The Benefits and Drawbacks of a Membership Business Model
Membership-based models have become a popular choice for both small and large businesses with customer communities.
Dollar Shave Club, Netflix and Spotify are just three companies that have made successes with membership or subscription-based approaches.
SFG Network loosely define a membership business as "a model where your customers pay money on a recurring schedule to receive access to specific perks and services, be it in-person or online".
It may be that your business meets the criteria for being restructured and transformed with a membership-based model.
Or, you may be wanting to start a membership business from the get-go.
Before deciding, it is crucial to think about some of the benefits and drawbacks of a membership business model.
It would help if you were sure that the choice is right for you.
Benefit 1 - Predictable Recurring Revenue
According to Moon Clerk, one of the primary benefits of the membership business model is recurring revenue from selling one service to a guaranteed buyer.
If yearly membership is an option, a business owner can predict long-term revenue. The model can prevent the ebbs and flows associated with non-membership product or service sales which are fuelled by one-off purchases.
As a result, a high customer retention budget may cease to be needed due to the nature of membership or subscription 'being in the background' for a series of months or years.
Starter Story note that once a customer invests in a membership-based service, they are pretty likely to put the effort in to make the most of it. Further, if a membership business is effective with referral systems, recurring revenue can grow over time.
Benefit 2 - Scalability
Membership businesses have the potential to be scaled. Online membership businesses do not carry high overheads. Also, it is also generally less expected for a membership-based service to be the finished product.
In essence, a commitment to a Minimum Viable Product (MVP) can kickstart a membership business to be scaled.
The Membership Guys state that scaling can be successful with suitable content, the scope for additional revenue streams, the correct choice of personnel and a well-constructed community growth strategy. As businesses evolve, they have more of a chance to adjust their offering to better fit changing customer preferences.
Benefit 3 - Customer Relationships
Businesses that sell products to customers on a one-off basis may find it challenging to build relationships as they are not in regular contact.
The membership business model ensures ongoing contact with a customer for as long as they remain members or subscribers. As customer relationships improve, a business can use survey-driven feedback to adjust its service according to customer wants and needs.
A crucial part of building customer relationships is understanding each customer's Willingness to Pay (WTP).
Many membership businesses will offer flexible pricing plans to grant customers more choice. With more pricing options, it is easier to adapt to what the customer wants.
Drawback 1 - Risk of Customer Churn
Membership businesses must deal with the issue of customer churn. Cancellation of membership can occur due to many factors, including fluctuating income levels, market competition and more.
By continually improving their product and factoring in all potential reasons for customer churn, a membership business can start to anticipate this challenge.
But avoiding high cancellation rates may require some budget, especially if the primary reasons are fundamental parts of the service.
Drawback 2 - Value Maintenance
Moon Clerk state that a competitor may replace a membership business if they lose value over time compared to other options on the market.
With stagnation in service improvement, a customer may lose interest in the business. Surveying for suggestions on improvements may mitigate such a situation. But implementing those suggestions may become costly in terms of funding and logistics.
Let's use Netflix as an example relating to the subscription industry. If Netflix were not to continue to update their movie selection, customers would eventually become disinterested in their service. With no value top-ups, their online experience would feel repetitive.
For online membership businesses, developing initial value may be a complex process. And value top-ups require continual investment to account for bug fixes, UX adaptation and new online deliverables.
Drawback 3 - Uncertain Launch Revenue
Though membership businesses benefit from recurring revenue once established, income can be uncertain during a business's startup phase. The risk is common for all companies.
Riding the rollercoaster of starting a membership business requires adequate market research, a strong network, access to consultancy-style knowledge and proper infrastructure to grow a community.
Some membership businesses offer free trials or significant discounts as a market research strategy to understand what their customers crave during their startup phase.
Investing depends on your budget and willingness to take a risk.
Overall, recurring revenue, scalability and ongoing customer relationships make membership-based businesses appear an attractive prospect. You must weigh up the risks of customer churn, the need to maintain value and income uncertainty during the startup period.
But a membership business that is valuable to a particular market and that you are passionate about, may be worth pursuing.
The decision is yours!
If you are considering whether a membership is right for you, book a free consultation with a member of our team here, or ask us about our How to Build a Membership Mastermind.