How to make income automatic by building a subscription business

One of the biggest faults with many creative businesses is that a client does a project with you and then they’re done. That single purchase was all they needed — you’ve solved their most pressing problems and they’re going to run with the solution.

Moving from one-off projects to recurring revenue is the dream of almost every business owner. The Automatic Customer gives you some tools to achieve this dream.

Let’s start with my biggest issue with the book, which is its focus on the ‘sellability’ of a business, and how recurring revenue increases the resale value of your business. The beginning of the book is littered with quotes like this:

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.

and

it has been my experience that financial buyers are really buying only one thing when they purchase a company: a future stream of profits

I don’t disagree with the statements in any way, I just find it sad that so much of the online world is only focused on the exit from the business they’re building. Much more appealing to me is the mindset of building a lasting business that you operate and get fulfillment from. That seems like success to me, and I’m not the only one.

Success, surely, needn’t be measured only by the hockey stick or the exit sign. We can choose to remain small. We can choose to devote ourselves to something that serves and respects and delights people. We can choose to do our small things in small ways, which over a period of time can build upon themselves. In the spirit of omotenashi we can find meaning, pride, and fulfillment in what we do, continually and selflessly. Surely, that is success too. – Natasha Lampard1

Putting that aside, John Warrilow wrote The Automatic Customer to teach you how to build a subscription business where customers pay you for ongoing services, or access, or something. He’s tried and failed to build one, and then built a number of successful businesses that produce recurring revenue, so he does know the mechanics of the industry.

He divides the book up into three main sections. In Section One we talk about why subscribers are better than one-off customers. Section Two walks us through nine types of subscription models that Warrilow identifies as common. The final section is intended to give the reader a blueprint for building a subscription-based business.

Part 1: Subscribers are better than customers

If you’re like most business owners, your largest asset is not your house or a portfolio of stocks. Your wealth is tied up in your business and how it is valued by potential buyers.

While much of this section is punctuated with quotes like this about how valuable your business is to sell if it’s a subscription business, or how valuable data on users is and how much of it a subscription business has, it’s not only about those two things.

Warrilow spends a decent amount of time talking about the hurdles you may encounter when moving to a subscription business. Some of them come from yourself if you don’t commit 100% to subscriptions but keep the option of one-off projects on the table. Most clients are going to stick with the way they’ve been using your services and stick with one-off projects, which will mean the subscription doesn’t get the traction you intended and you’ll count it as a failure.

A second big hurdle will come from your employees. Many of them have worked in your field already and have ideas about how the business should run. Usually these ideas are ‘traditional’ and conform to the way things have always been done.

You may find the move to a subscription model weeds out the employees who are more loyal to your industry than to your company. While the sorting-out process can be painful in the short term, wouldn’t your company be better off without these employees in the long run?

Innovation is hard, and not everyone will be around to stick with you through it. Take the pain now and cut those that don’t fit with the new model, just like you’re going to cut out clients that don’t want to convert to your new way of doing business.

Part 2: The Nine Subscription Business Models

While this is a fairly decent sized list of possible subscription methods, Warrilow ends the section by admitting that there may be other models he’s not familiar with. If you’re looking at a subscription business, don’t just get stuck with the models provided — think hard about what fits your business and your customers.

Let’s look at the models Warrilow presents.

Model 1: Membership Website

Membership websites are fairly common now. I’ve built them for many clients. If you want to build a membership site you need to ask yourself:  what do you know that no one else does? Or maybe, what do you do better than others?

Now build a site to teach others your method of doing those things.

Many people online will say that ‘information wants to be free’ to which Warrilow has a challenge:

The challenge with making information free is that if you take away the economic incentive to sell it, the quality of the content gets really bad.

While there is much poor quality content online, I don’t think that just because content doesn’t have payment directly linked to it, it’s bad by default. Warrilow is pushing the limits here to make his point. There is lots of great free content online. You’re reading this for free and I’d like to think that it’s content you’ll find useful. In fact 90% of the content I put out is free and I put as much work into that free content as I do the paid content.

One hurdle that many membership websites have is that they can’t get the traction they need to become really profitable. Most often this seems to be a lack of a niche.

The most financially successful membership websites tend to focus on helping business owners master a specific industry or skill.

Warrilow agrees with me, you need a niche and you need to teach a specific skill or focus on a specific industry. You can’t just be the go-to site for everyone unless you want to fail.

Model 2: All-you-can-eat library model

This model is best seen in services like Apple Music, Spotify, or Lynda. Here you pay your monthly fee and then you get access to all the content you can consume in the month.

The biggest hurdle here is to get that big library of content. It’s unlikely you can create a new music service currently because you’d have to make contracts with the music industry to get access to their content.

For starting services you can look at a revenue split with the instructors. Offer them 50 percent, or 60 percent, or whatever percent you want, of a subscription. Or offer them payment based on how many plays their content gets. Once you’ve got a critical mass of subscribers and income you can look at purchasing the content for a flat rate up front and then owning it.

A second big issue is that you need to keep generating new content for your subscribers. Music sites can do that as music artists keep producing music. Training sites that do general software training like Lynda can keep updating courses as the companies that build the software update the software. If you can’t keep delivering great content then you’re going to lose the interest of your long-term subscribers and they’ll drop off.

Model 3: Private Club

Private Club memberships are seen in exclusive golf clubs or things like The Genius Network. For your monthly or yearly fee you get access to exclusive things that others don’t.

With the Genius Network you get to rub shoulders with many high-end consultants like Tony Robbins or Dan Sullivan because they’re members of the group as well. You get to call them peers in many ways.

The hurdle here is to become the place that THE people everyone wants to rub shoulders with. How do you get some of those people in to start before you’ve built a reputation?

Another key to the private club is to make it exclusive in that you limit membership. Maybe you only allow 10 people into the club ever, so new membership only opens up if someone leaves. The fact that it’s exclusive makes it more desirable and thus more valuable to prospects.

Model 4: Front-of-the-line model

We see this front-of-the-line model in priority support which lets you jump the line and get faster service. A hard part here is that it’s usually not a large fee you can charge which means you need to have lots of customers opt into the front of the line for it to be profitable for your business.

Model 5: The Consumables Model

Ugh — who likes shopping for razors? You walk up to an enclosed case and then have to find someone to unlock it for you so you can shave. Businesses like Harry’s or Dollar Shave Club have taken this frustrating process and turned it on its head with their shave subscriptions. Amazon has done a similar thing with their diaper subscriptions. No more running out late at night when you realize you’ve used your last diaper because Amazon sent you a new box before you needed it.

A challenge here is to be different than the big players like Amazon or Walmart. They can always beat you on price and speed of delivery, so you need to rely on branding your business. Harry’s has done this as they brand themselves as the highest quality razor, since they bought the factory that’s been making blades since 1920.

Their brand is better blades for less money because they own the process. If you can’t win on branding, then don’t look at this model.

Model 6: The Surprise Box

This subscription model involves surprising your customer with awesome goodies that fit their profile. Companies like Bark Box do it well. They provide you with neat items for your dog every month.

Making money here can be in the form of the subscription itself, or you could provide sample-sized items and then get your subscribers to ‘upgrade’ their purchase by getting a full-sized version from you.

Model 7: The Simplifier Model

For a long time I lived in a set of townhouses where we shared some of the expenses of the town house. One of the recurring things that came up was the payment to the lawn cutting company. Some of the people didn’t want to pay them and wanted to take on the cutting of their lawns. The big issue was that no one was willing to take on cutting the communal sections of the property so we never cut the expense, instead choosing the convenience of having someone else cut the lawn.

This is a great example of the simplifier model — the lawn company took a job off my plate. For a bit extra they fertilized and aerated the lawns as well. We purchased a total lawn care package and didn’t need to worry about it again.

Other companies may take care of the interior of your house including the light bulbs, or regular cleaning.

Companies involved in the Simplifier Model take mundane tasks that you’d have to tackle and do them for you so you can focus on more ‘interesting’ stuff.

Model 8: The Network Model

The most prevalent network model is our cellular phones. We pay for access to the network that phone companies have put together. This is different than the private club in that as more people join the membership becomes more useful.

Companies like WhatsApp with it’s $1 per year fee show that the critical mass can generate huge revenues, in their case a big exit as Facebook purchased the company.

Car sharing services or Uber are also in this same category. The more cars available due to more users the more useful it becomes to you.

Model 9: Peace-of-Mind Model

As an outdoor enthusiast I’ve often looked at products like The Spot as a great peace-of-mind subscription service. By paying yearly for this device I can head into the back country solo with confidence that I can get an emergency signal out if something comes up.

There are businesses that provide this for tracking your pets, your keys, and many other things. With this model you’ll get what’s called ‘float’ which is the money left over because most people aren’t going to use the service lots, and then you get the money while doing little real work for it. All they paid for was the promise that if they needed it they could use your service.

Part 3: Building Your Subscription Business

While a subscription business sounds like a golden money-making goose, it’s far from easy to build one. Many startups encounter the slow ramp of death, which means they aren’t really profitable until month 12 when the initial costs of sales and onboarding new users have been paid and they are positive for members that stay.

The goals with your business should be to reduce the costs of sales, increase the number of users that have a great onboarding process, and keep them around for a while. The thing is, that while you may start with a ‘high touch’ onboarding process you can’t keep that up as you grow.

Consider the scale-ramifications of on-boarding 1000 new customers a month. In that case it’s likely that any given server issue can affect a customer who has only been with us for 30-60 days. Thus the issue causes a “bad first impression,” which is harder to address than a customer who has been with us for three years and therefore has built up a “bank account of patience.” – Jason Cohen in The Automatic Customer

By focusing on their onboarding process Ghost was able to increase their conversions by 1000%, which is nothing short of amazing.

In addition to working to impress upon you how important it is to focus on onboarding, Warrilow gives you a bunch of formulas that subscription businesses use to measure their success. Get ready for acronyms like CAC (Cost to Acquire) and LTV (Lifetime Value). To me the talk of formulas was the least clear part of the book, and I’ve read about these metrics more than once.

The author doesn’t just stop at giving you formula though, he discusses ways to get the numbers moving in the direction you want. I do think that he falls far short of giving you a ‘blueprint’ to build a successful subscription business though.

He misses much about marketing, or developing your idea and finding the niche it fits in favour of ‘smart sounding’ formula. Despite these missing pieces Warrilow does bring up many valid concerns that subscription businesses need to watch for as they grow.

You’ll need to watch for subscription fatigue in your customers. One can only pay for so many things monthly before they look at the bill and realize it’s crazy expensive and look for things to cut. Then you better hope you’re not the subscription they use the least because you’re going to get cut. In fact, that’s the biggest hurdle to overcome as you build the business, making sure that your subscribers are making proper use of your service so they find it valuable and keep paying for it.

One of the biggest reasons people stop subscribing to any service, whether a website like DanceStudioOwner.com or an investment club like TIGER 21, is the perception that they are paying for something they are not using.

Therefore, your biggest competitor for your subscription business is not the rival service; it is your customer’s inertia in not using your service.

Some key ideas I’ve used with my customers as I build membership sites is to watch for users that haven’t interacted with the site content and then email them with items that are similar to those they’ve been interested in before. By getting them to re-engage as they drop off we were able to increase the Lifetime Value (LTV) of customers.

While there are a few examples like the one I just provided, again I feel that Warrilow fell far short of his ‘blueprint’ in this regard.

Recommendation

As always, the final question with any review is, should you read it? Since this is a quick read then I’m going to say…maybe. If you can cite a bunch of the standard formulas used in subscription businesses then you’re likely to get little new information from this book.

If you’re new to the subscription and SaaS (Software as a Service) space then The Automatic Customer provides a broad overview of the things that you should be concerned with. It doesn’t dive deep into some crucial areas so you’ll have more research to do, but it will put you on firm footing as you take further steps to build your business.

Get The Automatic Customer on Amazon

  1. Lampard, N. (2016, September 01). An Exit Strategy. Offscreen, (15), 11-11. ↩︎

photo credit: clement127 cc

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