, Microsoft, and LinkedIn, are among the most valuable companies in the world. And, in Spring, 2019, Apple announced a major investment in subscription services, to shift the balance away from a total reliance on premium hardware, the growth of which had been slowing.5

To justify higher valuations—which are often based on revenue multiples—and to attract investors, many companies focus disproportionately on new customer acquisition and topline revenue growth. They tend to ignore other metrics important to assessing business model health, most notably lifetime customer value. A fast-growing profession called growth hacking focuses on attracting customers by continually tinkering with marketing activities throughout the sales funnel, with a goal of driving incremental improvements in customer growth. They use email, copywriting, channel experiments, analytics, and search engine optimization (SEO) among other tactics, all with a goal of amping up acquisition. Growth hackers iterate rapidly and look for lower-cost channels. I’m generally a fan of the discipline. In fact, some of the practice’s thought leaders claim that rapid prototyping is a part of growth hacking, and that any “good” growth hacker only tests sustainable, profitable tactics.

However, as the name suggests, this approach usually happens in a vacuum, where growth is completely separated from engagement and retention numbers. The value created for the subscriber is often overlooked. Some growth hackers try things without enough concern for how their tactics fit with a larger strategy. As a result, you risk running acquisition campaigns that might mislead customers about their offer or that attract a particular type of customer who is quick to sign up and quick to cancel.

Organizations with a strong growth hacker culture often lose money on every new customer. That’s okay if the organization has deep pockets and a long-term plan to generate revenue from a community of subscribers operating at a loss, or if they’ve built a clear customer lifetime value (CLV) model demonstrating a path to profitability, market-share dominance, or successful exit (depending on their overall strategy). However, growth hackers don’t necessarily have revenue generation responsibilities; their objectives may conflict with long-term revenue.

MoviePass implemented a growth strategy in 2018 when it offered its subscribers virtually unlimited movies at nearly any theater for just $9.99 a month. MoviePass took this approach for several reasons. First, the parent company’s larger plan was to collect data. It never planned to make money on the MoviePass revenue; it had a bigger strategy that assessed a value for each new member. Second, the company was attempting a “land grab” to change how consumers consumed movies in theaters. MoviePass couldn’t sustain the bargain-basement pricing and, after changing the offer in 2019 to $14.95 for a limited selection of movies and theaters, lost 90 percent of its subscribers within a year.6

The “Extract Every Drop of Value” Problem

When I was in business school, there were two kinds of parking permits—A and C. Cs had limited spaces, while As could park in A lots and C lots. The problem was, there weren’t enough spots. The university’s solution? Change the C lots to A lots. Still not enough spots, but now everyone paid more because you had to have an A pass to park within a mile of the classroom. This felt very unfair to students because the scarcity problem was manufactured by the university in the first place.

Organizations talk a lot about customers’ willingness to pay and want to extract as much value from customers as possible. I understand this sentiment. If you have the only water in the desert, or the antidote for a painful ailment, it can be tempting to charge a huge premium. But there’s a risk here, especially for businesses that depend on long-term relationships with customers—it’s just a matter of time before a competitor enters with a less expensive, “disruptive” alternative. When that happens, your customers will not only switch—they’ll realize that you were gouging them and won’t trust you. By focusing on the long-term relationship, you can do much to “disruption proof” your business.

In 2019, SoulCycle, the spinning studio company, realized that its members cared so much about getting their favorite bikes and classes that they made sure to log in Mondays at 12 when the week’s classes became available. As a result, SoulCycle introduced “SoulEarly,” which allows members to sign up on Sunday for a 50 percent premium on standard rates.7 Members can also “earn” SoulEarly credits by buying more classes. On the one hand, this seems like a great example of adding a new value tier. On the other hand, this is a case of charging more for limited inventory and creating status for spend. There’s a risk here that this short-term revenue generator might have a long-term result of turning off members who don’t want to be second-class citizens. And Peloton’s all too happy to take on the SoulCycle refugees as members—at a fraction of the cost.

The Cash Cow Problem (or Don’t Harvest Too Early)

Every once in a while, prospects call me for help “cash cowing” their business. I’m referring to Boston Consulting Group’s famous growth-share matrix created by Bruce D. Henderson (Figure 14.2). Cash cows are low-growth businesses that nevertheless generate profitable revenue. Usually organizations harvest such businesses and use the proceeds to invest in future opportunities. Harvesting (pulling in revenue without investing in the long-term health and growth of the business) is fine if you know you’re going to be leaving that market.

FIGURE 14.2 Growth-Share Matrix

Source: Martin Reeves, Sandy Moose , and Thijs Venema, “BCG Classics Revisited: The Growth-Share Matrix,” BCG, June 4, 2014, https://www.bcg.com/en-us/publications/2014/growth-share-matrix-bcg-classics-revisited.aspx. Accessed March 25, 2019.

Too often, organizations take a harvesting mindset in businesses while still acting as if the business is going to produce revenue like a high-growth, high-market-share star. This often happens when the organization has become distracted by short-term goals. In a rush to hit those goals, they make decisions that might kill the golden goose (mixing metaphors, I know!). For example, a newspaper whose subscription base is shrinking might raise fees, with little notice among loyal subscribers, to hit revenue targets.

Continuity programs have long been guilty of this mindset. Remember 13 CDs for a penny? That was music continuity. Today’s continuity programs include Proactiv for acne, Fabletics for athletic clothing, and the dozens of something-of-the-month clubs. My current favorite is Cowgirl Creamery’s Cheese-of-the-Month Club. Subscribers pay in advance each period for physical product delivery. Some services focus on replenishment, others on discovery or variety, and some both. Although there are some highly ethical and transparent continuity programs (including Proactiv and Fabletics), many of these types of businesses are notorious for thwarting cancellation and hiding fees that drive costs higher than originally advertised. These decisions and tactics (all of which really happen) might generate a little more revenue now, but they will frustrate subscribers, resulting in fewer sign-ups and more cancellations.

The Miami Heat Invests in Forever with Fickle Fans: A Case Study

Kim Stone, a veteran executive and vice president of service at the professional basketball team the Miami Heat, focused on fan experience, and particularly the experience of loyal fans and season ticket holders, as a means of building loyalty in a fickle market during her 15-plus-year tenure in the role.8 Miami has a crowded sports landscape, with professional hockey, football, and baseball, as well as basketball and high-level college athletic teams. It’s also a popular destination for outdoor recreation and nightlife. But service is a tricky differentiator, and it doesn’t work well as an acquisition tool. The value of service is only recognized after it has been experienced. Its true role is in retention. Most organization claim they provide (or want to provide) good service, but it takes a long-term commitment. The payoff takes a while to realize, and it’s easy to cut back as a shortcut to quick cost savings.

The Heat consciously pursues a strategy of high-level and meaningful customer service to secure the loyalty of fans through down seasons as well as winning ones. Season ticket holders are “Season Ticket Members” to the Heat, emphasizing the connection the team wants to make with the people they serve and the sense of belonging and status they want fans to feel.

The team embraced this emphasis on experience when Shaquille O’Neal left the team during the 2007/2008 season after three and a half years with the Heat. O’Neal had megastar powers of attraction, and following his trade to the Phoenix Suns, season ticket sales in Miami plummeted. Understanding the importance of long-term member retention, Heat president Pat Riley separated sales and service into two departments with different metrics. This organization structure was used for more than 10 years and has served to instill a philosophy of fan-centricity that continues to this day.

Service reps prioritize building a personal relationship with each season ticket member, acting almost as concierges. They are empowered to do “whatever it takes” within reason to delight their members—a Dwyane Wade jersey for a kid’s birthday or flowers for a season ticket member’s anniversary when special occasions are celebrated at the arena. Members enjoy events with players, get better pricing on tickets, and have reserved access at the most conveniently located ticket gate. They enjoy a sliding scale of preferred pricing at concession stands, topping out at 30 percent for those who have been members for 10 years or more. Members also get priority selection for in-game entertainment, like the half-court shooting competition. When a season ticket member is announced as a contestant, it’s as “Robbie Baxter, our season ticket member since 2001.”

Stone says, “We want season ticket members to bask in the glory of being a season ticket member in front of their friends.” She also notes that technology such as a mobile app and season ticket member web portal provide convenience and utility for members to support the relationship. But the relationship itself is at the core.

When things are going well for the team, with a winning record and marquee players, it can be tempting to raise prices for everyone. But the Heat has resisted this temptation. In 2010 the Heat got the big three: LeBron James, Dwyane Wade, and Chris Bosh. They doubled down on season ticket holders. They invested in services to ensure that when the big-name players left, as they inevitably would, the relationship with fans transitioned from the back of the jersey to the front.

In 2019, Stone left Miami to become general manager of the Chase Center, the new San Francisco arena home to the Golden State Warriors of the NBA. The Warriors have dominated the NBA with several All-Star players and three championships in five years. The burning question is, however, as players like Kevin Durant move on, and the record sinks, will the fans stay loyal? Will the Warriors pursue a customer-centric strategy that can survive losing seasons and lost marquee players?

The Warriors have been locking fans into long-term “contracts” at their fabulous new stadium, charging $35,000 for the privilege of buying season tickets (tickets themselves are hundreds of dollars each), and requiring members to buy the full season or forfeit membership.9 When the team was winning, fans didn’t seem to mind, but I wonder how they’ll feel when the team isn’t as exciting. The Warriors have set the bar high for joining; hopefully their new stadium will provide the service and experience to justify the commitment. No shortcuts.

Root Causes

Why do businesses make short-term decisions that cause long-term relationship damage? There are many reasons. Some organizations fear that the subscription value itself won’t drive engagement, loyalty, and profitability. Some want to maximize the value of members who trust the organization so much that they neglect to read the fine print. There are two schools of thought here—some believe in “buyer beware,” while others (myself included) believe that trust must be earned. Many financially oriented owners and executives don’t understand the mechanics (and requirements) of successful subscription business and don’t realize that short-term harvesting can do long-term damage. Finally, executives and investors focused on their own exit strategies may do whatever it takes to generate attractive metrics in advance of that exit.

Sometimes companies get distracted by short-term goals. Occasionally, the short term is the only priority, and the company must hit certain arbitrary milestones in order to keep the doors open or win financing. But unfortunately, a short-term emphasis destroys the brand value you’ve spent so much time and effort to build. Remember, the beauty of a forever transaction is the annuity-like nature of the revenue stream. A business that focuses on the long-term well-being of customers earns the right to autopay. Don’t choose clever over forever.

What to Do Next

    If you haven’t already, establish a guiding principle to keep the team focused on customer success. If you have one, make sure everyone knows about it.

    Consider putting someone on your support or success team into a more prominent role; ensure this person is a regular speaker at all-hands meetings.

    Find a way to have the customer “in the room” at key moments, and institutionalize ways to keep the customer front-of-mind in structured and unstructured meetings.