368 – John Warrillow Shares Subscription Business Tips From The Automatic Customer Book

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John Warrillow

In this episode:

01:48 – The difference a recurring revenue makes
02:41 – Does your business suit a subscription model?
03:08 – The “pay to play” model
04:26 – The model for online businesses
06:09 – One simple subscription model
07:42 – Why subscriptions really work
08:57 – A hidden secret to retaining subscribers
09:30 – Who’s doing it wrong?
10:28 – How you can help by offering subscriptions
11:35 – Offering the value proposition of subscribing
13:07 – The half-pregnant approach to marketing
15:01 – Giving the ultimatum
18:00 – The real value of a recurring revenue
19:33 – How to sell a subscription model
21:25 – Do the 10x value proposition
22:50 – Calculating the appropriate subscription rate
26:26 – Should you offer lifetime memberships?
30:03 – The art of running a subscription company
31:35 – Mistakes to avoid
38:34 – Some action steps

Achieve more with your business than you thought possible

Tweetables:

People will pay to jump the queue. [Click To Tweet]
Just keep delivering. [Click To Tweet]
Make the case as to why subscribe. [Click To Tweet]
Keep the engagement to keep the subscriber. [Click To Tweet]

Transcript:

James: James Schramko here, welcome to SuperFastBusiness.com. Today, I’m having a chat with John Warrillow, who has just published a book called “The Automatic Customer: Creating a Subscription Business in Any Industry.” Welcome John.

The Automatic Customer

John: Thanks for having me.

James: I loved your last book, “Built to Sell.” The last one I saw anyway, I’m not sure how many books you have but that was such a phenomenal book in terms of package services, which was right up my alley at the time. You mentioned in this most recent book that you’d wish you’d dedicated more of that book to that subscription model. Why is that?

Built To Sell

John: You know, my day job is running something called the The Value Builder System. So we help businesses improve the value of their company, and we see thousands of businesses. Last check I think we had 14,000 businesses that we’d gone through this system.

And one of the things we found is that recurring revenue is a huge driver of the value of the company. And in “Built to Sell,” I talked about packaging a service, and productizing a service, and picking one thing… But really, recurring revenue was something I gave a bit of short shrift to, and so I figured I better write that wrong and dedicate a whole book to this notion of recurring revenue. If an acquirer is going to view your business as valuable, they’ve got to see where the revenue is going to come from when you step away.

Why you need to have a recurring revenue business
James: Right. So it’s a very powerful factor if you want to sell a business. What other reasons would there be for having recurring revenue?

John: Well I mean, it smooths out your demand flow. Obviously, you can start predicting your business a lot more carefully. If you have inventory, it allows you to really start to make sure you’ve got enough inventory, not too much inventory. It typically proves the lifetime value of a customer.

I mean I wrote about it in the book. This business called H.Bloom is fascinating. These guys do subscription-based flowers. So instead of selling flowers to the guy on the way home from work, they sell flowers to spas, and restaurants and hotels that want fresh cut flowers. And so they sell them on subscription; every 2 weeks, get fresh cut flowers on your desk. The average lifetime value of an H.Bloom subscriber is something like 4 grand. If you compare that to the average guy who walks in and buys a bouquet once or twice a year. So it improves the value of your customer tremendously.

Are there businesses not suited for subscription model?
James: Are there any businesses that you don’t think would suit the subscription model?

John: I think everybody, when they hear the subscription model, they think, “Oh. Sure, that’s for software companies. That’s for media companies.” And then they sort of stop and say, “I don’t think this could really apply to my business.” Part of the goal of the book is to say, actually, hang on a minute. You could create a subscription in virtually any business and any industry.

I’ll give you an example: 1 of the 9 subscription models I talk about in the book is called “Front of the Line.” And Front of the Line refers to the idea that people will pay to jump the queue. We pay to buy a fast pass at Disney, we pay for special access to highway lanes. We’re becoming much more comfortable with this notion of paying to play.

And so, if you’ve got customers by definition, you could create a subscription model where they pay for a kind of 911 or 999-level, concierge-level service. The software guys have nailed this; Adobe, Salesforce.com, they’ve been charging for service subscriptions for decades, long before they started selling software subscriptions especially in the case of Adobe. But you can do that for law firms, accounting firms, online companies, the gamut. As long as you have customers, that’s 1 of the 9 models you could apply.

James: Right. I like that one. So, let’s talk about a couple of the other membership models. I think we’ve established that a subscription model is a good model to have if you want to have a high value fee business, if you want to smooth out revenue, if you want to increase the lifetime customer value. So what are some of the others? Let’s pick 3 models perhaps. You’ve taught us the Front of the Line model. Let’s think about an online business because that’s where most of our audience are.

The membership website
John: Yeah. I mean the classic would be the membership website where you pay for access to special content. Obviously, your business would fall in this space. One of my favorite examples would be The Wood Whisperer, where they teach hobby woodworkers how to do woodworking, how to create your first cabinet or your first credenza, etc. It’s the videos and online communities that make those tend to work.

What I think is interesting and in particular an opportunity right now is that increasingly, we’re comfortable now paying for content online. You know, there was a time, maybe 10 years ago, where everyone thought information should be free, right? And no one was willing to pay for information online. What happened was editorial budgets got slashed, and we all realized collectively that, hey, wait a minute. Actually, it makes sense to pay for editorial.

We don’t go to restaurant and expect not to pay. We don’t go to theater and expect not to pay. It’s natural to pay for editorial. You see, the New York Times now has over a million subscribers, (WSJ) Wall Street Journal, Financial Times; all have millions of paid subscribers now. And that’s actually opening the door for these little membership websites because all of a sudden, we’re willing to pull our credit card for mission-critical information.

James: Nice. So there’s obviously a whole range of questions around the membership website, what to put in it. The biggest question I get is how much content do you have to start with and all this sort of stuff. And then there’s how you sell it. We might come back around to that. You’ve talked about the membership website. What are some of the other ones? For example, I do recurring services online with our traffic services, and I know that a friend mine does this with website development.

The Simplifier Model
John: Absolutely. It’s one of the simplest subscription models that could apply to virtually any business, and that is called The Simplifier Model. And basically, what it does is it says to a customer, “Look, you’re way too busy to keep hiring me back. We all know that I do a good job and you like the service that we provide. Let’s just set up a recurring agreement that says: Look, we’re going to do these 5 things for you every month. You can stop us at any time but we’re going to continue to do this until you do that.”

So for example, there are companies that will help you do search engine optimization. And they’ll say instead of you doing it on a project basis, they’ll say, “We’ll do all your SEO work. We’ll make sure you’re number 1 and number 2 at Google for your keywords. And we’ll do that for a year. And then at the end of the year, you could let us know if you want to continue. We’re going to assume you want to continue.” And so that’s just taking a service, in this case, search engine optimization, and making it available on a subscription basis.

Search engine marketing works the same way, website development. The difference between a transaction versus a subscription is that the customer is agreeing to continue on in perpetuity until they say stop. And that’s the key difference. Of course that means you as a provider of the services don’t need to resell it. It’s the sale that kind of keeps on giving if you won’t.

James: Yeah, that’s why I’m a fan. You sell once and you keep delivering. Just to really put a spotlight on that, the thing that I think makes it really work, as long as you keep delivering value is that it actually acquires effort for someone to stop it. Something has to happen. A lot of people have resistance to taking an action that will stop a rolling stone or that momentum as long as you keep delivering. Obviously, any product you’re selling subscription, whether it’s vitamins or websites, it should be good quality, right?

John: Absolutely. You’ll never get away with having bad quality. But once you get beyond that, there is that inertia that kicks in. One of the other things we saw in doing the research for this book is that a lot of times, people will continue to subscribe for fear of losing their data. So if you’ve got something like HubSpot, all-in-one marketing platform like InfusionSoft, you’ve got reams of data about response levels, email campaigns, response level to social media campaigns. Sure you could go from HubSpot and cancel and go to InfusionSoft. But the question becomes, “What happens to all my data?” You could leave Aweber and go to ConstantContact as an email provider, sure, great. But what happens to all my data?

A little secret in retaining subscribers
One of the little hidden secrets of retaining subscribers is to make sure that you say, “Look, we’re going to keep your data here forever provided you continue to subscribe.”

James: So you’re talking about what might be called “pain of disconnect.”

John: Yeah. I think that’s exactly right.

James: Yeah. So if my Internet connection stopped, that would be annoying. And I’d do whatever it takes to get it back on quickly. That’s the kind of thing you want. It’s where people will miss it tremendously if it’s not there.

John: Yeah. And you know who’s doing a really terrible job at this, is Microsoft. Microsoft Office 365 is their big bold step into the subscription economy. But they’re half pregnant. They’re continuing to sell it mostly through their partners. And in an effort not to alienate their partner community, they’re not directly creating a relationship with their subscribers and they’re asking their partners in many cases to renew the Office 365 relationship at the renewal date, and it’s just a mess because once you subscribe to Office 365 and you’re running PowerPoint, Microsoft Word, Excel, like they key kind of suite most people run on, you don’t want to have to pick up the phone and call someone and say, “Oh yes, I’d like to re-subscribe or continue to subscribe.”

If it’s a mission-critical software like that, you just want them to know that “Hey listen, I’ll let you know if I don’t want to subscribe. But don’t interrupt my service.” Microsoft right now is really fumbling the ball trying to figure that out.

Showing the benefits of a subscription business
James: So you could actually help someone more by having them go into a recurring plan than to have to stop-start-stop-start. Where we might have a fear of asking someone to subscribe perhaps, and we have to think of it in ways that it’s actually more helpful to the customer to have this seamless delivery of service on the agreement.

John: You bet. I think that’s right. I think you need to think about what are the benefits. One of the benefits of Microsoft Office 365, to come back to them, one of the things I think they’re doing a good job of, is downloading patches and security patches immediately. So if you subscribed to Office 365 and they find out about a virus, they’ve got a patch in hours. Whereas, if you are doing an old school and you’re getting CDs and you’re loading them up on your hard drive, clearly those are outdated and you’re going to have to rely on third party virus protection software. So that’s part of the value proposition, getting real time updates, patches and so forth.

Another example of that, to go back to an earlier point James, is H.Bloom as an example. The flower guys that do flowers on subscription. One of the benefits of subscribing to flowers is that H.Bloom knows who you are, knows what flowers you like, and knows months in advance of what your order is. That enables H.Bloom to actually buy directly from farmers, not how flower stores typically buy, which is through wholesalers, and distributors and so forth.

And so, when H.Bloom buys flowers, they buy directly from the farmer, with 2 days, they’re at their subscriber’s doorstep. The net result is that the flowers are 2 weeks fresher and last 2 weeks longer for the subscriber. And so when H.Bloom goes out and talks about the value proposition of subscribing, that’s a big part of their sales pitch. It’s “Hey, you get flowers 2 weeks faster, which means they last 2 weeks longer.” And if you’re a spa, or a restaurant, or a hotel, that’s money in your wallet, not having to replenish fresh cut flowers more frequently. So I think you’ve hit on a really good point; selling a subscription, you’ve got to make the case as to why subscribe, right?

James: Yeah. I’m really relating to what you’re talking about because when we were really growing with our SEO service, we had trigger points whenever we took on X number of customers for particular recurring packages that would start an HR recruitment process. And when you’re hiring people, that’s one thing you don’t want to mess around with. You want to be able to make sure you can provide sustained employment. But we knew that the customer would stay X number of months, and that we would need that manpower.

The challenge of changing from one-time to subscription products
Now, I want to go back to another comment you said before, which was the half-pregnant approach to marketing. Here’s something I really want to dig in on. I’ve seen people when they change from selling one-time products to subscription have a lot of hesitation about not selling a front end product. It’s like they’ve gone from having the customer be able to nibble away at low end products because most Internet marketing educators are talking about the ascension model. They send you a free report to a small product, to a back end recurring, to a high ticket item.

And I teach the Chocolate Wheel, which is “Hey, someone might want to come straight to your high level marketing and not need to go through the free report, the small product, the recurring things.” So I’ve made all of my products accessible. There was this one point where I actually cut off all my front end products, which significantly streamlined our marketing. It made everything much easier. We just put it all into one pot and had this huge front end of blog posts and podcasts feeding the membership.

So really, it was now what my old boss used to call them; forgive me if it’s too crass, he used to say, “Piss or get off the pot.” You’re either in or you’re out. And customers now had this decision whether they wanted to be part of it or not, but there was no easy option because I found, sometimes it was quite hard to convert people from the low products to a subscription back end if you gave them a stepping stone. I’d love to know if you’ve had some experiences around this sort of challenge that people go through.

Giving the ultimatum
John: Yeah, absolutely. And I think you’ve nailed it really well. I mean you can have that graduated free offer, very low cost offer, subscription offer, high end offer; and everyone, from Tony Robbins to all the big content marketers have done that. I think that’s a successful model. But equally successful as well is what I would call giving people the ultimatum, which is, “Look, we believe in our subscription offer, and we think we provide tremendous opportunities for the people who subscribe. And therefore, you can’t just nibble away at the edges. You can’t taste test it. You’re either in or you’re out.”

So that takes enormous courage. You obviously got to have a tremendous value proposition. But what it really needs I think for it to give people the ultimatum is some level of exclusivity. So you can legitimately look the eye of the customer, either through the computer or directly and say, “Look, we only have 9 spots available. And that’s why it’s the ultimatum. It’s not always going to be available. We’re only doing this for this group and this city for this limited amount of time.” So I think you really need to have some scarcity associated with those sorts of offers where you have an ultimatum. I think that bolsters your value proposition tremendously.

James: I think deadlines and scarcity are wonderful tools. I found also coupons can work particularly well at the right part of a sales funnel. One little segue we had was to offer people a bonus and send it if they purchased an affiliate product through us. And inside their bonus gift was a recommendation to join the membership with a coupon that could be redeemed. That was a nice little way to segue people through.

But it does take a lot of courage to turn off a productive front end to let people in. But my product philosophy was that I’d rather be able to coach people through a product they’re consuming rather than just to buy it, download it into their hard drive and never look at it again, which is a very common behavior of online education. People feel when they’ve purchased something that they’ve got the benefit of it straight away. It’s like buying a Kindle and never reading it.

And I wanted to be able to help them. I wanted to be able to answer their questions and encourage them to take action and make progress through that. So it was almost a creative requirement of mine to help people get better results for themselves, and almost to make it not so easy on them. It’s like instead of doing 3 little skipping exercises every morning, I’d send them to bootcamp but they get much better results.

John: Right. Yeah absolutely. Maybe it’s my personality or whatever, but I feel like I’ve got to be building something. I can’t just be running on the hamster wheel of “Hey, we’ve got this new product and we’re going to get a hundred people to buy it, and then we’ve got this other product and we’re going to get 10 of the 100 to buy that,” but all the time, you’re just spinning your wheels trying to get to the next launch, the next product launch, the next exciting thing, the next shiny ball, so to speak.

The real value of a recurring revenue
And 5 years goes by and maybe you’ve built yourself a decent lifestyle, but you haven’t built any equity, you haven’t built anything you can sell. You’re just one step away from, you’ve got to continue to reinvent yourself. Whereas if you’ve built 500 or 1,000 to 2,000 subscribers who are paying you a regular fee for access to your information, that’s a business that you could bring in a manager to run, you could sell it, you could partner with someone and take half the equity off the table.

I mean there’s real value in that recurring revenue. But if all you’re just doing is you’re coming up with the next big product and having a launch and getting a bunch of people to buy it, you may spike your bank account but it does nothing to create any long-term equity.

James: This is such a topical thing so it’s worth digging in on a little bit because in our market, this launch syndrome, it’s just the annual relaunch of the big major products. But there’s a lot of fatigue involved. It’s the energy from the person putting it together, there’s a lot of stress on the market, there’s huge refunds, there’s affiliate payouts, competitions, inboxes get exploded. It’s no way to run a business, and I’m totally with you. I love having a recurring net roll coming in without the need to have affiliates, or launches, or the song and the dance. It just keeps coming in and the services in particular can be management run. And if you have a nice front to it, say content marketing, which is my choice, it could be a very nice railway track to roll that engine down smooth and easy, no pain.

So let’s talk just a little more on selling a subscription model. Let’s say we’ve listened to this. We think, “Oh John, this is fantastic. I want to smooth out my revenue. I want to hire lifetime value. I’m going to commit to helping people more and letting them continue to get my fantastic service. They’re ready to pay t0 play.” How do I get about selling this model? Is it just a traditional sales page, is it piggybacking something else so there’s some little dials or buttons we should push to make it work easier?

Selling a subscription model
John: Yeah. Think of the analogy of a marriage. It’s a transaction, you’re going to an event, buying it, a special report on XYZ. It’s like a one-night stand. You go to the bar, you both have a good time, and there’s no commitment after the fact, right? Whereas a subscription, you are having a romantic relationship and you become engaged and ultimately married to that company, meaning you give up a little bit of freedom, but you also hope that you get much more in return for that; a loyal committed relationship etc., the benefits of that.

And so, with a subscription, you’re selling a much longer term relationship. I think it’s worth going with that philosophy. The other point I would make philosophically is that nobody’s going to subscribe to your service to save 10%. If they can look at your product lineup and say, “OK, I could go to his event for a thousand bucks, I could buy the white paper for a hundred bucks, well thats 1,100 bucks. Or I could subscribe and it’s going to cost me 900 and basically I get the same stuff.” They’re never going to subscribe. They’re always going to choose freedom over the subscription if it’s just to save 10% or 15%.

What I would encourage you to think about is to try to develop a value proposition that is 10x better than the transaction. Good example of that is guys over in California called the New Masters Academy, and what they they do is they specialize in helping people learn how to do art, watercolor painting, or pottery, whatever art you’re into. They charge 30 bucks a month for a subscription and you can log in and then download as many tutorials as you want.

The competitive set for New Masters Academy, if you want to learn how to become a pottery expert, you have to go to a community college and spend 600 or 800 bucks to learn the same skills you can learn at New Masters for $30 a month.

That starts to look like a 10x value proposition. I think you’re trying to find a way to make a case that it’s literally 10 times more beneficial to subscribe than it would be to buy the same stuff on a one-off basis.

James: So in a simple way of looking at it might be to think of a monthly subscription almost like a part payment plan on what the annual total might look like.

John: You could certainly do that, yeah. You could certainly do that. Again, what you want to make the case is it’s so much more valuable. When we think about Netflix, it’s so much more content and value than downloading individual TV shows or movies off of iTunes. Again, there’s this 10x value proposition.

James: Yeah. So how do you calculate the difference between a one-time product? Let’s say we’re an info marketer and we sell a $1,000 thud factor box one-time hit. How do we price that as a recurring subscription? Because I had a question about this on my blog, which kind of made me smile. I was publishing information about the recurring business model, because I was really a believer in it. The lady mentioned that she sells 3 out of 4 people for a $3900 program or a $1997 program. She can do 1 to 3 sales an hour for her 6-figure business, and she says now if I do a $1995 per month subscription and have to provide new content each month to them, calculating the attrition rate, she needs a heck a lot of subscribers. I said a $3900 program customer is not a $1995 per month customer. It’s probably a $399 or $799 customer. Now how do you calculate the appropriate monthly subscription if you want to convert from one-time to subscription?

Calculating the appropriate monthly subscription rate
John: Yeah, it’s a great question. I think what you want to do is try to project your churn rate, which will allow you to establish your lifetime value of a customer. So one quick piece of Math that’s very easy for people to figure out is if you’re trying to figure out how long the average customer is going to stay as a subscriber, you could take 1 and divide it by your churn rate, and you’ll get the number of months they stay.

You could start by estimating your churn rate. Your churn is going to be directly related to how good your content is and your entire business model. And to some extent, you’ve got to get some experience in the market, you’ve got to get some subscribers to see how long they stay with you. Churn rates for mission-critical software might be, I mean mission-critical like Office 365 or Salesforce.com, it might be less than 5% a year. Churn rates on online magazines, membership websites could be as high as 60% or 65% annually. And again, that’s going to be driven by how important your information is.

A good example of the membership website model being done right, which is called contractorselling.com, and they teach best practices for plumbers, electricians and contractors on how to do sales marketing and how to build their business. When I said mission-critical information, that’s not just “nice to have” information, that’s information that plumbers, electricians need in order to do a better job. Their churn rate is going to be lower than somebody who’s publishing content about mountain biking excursions in New Zealand. That’s a flight to fancy. It’s something that’s easy to drop in a subscription, whereas what you’re really trying to do is get to be mission-critical.

But there are no short answers, I don’t have a specific way to do the math, it’s not an easy math calculation, but you’ve got to start experimenting I think. Knowing that sure, your 3 grand is a nice little revenue pop, but you basically just got a job. You’re not creating any equity in your business if you’re just selling these products. It may be better to stay without a subscription if all you want to do is create this one-off revenue hits. But if you want to build a business, that’s where you’ve got to have recurring revenue from subscribers in my opinion.

James: Do you have a viewpoint on lifetime subscriptions?

Lifetime subscriptions
John: Meaning you pay 5 grand to be a subscriber for life?

James: Yeah. It’s pretty popular in my industry again, where someone will pay, say $1,000 or $2,000 for a lifetime subscription. I’ll also say that I don’t get it because they’re creating a very long tail. They would have to extrapolate out to cater for at least 2 years worth of service fulfillment. And they’re sort of counting that as a one month income, but I don’t think that’s accurate. I think they’re not amortizing their future commitment, and the more they sell, the more expectation and capacity that they’re committing in the future, and I think it will catch up on them. I’ve also noticed they could have a 40% or 50% refund rate, which seems horrifically high.

John: Yeah. I tend to agree with you. I don’t really get lifetime subscriptions. Dynamic businesses, which I think most of the people listening have, fast growth dynamic businesses, they’re going to change so much that it seems a bit misguided to offer a lifetime subscription. Who knows what your business is going to look like 2 years from now? I mean Netflix is an example. We’re still sending CDs, movies in an envelope to subscribers 5 or 6 years ago. Now, their business is totally different. I just don’t really get the lifetime subscription.

James: Blockbuster’s business is really different.

John: Right. The other piece of what I think you’re missing if you offer someone a lifetime subscription is one of the glorious little benefits of getting people to subscribe, is you all of a sudden have permission to communicate with them. You have a regular monthly reason to communicate with them, which guess what, gives you a regular monthly opportunity to talk to them about the other things that you do, with the other subscriptions that you sell.

James: Well, one person who I spoke to, who was an advocate of lifetime subscriptions said that that gives you permission to communicate with them forever because they’re always a member, and they felt that that was a positive for a lifetime subscription. However, I’d rather be just communicating with the people who are prepared to pay to play and who value the service. So I don’t want to be communicating with everyone.

Even if you go to anyone’s email list, a huge section of it will probably be dead, where they’re not responsive or they’ve opted out. I know Facebook last week removed a ton of likes from dead Facebook accounts, and it just sort of pulled back the veil on what was really going on with active users.

John: In the book we talked about recency and frequency, and the idea that the people who are going to buy your subscription are the people that have bought most recently from you, and most frequently from you. Those are always going to be the people that are going to buy your subscription first. So if you’ve got someone on your email list that opted in 7 years ago and has some Hotmail account which hasn’t sent emails… probably not a good account anymore. But even if it is, the chances of them buying from you is much lower than someone who has, for example, opted in the last 3 months. So, recency-frequency.

James: Yeah, I see it. Things like open rates on the weekly news, emails and stuff, it’s just off the Richter scale, and the welcome and onboarding sequence’s very, very high, when someone’s paid to belong, they’re really interested in getting information.

The importance of onboarding
John: You mentioned onboarding, and I think that is one of the real, what should I say? The art of running a subscription company is how do you get… Because I think you know that in the first 90 days, you have the opportunity to really affect change on your subscribers, so if they subscribe, you’ve got that 90-day window where there’s that halo effect with you and you have the opportunity to define how they think of you in their minds. But once that 90-day window closes, whatever they think of you, however they’re using your service is likely how they will use it forever.

And so we know that getting things sticky, subscriptions sticky is getting them to use lots of different things within your subscription offering. But you’ve got that very short 90-day window to do it. And so sequencing of emails and videos and webinars and face-to-face and all the things that you would try to choreograph to make the ideal, most engaged subscriber.

I mean, there are boardrooms full of people that just do onboarding work, at companies like Amazon and Hubspot and Apple and all these huge, subscription offerings, because they know that it’s so, so important to your ultimate lifetime value as a subscriber.

James: Yeah, I agree with you, having now, I think, seventh year of subscription membership. Onboarding is a big one, and weekly news updates, bringing people back in, finding topics that are of interest. If you can keep the engagement, then you keep the subscriber.

So let’s just cover a couple of mistakes, and then we’ll wrap up with some action steps. What do you see people doing horribly wrong when they approach the subscription model?

Turn off the other stuff
John: Well, I think the big one is that sense of being half pregnant. In other words, they run a subscription model, they try to launch it, but they keep their other business sort of going. And I feel passionately about this one because I made this mistake myself. My last company I ran was a market research company where we provided market research to big companies who wanted to understand the SME market.

And so when we first launched the subscription offering, we realized it was similar to what you might get from a Yankee group or a Gartner or IDC. We said, look, we’re going to package up our research, we’re going to publish these reports, and then we’re going to give you these reports and you could subscribe to that.

And our best customers for the most part gave us a meeting, we went to see them. And these would be people like Telstra in Australia, British Telecom in the UK, Verizon in the United States, these very large companies. So we would go in, and talk to them, and they would look politely and nod as we described it, and then they would turn around in the same meeting and say, “Well, that’s nice, we’ll think about that. But now you’re here in the boardroom, can you tell us about our latest new custom project that we want to get done?”

And they would completely ignore the subscription offering, because we continued to offer these two different models simultaneously. And we got to maybe half a dozen subscribers before I had to turn off the subscription. There just wasn’t enough uptake for us to offer both models. And so I went back, tail between my legs, spent probably two years running the custom market research company which was a brutal business model to run, because it was one of those businesses you start every month fresh, you got no recurring revenue, etc.

And then the second time around, when we tried to run the subscription offering, we did one thing differently, and it made all the difference. And the different thing that we did was we turned off the custom consulting, and we said, we believe so strongly in this business model, Telstra, British telecom, Verizon, that the only way we’re going to do business going forward is on subscription.

Well, all of a sudden, these companies that aren’t used to having people tell them what to do, they all of a sudden perched up on the end of their chair and wanted to know, well, what’s in the subscription? If you’re willing to bet our relationship on this, how good is the subscription? How many people subscribe, where do I get the research? How do I download? All the questions changed, so they were actually engaged.

We got most of our companies to subscribe to what we did, we got lots more subscribers to opt in, and that company was ultimately acquired by a public company in 2008, and again I think the big change was just simply that we actually had the courage to turn off the other stuff.

James: And I imagine their question list was a pretty good checklist for you on what to put in the membership as deliverables.

John: You bet. I mean, the customers are going to help you define it. You go out to the customers with an 80% value proposition, but the last 20% is something you’re customer’s going to tell you is important to them.

James: Well, we used to sell one thing one time and customers used to say, can we just get that on a subscription so we don’t have to keep logging in and buying it? That’s the ultimate customer demand.

So give me one more mistake, and then we’ll close out with some actions.

John: Yeah, sure. So one more mistake: taking subscribers for granted, I think, would be another one where you get a subscriber and you think, OK, the 90-day period is over, we’re going to just kind of let it ride and assume they’re happy. And I think, again, it’s a little bit like a marriage. You’ve got to continue to inject a degree of spontaneity, you’ve got to have date nights, you’ve got to continue to sort of show them that you care for them.

So a good example of that is the guys over at BarkBox. BarkBox, if you don’t know, is a subscription based company where they send you, every 30 days, a new box full of treats for your dog. So people are wildly crazy about their dog subscribe and get this box of treats. And what they do, is they have three head counts. Three people that work in their New York offices, and all they do every day is drop happiness bombs on their customers.

And a happiness bomb is where they scour their customers’ blogs and lists and look for reasons to surprise them. Looking for the birthdays of the dog, looking for the birthdays of the subscribers. One example that rings a bell was that there were two dogs that this one owner had and one of the dogs died. It was an old dog, and so the other one was severely depressed and moping around the house. And so BarkBox sent them a special box, unrelated to their subscription, and it was a happiness bomb. It was a cheer-me-up example.

And so thinking of ways to surprise your customers. Amazon is doing this, they’ve got a patent on something they call, “preemptive shipping,” I think, is what they call it, where they look at your behavior, and they think about it and imagine what you might like to buy next. And they actually in some cases put it on the truck to give you that product, with hopes that you’re going to actually buy it. So they’re trying to think through in advance.

James: Yeah, that’s incredible. They’re a very good company too, I remember they delivered me a sackful of copywriting books and it got lost in shipping and then they reshipped, and then the original one turned up about 8 weeks later, and they just said keep it. It creates a lot of goodwill.

I know what you mean about not taking them for granted. I still go over to London and out to local meetups in Sydney and travel to the U.S.A. to meet members of my online community offline and to interact with them. And we run an annual event each year, just as an appreciation and like the master get-together, and adding an offline element to an online business can be huge. It’s like when someone joins my highest level program called SilverCircle, they get a little offline package with some things inside it as a high-touch onboarding item that bonds as fast as possible.

John: That’s fantastic.

James: John, been great chatting, some really good insights, a few little extra bits and pieces that build on what you’ve put in that marvelous book. I highly recommend “The Automatic Customer.” In fact, I also highly recommend “Built to Sell,” it’s still a fantastic book, especially if you’re doing any kind of service. “Built to Sell” will save your life. John Warrillow, a super expert at all of these stuff, you’ve got a website called valuebuildersystem.com, which is what you’re doing when you’re not writing books, right?

John: That’s right.

James: Thank you for coming along and sharing these ideas.

John: Thank you James, it was a pleasure.

Action steps
James: So the action step, this is how we close out the show, is to have a look at your business and see what you can pull from this show and some of the highlights were the idea between not being half pregnant. If you could commit to having a subscription model, then you might enjoy a smoother revenue, high lifetime customer. Probably you’ll find it’s easier for you to run a subscription business. If you don’t take your customers for granted, if you have a great onboarding sequence, and if you start calculating your churn rate, you’ll be able to figure out how long people are going to stay.

Make sure that people will miss you if they’re no longer subscribed, and leave it up to them to stop the subscription. And in that case, you should have a nice recurring subscription business.

I’d love it if you could post your comments, and love to take some of those questions.

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