15 Continue to Iterate – The Forever Transaction: How to Build a Subscription Model So Compelling, Your Customers Will Never Want to Leave

15 Continue to Iterate

When I worked as a product manager at an enterprise software company in the mid-1990s, our work revolved around the Golden Compact Disk (CD). Every 18 months or so, we’d release a new version of our product. Engineers dedicated months to building the product, working at a fevered pitch as the release date approached. When the release date arrived, they’d burn a master CD with the entire fixed code for the new product. That master was a CD with a gold outer coating instead of the usual aluminum or silver coating, to make it stand out from other CDs (back in the day, tech offices were filled with CDs). We’d produce and distribute copies of this updated version of our software to all of our customers with a big “ta da”. Inevitably, there were features customers loved and those they hated, as well as some bugs—features that didn’t quite work as promised. We’d send patches to fix the bugs and promise that the unloved features would be fixed in the next release—18 months out.

Things have changed in Silicon Valley. Companies like Netflix, Oracle, and Google change their code on a daily, if not hourly, basis. Changes reach customers immediately through the model known as software-as-a-service (SaaS). The customers (subscribers) no longer own the software, they only access it. Because subscribers can cancel access to the software, software makers have a greater motivation to improve it. In some cases, their enhancements merit a price increase, either as a new level of subscription or as an add-on. Sometimes they lower the pricing due to changes in the market.

Whether you’re offering physical products, digital content, professional services, or access to a community, over time your products will change. You might add features, but you are also likely to remove features. There are good reasons to raise and lower prices over time. Because you’ve made a forever promise, you need to ensure that products and pricing continue to support the value you’re creating for the people you serve. This chapter provides some tips to do that.

Fine-Tune Delivery to Keep Your Forever Promise Relevant

While you want your promise to be clear, specific, and honest, it also has to be meaty enough to be interesting. What happens when the forever promise becomes uninteresting or too small? When Netflix launched, its forever promise of “broad selection of professionally created video content delivered with cost certainty in the most efficient way possible” was new and compelling. Other companies then went direct to consumers with similar promises—HBO, Hulu, Amazon Prime, and even CBS. Comcast started offering a wide range of movies and shows on demand. At this point, Netflix had to add unique content to its promise. Breadth, cost-certainty, and convenience were no longer enough.

The same challenges apply to long-established institutions. It’s interesting to watch parking garages evolve, as their promise of “helping travelers come and go efficiently” has been outdone by ridesharing services like Lyft and Uber. A 2016 article by the Local Government Commission notes that “autonomous vehicles could erase the need for up to 90% of our current parking lots in the next 15 years.”1 What could parking lots offer consumers to make travel more efficient? Maybe the extra space could provide safe access to ride shares, like many airport parking garages are doing. Or garages could aggregate additional services for the smaller group of cars still parking—making parking lots a place to drop off and pick up dry-cleaning and meals, or even have gas delivery and car washes. But any parking lot company that thinks the same volume of drivers will be parking there in the next few years is missing the opportunity to continue evolving for the customers they know best.

From Weight Loss to Wellness—Weight Watchers Rebrands as WW

In The Membership Economy, I held up Weight Watchers as “one of the best examples of a successful membership that has continually evolved to meet its members’ needs.”2 I still think it’s true, but it’s worth looking at what’s happened in the space and some of the strategic decisions the current CEO, Mindy Grossman, has made.

The challenge any weight-loss company faces is that once people have either successfully lost the weight or given up on weight loss for the time being, they cancel the membership. As a result, the more successful the product, the less time a member spends on the program. Additionally, as weight loss inherently has an end when users reach their goals, the average member stops using the program after six to nine months. It is very hard to track membership in terms of years rather than months.

One of the smartest things Weight Watchers has built into its model is the concept of a “lifetime member.” Weight Watchers members pay every week until they reach and maintain their self-defined goal weight (which must be at least a loss of 10 percent of body weight at sign-up) for six weeks. After that, participating in Weight Watchers is free forever, as long as members stay within three pounds of their goal weight and attend meetings at least once a month. If they exceed weight or miss a month, they have to pay for meetings until they’re back in compliance.

This approach has effectively achieved several important objectives. Most important, lifetime membership provides a system for helping members maintain their goal weight—their forever promise. It also means that success stories attend meetings—maybe for the rest of their lives—serving as role models and ambassadors to new members. Should a lifetime member fall off the wagon, there’s the possibility of additional direct revenue for Weight Watchers.

However, it appears that this model is no longer effective enough for the company. Weight Watchers has publicly talked about the struggle to attract members beyond its current demographic, primarily moms from the middle of the country. The company faces competition from all sides. There are weight-loss apps both free and paid, like Noom, Aaptiv, and even MyFitnessPal. There’s a proliferation of new diets, with associated coaching, food, and supplements—including Whole30, keto, paleo, and the Longevity diet. Perhaps the biggest threat comes from the many companies trying to claim leadership in the wellness space. Gwyneth Paltrow’s Goop garners a lot of attention. Fitbit, Apple Watch, and other wearables companies are introducing weight loss as one tenet of a full range of healthy behaviors, alongside exercise, meditation, and better sleep hygiene.

So Grossman is redefining the forever promise, a bold and risky move. Instead of promising weight loss and a lifetime at a healthy weight, she’s promising the broader, more inclusive but also more nebulous “wellness.” Her goal is to transform Weight Watchers into a “wellness company,” as the desire to be well never ends. She changed the name of the company to WW, standing for Wellness that Works. The company also brought on spokespeople whose desire was to live healthier rather than lose weight.

Will it work? The jury is still out. It may be a larger market, but people may not feel the same urgency to be “well” as they do to stop feeling overweight. It may be a challenge to keep the loyal Weight Watchers market with a new message that no longer targets the core audience.

Use Product-Market Fit (PMF) as a Key to Continuous Improvement

Companies generate and store oceans of customer data, but often it sits unused, or is presented without context and not applied to actual decision making. However, organizations are increasingly applying principles of data science to analyze data.

Some investors are pushing for better analysis and consistent reporting of the insights in customer data. One such investor is Jonathan Hsu, cofounder and general partner of Tribe Capital, who earned a doctorate in physics and helped to form and lead the data science and analytics organization at Facebook before making the transition to venture capital.3

Hsu spends a lot of time thinking about how data science can be applied specifically to assessing product-market fit (PMF). PMF is important because it’s the smallest unit of value exchange between an organization and its customers. It happens when the market wants and needs the product the company is offering. The term was coined by Andy Rachleff, cofounder of Benchmark Capital, and incorporates ideas developed by Don Valentine, founder of Sequoia, a leading venture capital firm.4

Rachleff explained it like this: “If you address a market that really wants your product—if the dogs are eating the dog food—then you can screw up almost everything in the company and you will succeed. Conversely, if you’re really good at execution but the dogs don’t want to eat the dog food, you have no chance of winning.”5

Most companies have a lot of usage data, which can be useful for assessing PMF. Hsu sees PMF reporting as a new kind of accounting. In accounting, you take a pile of data (a ledger) and turn it into something useful (an income statement or balance sheet). In a PMF report, you take a big quantity of usage data and turn it into valuable insights about the market needs. To assess PMF, Hsu suggests three types of analysis, each narrow enough to be more useful than a “pile of data” but broad enough to be applicable to many types of organizations and businesses.6 Together they create a kind of accounting statement for PMF:

1.   Growth accounting. Assess your growth rate. In addition to new revenue, track expansion revenue (same customers, new spend) and contraction revenue (same customer, declining spend). You might also track whether the new spend is on new products or more of the same products. With any kind of subscription, there’s a difference between acquiring a new dollar from a new customer and an additional dollar from an existing customer. You need to understand whether dollars lost were due to a decrease in spending or a customer leaving (churn). Businesses with subscriptions often have the healthiest growth because the recurring revenue is so profitable.

2.   Cohorts. Track your customers from acquisition through departure—the entire relationship. This analysis includes customer lifetime value (CLV), cohort customer retention, and cohort revenue retention. Analyzing the customers’ journey as well as their CLV based on shared customer traits, like lead source or timing of initial transaction, gives you a granular understanding of where the value is coming from, one cohort at a time. This approach is better than averaging, which is dangerous because earlier customers behave differently than customers acquired later. Additionally, a cohort of 100 customers might behave differently. Some might stay a few months, while others cancel right away. Or, if you don’t have a subscription, some might spend $100 each month, while others only spend $5. You need to track retention of customers, but you also need to track retention of dollars—ensuring that you’re optimizing not only for acquiring new customers but also for retaining the best and most valuable customers for the long term.

3.   PMF distribution. You need to continually evaluate the distribution of usage data. I have spoken before about tracking recency, frequency, and breadth/depth of usage. But it’s not enough to take averages. For example, knowing “average minutes spent” isn’t as useful as understanding the median and top quintile. Once you average everything together, you don’t see how big the spread is and whether there are clusters—for example, if the top 10 percent of customers spend $100 and the bottom 90 percent spend $10 each, the average is $19. You miss the whole story—that a few customers are very valuable but the rest aren’t. Similarly, for a software-as-a-service (SaaS) business, knowing average customer value (ACV) is useful (the analog of the “average” level of PMF), but knowing the median and various percentiles is usually more useful. You’ll find some customers use your product regularly for a narrow, specific use case, others use many features but only occasionally, and some never use the product after the initial purchase. Some of these customers are finding more value than others, and usage often correlates with perceived value. PMF distribution is about building a granular understanding of who is actually engaging with your product and how.

Hsu has tested these three approaches with thousands of products and companies, including large organizations with multiple products, each of which may have different levels of PMF. Hsu has found that the companies with the strongest evidence of PMF are the ones with forever transactions, whether they’re subscription-based like Slack or Netflix, or are simply highly predictable recurring revenue businesses like Amazon or Uber. Specifically, in the context of early stage companies, the detailed picture of recurring or recurring-like behavior tends to persist as the company scales. By contrast, when the product behavior is nowhere near recurring, it’s much less clear how customers will unfold as they age. An example of a nonrecurring business is the jewelry, gifts, and accessories retailer Tiffany, where the purchases are few and not predictable. After all, how many engagement rings does one person need?

Product portfolio analysis is key. Some cohorts are going to mature with the product, but new cohorts, particularly those with different demographics (usually younger) might want a different product that makes good on the same forever promise. Additionally, you might want to keep adding features for your most engaged and/or longstanding subscribers. If I’m a marathon runner, I might need basic support to get started, but once I break the four-hour mark, I might need a different training plan and nutritional coaching. Older, longstanding readers might prefer print, people choosing their news source now might prefer digital or mobile video content.

Avoid Feature Bloat

Most product teams are very familiar with the idea of starting with a minimum viable product (MVP)—the smallest, leanest product that solves the customer’s problem. Organizations layer in additional features and benefits to more deeply support their customers’ needs. But if you’ve been successful for an extended period of time and added lots of features, it may be time to start retiring products and features. It can be tempting to leave all features in the subscription, but there’s a cost to maintaining each feature. Too many features can confuse customers, and they might not be able to find the ones they value amidst all the older ones. As anyone who’s ever cleaned out a closet knows, you can find and enjoy what you want much more readily if you get rid of what you really don’t need anymore. The hard part is that there’s always that one loyal customer who loves that obsolete feature or product—and is really vocal. Even if you know that the right thing to do is to change anyway, and maybe let that individual know, privately, why you are making the change, it can be uncomfortable to do. So you may end up providing faxing services, or VHS formats, even though it takes up resources and mindshare you could otherwise use to invest in tomorrow’s members. So, even though it’s tough to disappoint a loyal customer, you may find that keeping the feature they love costs your company too much.

Keep an Eye on the (Competitive) Horizon

It’s important to remember the market part of product-market fit—not just which individual customers are engaging, but also the other options they have. This is a place where many companies stumble. Continued competitive landscape assessment is important. It’s not only companies with similar products you need to beware of, but also those companies that are solving your customer’s bigger problems.

Businesses with strong recurring revenue have solid PMF, but they’re also much more predictable by cohort. Their growth in CLV comes from the ongoing engagement customer, which makes for recurring revenue, not just from the initial transaction. Focus on where the growth is happening, which cohorts are engaging with the products, and what those people need. By matching that information with the changes in the broader market, you’ll have ample insights for your product road map.

Dawn Sweeney, CEO of the National Restaurant Association, told me about a game she plays with her team.7 Imagine your most strategic employee left your organization, found a great digital technologist and an investor with deep pockets, and decided to go after your “forever promise” from scratch. With none of your organization’s legacy baggage, what would that new team do?

Most banks promise to help customers make and receive payments in the easiest way possible. Along the way, they focused on some of their products, like credit cards. But if you were starting from scratch, you might want to start with the mobile phone, which is more convenient and provides more functionality than a plastic card. This kind of thought exercise works for nearly any business or industry. For example, speaking with the International Car Wash Association, I suggested that a car wash might offer a forever promise: “Your car will always be clean with minimal effort from you.” If that’s the promise, I don’t want to come into the car wash at all. I’d prefer the car wash to come to me (to my car) and just make sure it was clean periodically.

How would car washes deliver this promise? Owners should spend less effort shaving minutes or seconds off the time it takes the car to go through the car wash—the current goal of most car wash innovation—and more effort figuring out how to go where the cars are with a mobile service. The car wash owners I spoke with didn’t want to make that available because they’d already invested so much in their real estate and capital investments. I understand their concern—but they’re unwittingly creating a disruptive opportunity for the many mobile car wash services, and for services like Filld, which fills your gas tank in your driveway in the dead of night. And now, they face a much bigger challenge, as autonomous vehicles promise to change the landscape of cars yet again.

Don’t limit your evaluation to feature comparisons with your most direct competitors. And don’t start with the product. Instead, always start with the customer’s needs and challenge yourself to identify better ways to more fully meet those needs. Keep finding and resolving pain points. To keep your forever promise relevant, continuously evaluate how you could better deliver on it. Be willing to change products, processes, and even your team members. Consider your competition, but also consider other broader trends in how your target audience solves their problems. And continue to use PMF accounting so you can recognize changes in engagement. It’s always best to start with the promise, though, and work backward from there.

What to Do Next

    Make sure you are able to track the right PMF data, and that you have processes to implement the insights you gain from your assessments. If you aren’t able to track it yet, be resourceful—do interviews, send surveys, and use what you have.

    Listen carefully to your early cohorts as well as to the cohorts who surprise you by not taking your offer. Incorporate that learning into future iterations.

    Resist the temptation to put product and service improvements on the back burner. You are never “done,” because your goal is delivering on your promise in the best way possible. Your goal is not “getting a product to market,” it’s helping to make your customer’s life better.