The Automatic CustomerCreating a Subscription Business in Any Industry
The lifeblood of your business is repeat customers. But customers can be fickle, markets shift and competitors are ruthless. So how do you ensure a steady flow of repeat business? The secret – no matter what industry you’re in -- is finding and keeping automatic customers.
These days virtually anything you need can be purchased through a subscription, with more convenience than ever before. Far beyond Spotify, Netflix, and New York Times subscriptions, you can sign up for weekly or monthly supplies of everything from groceries (AmazonFresh) to cosmetics (Birchbox) to razor blades (Dollar Shave Club).
According to John Warrillow, this emerging subscription economy offers huge opportunities to companies that know how to turn customers into subscribers. Automatic customers are the key to increasing cash flow, igniting growth, and boosting the value of your company. Read More Consider Whatsapp, the internet-based messaging service that was purchased by Facebook for $19 billion. While other services bombarded users with invasive ads in order to fund a free messaging platform, Whatsapp offered a refreshingly private service on a subscription platform, charging just $1 per year. Their business model enabled the kind of service that customers wanted and ensured automatic customers for years to come.
As Warrillow shows, subscriptions aren’t limited to technology or media businesses. Companies in nearly any industry, from startups to the Fortune 500, from home contractors to florists, can build subscriptions into their business.
Warrillow provides the essential blueprint for winning automatic customers with one of the nine subscription business models, including:
The Membership Website Model: Companies like The Wood Whisper Guild, ContractorSelling.com, and DanceStudioOwner.com offer access to highly specialized, high-quality information, recognizing that people will pay for good content. This model can work for any business with a tightly defined niche market and insider information. The Simplifier Model: Companies like Mosquito Squad (pest control) and Hassle Free Homes (home maintenance) take a recurring task off your to-do list. Any business serving busy consumers can adopt this model not only to create a recurring revenue stream, but also to take advantage of the opportunity to cross-sell or bundle their services. The Surprise Box Model: Companies like BarkBox (dog treats) and Standard Cocoa (craft chocolate) send their subscribers curated packages of goodies each month. If you can handle the logistics of shipping, giving customers joy in something new can translate to sales on your larger e-commerce site.
This book also shows you how to master the psychology of selling subscriptions and how to reduce churn and provides a road map for the essential statistics you need to measure the health of your subscription business.
Whether you want to transform your entire business into a recurring revenue engine or just pick up an extra five percent of sales growth, The Automatic Customer will be your secret weapon. Read Less
The Automatic Customer Online Course is an interactive, video-based training program that teaches you how to create a repeatable, recurring revenue stream for your business—no matter what your industry is. Based on the book, The Automatic Customer: Creating A Subscription Business In Any Industry, that Fortune magazine rated one of the Top 5 Business Books of 2015.
Whether you want to transform your entire business model into a recurring revenue engine or just pick up an extra 5% of automatic sales, you won’t want to miss this course. You’ll learn how to leverage recurring revenue in your business and how to value a subscription business, the most important ratio you need to understand and optimize in order to attract venture capital investment.
“In this fantastic book, John Warrillow provides a clear path to turning your company from one that needs to start from scratch every month to one in which your work and, most important, your results, are predictable. If you want to build a business with a very healthy bottom line and extremely well-served customers, this book is an invaluable resource.”—Bob Burg, coauthor of The Go-Giver and author of Adversaries into Allie
The Author & Speaking Engagements
John brings his message about the importance of recurring revenue to businesses around the world in almost every industry. Read what Inc Magazine said about hiring John and then request him for your event by filling out this form.
John Warrillow, the author of Built to Sell, is the founder of The Value Builder System™ where advisors help company owners increase the value of their business. Previously, he founded Warrillow & Co., a subscription-based research business dedicated to helping Fortune 500 companies market to small business owners. A sought-after speaker and popular Inc.com columnist, he lives in Toronto. Sign up to receive an email when John publishes new tools and content, or connect with John on social media using the links below:
Questions & Answers
How does selling a subscription differ from selling a one-off product or service? Selling a subscription is different than selling a stick of deodorant. With a subscription, you’re proposing a relationship over time. Shifting from selling a one-off product or service to selling a subscription is like the difference between a one-night stand and getting married. In a subscription relationship, the customer agrees to stay loyal on a long-term basis, while you agree to keep your customer’s interests at heart. Like all long-term relationships, each party is giving up a little bit of freedom in return for what he hopes will be a better deal in a committed relationship.
Customers may give up a little purchasing freedom when they subscribe, but there are a lot of benefits to subscribing rather than purchasing on a one-off basis. A Zipcar subscriber, for example, can access an expensive car for a few dollars a month. A Mosquito Squad subscriber can invite his boss over for a barbecue on a warm summer evening, knowing the backyard is already protected from bugs. Netflix subscribers don’t have to rent movies from iTunes at $5.99 each; they can pay less than $10 a month and have access to thousands of titles.
How do subscriptions help protect your business against dips or recessions? When you create a steady flow of recurring revenue, you insulate yourself from the worst of a potential recession. Read More Take a look at the transformation of New York–based Tri-State Elevator Co. The company started by installing elevators, which is the sexy part of the elevator business. When a shiny new building is built on Fifth Avenue in New York, every elevator company in the city wants to work on the job.
Most of the time Tri-State would bid on installing elevators for new buildings but lose out to larger elevator companies or manufacturers like Otis that also have an installation division. When Tri-State won a project to install an elevator in a new building, it often experienced headaches associated with delays. Big construction jobs are fraught with unknown expenses, and no matter how good Tri-State was at estimating the cost of a job, many new installation projects ended up as money losers. Gross margins on installation jobs varied from as “high” as 15% to a loss of 25%.
Then Tri-State decided to change its business model. Instead of focusing on new elevator installations for commercial properties, the company decided to focus on maintaining existing elevators for New York’s wealthiest individuals—people who have elevators in their ultra-high-end estates, apartments, and townhomes valued between $10 and 100 million. Today Tri-State enjoys gross margins of 24% to 40% in its business of maintaining the elevators of billionaires. For a fixed monthly subscription, you can ask Tri-State to keep an eye on the private elevator in your 10,000-square-foot Manhattan penthouse. The company will inspect your elevator regularly, replace parts that are wearing out, and make its service people available to you every day of the year if an elevator gets stuck.
Now Tri-State has a steady flow of $70,000 a month in high-margin maintenance contracts, which amounts to roughly a third of its revenue each month. That steady flow of business got Tri-State through the financial crisis of 2008. In the depth of the recession, virtually all new building in New York State stopped, and didn’t restart again in a big way until 2012. If Tri-State had still been focused on chasing shiny new builds, it would have been put out of business. Its high-margin, recurring-maintenance revenue kept it going and inoculated it against the worst of the recession.
What are some challenges owners face in deciding to implement a subscription model? The biggest risk is spreading the cash you receive from a customer over the life of the subscription. This usually means your customers are more valuable to you over time, but in the short term, you may get less cash up front when they decide to subscribe instead of buy.
How do you assess the success of your subscription business? What financial measuring tools can you use to understand the value of your subscriber? In a subscription business, understanding your financial performance requires a new set of operating statistics. The foundation of your subscription business is built on your monthly recurring revenue (MRR). This is the revenue listed on the company’s P&L every month. When a customer subscribes to a Membership Website for $99 per year, the company gets to recognize that revenue on its P&L at the MMR rate of $8.25 ($99 divided by 12).
The next number you need to understand is the lifetime value (LTV) of a subscriber. LTV is calculated by multiplying your MRR by the number of months your customer stays with you, less the cost of serving them during the life of the subscription. To keep things simple, let’s imagine you don’t have client managers serving subscribers, so we’ll assume the cost to service subscribers is zero. If your average subscriber stays with you for 30 months, then the LTV of a subscriber is 30 x $8.25 = $247.50.
The next data point you need to assess the health of your subscription business is your customer acquisition cost (CAC). This is the amount of money you spend on sales and marketing to win a new subscriber. If your company’s total expenditure on sales and marketing last month was $2,000 and you acquired 25 subscribers, your CAC would be $80 during that period ($2,000 divided by 25).
Your true CAC will be revealed after you pick the low-hanging fruit. Your friends, family, and best customers will likely subscribe to your new offering out of loyalty to you and a desire to encourage your new business, so you need to discount these early subscribers in your calculation. To truly understand your CAC, you want to know what your CAC is at scale, meaning what is sustainable after the “love and guilt” subscriptions have been signed up.
What are the best ways to sell a subscription? Think 10 X vs. 10%. Most consumers are aware that a subscription relationship is much more valuable to you than a onetime purchase. So to get them to commit you’ll need to give them a big return on their investment. A consumer with an acute case of subscription fatigue is unlikely to subscribe just to save 10%, but she might be convinced to subscribe if you could make a case that she will enjoy 10 times the value of the alternative.
For subscribers to the online art school New Masters Academy, $29 per month buys access to 350 hours of video tutorials. The going rate for a one-day in-person art class from a New Masters Academy instructor is $600–800, so you get access to 350 classes each month for around one-twentieth the cost of an in-person lesson. As New Masters Academy founder Joshua Jacobs said, “We provide a ridiculous amount of value.”
At Genius Network, the Private Club subscription program for some of the world’s leading entrepreneurs, Joe Polish promises prospects a 10X (10 times) return on their investment. Polish loans each new member an iPod pre-loaded with $80,000 worth of marketing “how to” content. The member can keep the iPod as long as she renews her subscription. Polish is so confident in his 10X promise that he tells new members that if they do not feel they are getting 10 times the return on their investment with Genius Network, he’d rather they not renew.
Netflix provides access to tens of thousands of titles for less than $10 a month. GameFly subscribers get 8,000 video games to choose from for a few bucks a month. Rdio provides a library of millions of songs each month in return for the cost of a fancy coffee. It makes economic sense to the customer to use these services instead of purchasing each DVD, video game, or MP3 individually.
How is your forthcoming book The Automatic Customer different from your previous book, Built to Sell? Built to Sell: Creating a Business That Can Thrive Without You is designed to illustrate how to transform a successful business into a sellable one. In it, I touched briefly on the importance of having customers who repurchase from you on a regular schedule, but in hindsight, I should have dedicated at least half the book to recurring revenue.
In the years since Built to Sell was published, I’ve come to see how important recurring revenue is in building a valuable, sellable company. These days I run a subscription business called The Sellability Score (SellabilityScore.com) that helps owners build valuable companies by examining the eight key drivers of sellability. Owners who achieve a Sellability Score of 80 or more out of a possible 100 garner offers that are 71% higher than the average.
The biggest factor in driving up your Sellability Score is the degree to which your company can run without you, the owner. That’s a head scratcher for a lot of owners who are the best salesperson in their business. The secret is to build recurring revenue that brings in sales without having to resell the customer each month.
Who is winning the subscription economy and why? Companies like Apple and Microsoft are betting heavily on the subscription model but the most prolific winner in the subscription economy is Amazon. Amazon has come a long way since its days of just hawking cheap books online. Of course, you can still buy books on the site, but today’s Amazon will sell you everything from diapers to laundry detergent. Increasingly, it is digging deeper into our pockets through Amazon Prime.
Amazon Prime subscribers pay Amazon $99 a year in return for goodies like free streaming of thousands of movies and TV shows and free two-day shipping on most Amazon purchases. According to a 2013 report released by Morningstar and Consumer Intelligence Research Partners, there are now approximately 10 million subscribers to Amazon Prime. The folks at Morningstar estimate (since Amazon does not release the data publicly) that membership in Amazon Prime could swell to 25 million by 2017.
If you were to carve out Amazon Prime as a stand-alone business, it would already be a billion-dollar subscription company, but that severely underestimates the value of Prime to Amazon. Like many subscription models, Amazon Prime is a Trojan horse that is expanding the list of products consumers are willing to buy from Amazon and giving the eggheads in Seattle a mountain of customer data to sift through. According to Morningstar, the average Prime member now spends $1,224 on Amazon purchases each year, compared with $505 for non-Prime customers. We cannot say Prime members spend that much more just because they are members since presumably a lot of Amazon’s best customers would have been attracted to the free shipping offer. However, this data seems to suggest that once someone becomes a Prime subscriber, they become even more loyal to Amazon. Further, Morningstar figures that after factoring in costs incurred for shipping and streaming content, the average Prime member yields Amazon $78 more per year in profits than the typical customer. Given the positive impact Prime seems to have on customers’ buying behavior, some analysts have argued that Amazon should drop the fee for subscribing to Prime in order to grow the program even faster. But that thinking misses a key element of Amazon’s strategy. When you pay $99 per year to become a member, you want to “get your money’s worth.” Suddenly you start checking Amazon’s pricing on all sorts of products, from paper towels to sneakers, with hopes of “making back” what you invested in the membership. Given Amazon’s aggressive pricing and seemingly endless product selection, you can almost always find what you’re looking for at a price that’s lower than what you could find elsewhere. When you factor in free shipping, it becomes an easy decision to buy from Amazon.
Amazon, having learned a lot about the subscription business through Prime, is now applying the subscription model to other areas of its business. AmazonFresh is a grocery delivery business Amazon has been experimenting with in its hometown of Seattle since 2007. AmazonFresh didn’t start out as a subscription business; instead, it was open to anyone willing to pay the delivery fee of $8 to $10 to have milk, veggies, and meat brought to their door in a one- to three-hour delivery window. AmazonFresh stayed stuck in beta in one city for six years as the company tried to work out a profitable business model. In spring 2013, AmazonFresh added Los Angeles as the second city for the program. But in L.A., the Amazon Fresh offer had one stark difference: L.A.-based customers were asked to subscribe to Prime Fresh for $299 a year, which gave them free grocery delivery on orders over $35.
As with Amazon Prime, the act of subscribing spurs Prime Fresh members to buy more frequently and from a broader array of grocery categories. If I’m ordering milk anyway, a customer might reason, why not top up the order north of $35 with a case of Coke and a refill on the laundry detergent I’m about to run out of? As with Prime, the very act of sinking money into a subscription triggers the desire for the consumer to want to “get his money’s worth,” which in turn creates the kind of customer behavior Amazon wants to see. And Amazon isn’t stopping at groceries: Subscribe & Save is yet another subscription service from Amazon; you subscribe to receive regular shipments of things you frequently run out of, like dish soap and paper towels. If you sign up for five or more subscriptions that share the same delivery date, you receive 15% off the entire order.
One of Amazon’s latest ventures is a subscription that offers to help other companies grow their subscription businesses. Amazon Web Services (AWS) offers companies access to servers, software, and technology support on a subscription basis. Many of the world’s largest subscription companies, including Adobe, Citrix, Netflix, and Sage, use AWS, along with many of the highest-profile start-ups, like Airbnb, Pinterest, Dropbox, and Spotify.
Why are automatic customers worth more than one-off customers? The most obvious benefit of the subscription model is that it increases the lifetime value of a customer. When you sell a customer a subscription, that one sale can create a long-term relationship thanks to the magic of recurring revenue. Take a look at a typical flower store. Like many traditional businesses, the average flower store starts each month with no revenue, so they constantly have to find ways to stimulate demand. They pay for expensive retail space so they can grab your attention the day before your wedding anniversary. They buy advertising around key holidays like Mother’s Day and Valentine’s Day so you’ll buy your flowers from them and not from the guy down the street. If they guess wrong on how many customers they will win on a given holiday, their inventory rots within a week.
Compare that model to H.Bloom, a flower company whose founders, Bryan Burkhart and Sonu Panda, say they want to become the “NetFlix of flowers.” H.Bloom provides fresh-cut flowers to businesses like hotels, restaurants, and spas. Unlike traditional flower stores that have to stimulate new demand each month, it sells subscriptions to a weekly, biweekly, or monthly fresh flower delivery. Because H.Bloom doesn’t need to be physically in front of potential customers, instead of paying $150 per square foot for prime retail space in Manhattan, it pays less than $30 per square foot for space on the third floor of a 100-year-old building in an industrial area of the city.
The traditional flower store sells a one-off bouquet to a customer they may never see again, but at H.Bloom, a hotel can sign up for a weekly delivery of the basic $29 bouquet. If H.Bloom keeps the subscriber happy for three years (its monthly churn rate is less than 2%), that one $29 sale will end up creating a customer that is worth $4,524 ($29 x 156 weeks).
Why is subscription revenue stickier than a onetime purchase? Imagine that you own a 100-pound Pyrenean Mountain Dog that eats two hearty bowls of dog food a day. Feeding the love of your life is an expensive proposition, so you’re always on the lookout for a deal on dog food. Once every two weeks you trudge down to the local pet supply store and cart a case of kibble home. If you see dog food on sale at your local grocery store, you’ll buy it. Or if you get a coupon for a buy-one-get-one-free offer from another store, you’ll take advantage of it.
Eventually, you get tired of last-minute trips to the store, so if you live in the U.K., you subscribe to Warwickshire, U.K.–based PetShopBowl.com, which offers a Bottomless Bowl subscription service. Now you know you’re going to get a shipment of dog food every fortnight, and the part of your brain that scans the flyers for dog food starts to shut down. And there is no need to cart a heavy container of food back to the house every week when your shipment will arrive automatically.
Subscribers knowingly enter into an agreement in which the convenience of uninterrupted automatic service is exchanged for their future loyalty. Rather than buying once without returning, subscribers stick around—hopefully for years.
Why are subscribers better than customers? Subscribers are better than customers for many reasons. Recurring revenue will increase the value of your company and drive up the lifetime value of a typical customer. One of the other reasons subscribers are better than customers is that subscribers smooth out demand. One of the biggest challenges in a traditional business is estimating demand. Guess high and you end up strapped for cash and with a warehouse full of inventory. Guess low and you risk running out of stock, losing out on sales and disappointing customers.
Even companies without perishable inventory are affected by lumpy demand. Every company that employs people has to guess how much demand they will have and staff accordingly. In a people business, when you underestimate demand, your employees burn out, morale sinks, the quality of your service suffers, and your brand is damaged. If you have too many employees, they spend time gossiping about when the layoffs will come, while your profit margin shrinks because you’re paying for people to sit on the bench.
By contrast, the subscription business model smoothes out demand so that you can plan your business effectively. Knowing within a few percentage points how many customers you will have next month helps ensure you have the right number of staff and adequate supplies. Optimizing your labor and raw materials means lowering your costs—and your blood pressure.
Your typical bricks-and-mortar flower store, for example, has to throw out between 30% and 50% of its flowers each week because they rot. At subscription-based flower provider H.Bloom, the spoilage rate is just 2% per month. Read Less