Optimizing Your Membership Model
One useful equation and six features you should consider if you want to build stronger retention, loyalty and referrals.
With any membership model the deadliest issue is ‘the leaky bucket’. The leaky bucket is caused when churn is greater than new acquisition. A good (or bad) barometer to watch out for is if monthly churn is greater than 10%.
Studying membership models that I have developed, particularly Nike Adventure Club, and those of colleagues, peers and mentors, there is an equation that seems to consistently describe how best to avoid the leaky bucket and achieve strong retention. Here it is:
R = FA + EP + FS + S&D
Where:
R — Retention
FA — Focused Acquisition
EP — Effective Product
FS — Frictionless Service
S&D — Surprise & Delight
Let’s take a deeper look at each variable.
Retention is measured in two main ways: 1) Monthly churn and 2) Decay rates. Ideally, both should be measured by cohorts and usually, for a recurring revenue business model monthly payment cohorts are most appropriate.
Monthly churn is useful to give you an immediate warning sign of retention issues with your membership model, but it is only by looking at the long-term decay rate graphs that you can see if you have product market fit.
An example of a monthly cohort decay rate graph is shown below.
What the graph shows is an immediate drop off in payment for all cohorts in month 1, and then again in month 2 but at a lower rate, and then leveling off in later months. That leveling off is critical to any membership model, since it shows that there is some long-term stickiness. What’s good to see is that each of the later cohorts are dropping off at lower rates and leveling out higher than the previous cohort. This is ideal. The goal is to continually optimize the model to improve stickiness and retention. Let’s look at the strategies to do just that.
Focused Acquisition is one of the most controversial of our retention strategies. The reason is that you may have to ask your marketing team to NOT target some potential audiences, and to potentially PAY MORE for audiences that you believe are likely to stay longer in your membership model. But how much is too much in terms of cost per acquisition? Enter the key 1:3 ratio.
At Nike Adventure Club, we used a variety of paid media sources to recruit parents to our kids’ shoe subscription, one of which was Groupon. While Groupon was a cheap and effective way of ‘juicing the numbers’ of parents acquired, those parents didn’t stick beyond the first month. Why? Because Groupon members are bargain hunters. Bargain hunters, by nature, are restless deal seekers. What we found worked better was performance marketing that targeted and recruited ‘convenience moms’. While harder and more expensive to recruit, this strategy led to stickier relationships and greater lifetime value.
Effective Product may seem to be the ‘no-brainer’ in our equation, but validation must be made to justify that our product continuously and consistently solves the pain-point of our audience. The point here is that in addition to continually optimizing the membership model, you must also continually optimize your core product to meet the needs of the customer.
In building or evolving your relationship-based business I recommend setting up feedback loops with your customers to seek out their direct feedback on product satisfaction. One easy method to do that is surveying for NPS or Net Promoter Score (Delighted is a good option) and adding open answer fields requesting details on why the respondents gave the score they did. We used to review the NPS rating and the open answers on a bi-weekly basis and then developed product improvement sprints to make changes accordingly. Obviously, some product improvements can happen quickly, while others need more effort. So how do you prioritize? Using a 2x2 grid is an excellent way to do this.
Frictionless Service is the more traditional bedrock of an excellent relationship-based business. One of the key tenets of memberships and subscriptions is that they bring additional convenience to customers — free and faster shipping being an obvious example.
A rule of thumb I recommend thinking about in terms of your business’ service offering is to take the number of people and resources dedicated to acquisition and multiply by 5 in relation to customer service, customer satisfaction and customer success. So if you have 1 excellent performance marketing specialist, you should have 5 customer service personnel. Improper customer service ratios are by far the most common issue we see at UNBRKBLE for subscription businesses struggling with retention.
Surprise & Delight is the variable in our equation of retention that I believe gets the least love and yet can bring the most joy. This may seem an unusual assessment since the world of rewards, points and loyalty schemes dominates many articles about membership.
I have spoken and written often about my frustration with loyalty schemes that are built for the express purpose of retention and yet detract from the core offering of a relationship-based business. If there is one thing I want every reader to recognize is that any great relationship-based business does one thing really, really well — they solve their members pain-points, problems, unmet needs or desires. I have yet to meet a consumer in the world who wakes up in the morning and says “I can’t possibly go through the day without a few more reward points.” And yet, so many businesses are missing the mark by prioritizing rewards programs over nurturing the actual relationship.
Now that we’ve addressed the elephant in the room, I want to share with you six brand-right ways I have found to elicit surprise & delight in members while solving pain-points and driving loyalty and retention.
Six examples from Nike Adventure Club to illustrate routes for delivering surprise & delight in your membership program:
1. Sustainability and social purpose — today’s consumers and especially members want to know the programs they are supporting are doing good for the world.
a) For the parents who subscribed to receiving new Nike shoes every month, two months or quarterly there was a pain-point around what to do with the shoes at end of life. By adding a pre-paid return bag to our boxes, we removed this guilt and were also able to gather data on what areas of our shoes wore out first.
b)During the social justice movement around George Floyd’s death in 2020 we heard a plea from our members: “What do I tell my kids about this?” and so we responded by sending them a well-researched content from trusted partners explaining how to talk to your kids about race.
2. Participation activities — the pandemic is just accelerating a long-term trend towards isolation in Western society. Community time used to be a far greater part of people’s daily lives. Today that is taken up with screen time, and that was something we discovered was weighing heavily on the minds of our parent members. In response to this, we added a digital QR code to all our email communication allowing parents to access activities under the title: “Things to do with kids during Covid-19”.
3. BYO / Potluck — pride is a powerful human motivator and brands that can empower their members to feel pride and feel recognized for their achievements will be building an unbreakable bond. With Nike Adventure Club, members regularly shared images of their kids doing our weekly activity challenges and also showed off how cool their kids looked in their new Nike kicks. This fueled a virtual cycle of pride and joy every time a new box arrived or a new digital challenge was downloaded.
4. Useful and brand-right giveaways — when asked in interviews or surveys: “What else do you want?”, members of subscription or other relationship-based businesses often answer discounts or rewards, and in the majority of poorly run businesses that is what they get. For a short-while there may even be positive data that supports these giveaways. But in my experience and those of peers and mentors this strategy is only teaching the member that the true value of the member offer is weak.
However, with the right timing and the right reward, benefits can actually enhance the core offering. In the case of Nike Adventure Club, because the core-offer was a pair of shoes and we recognized that the key retention period we wanted our members to celebrate was 6-months, we sent them a unique Nike Adventure Club branded drawstring bag with a note of thanks for their loyalty. The reward was both practical for the parents and kids and was unexpected, which enhanced the surprise & delight of the offer.
5. Surveys / questionnaires WITH FOLLOW-UP — if you are like me and enjoy it when people ask your opinion or advice, then there is nothing as simple and enjoyable than answering a short and interesting questionnaire or survey, and being told afterwards how valuable your opinions were.
My first piece of advice to any entrepreneur starting a new relationship-based business to send out regular and interesting surveys to members and to always follow-up with them about the results. People love to hear about other people’s opinions too.
One of the most successful surveys we did for Nike Adventure Club was around a simple statement made famous by McDonald’s: “Can I add….with that?”. In our case, we didn’t want to add fries, but could we add socks, water-bottles, tee-shirts, balls to the box? Over 60% our members responded. I wonder if you can guess what they wanted most from the list above?
6. Collaborative content — knowledge is a useful tool and powerful fuel for any relationship-based business. Because members generally have shared demographics, interests and passions it is often possible to find areas their want to increase their knowledge. In the case of Nike Adventure Club, we found that parents wanted to know more about foot growth and health. They wanted to know if their 5-year old was normal, healthy. They wanted to know how best to keep their feet healthy. Using respected pediatric advice was a way to provide that support and to reinforce our credentials as a brand that ‘have parents back’.
Remember — it’s the equation that will drive retention so consider all variables when you’re looking to fix a leaky bucket — or better yet, to prevent one all together.
