The Membership Economy

The Rabbit Hole is written by Blas Moros. To support, sign up for the newsletter, become a patron, and/or join The Latticework. Original Design by Thilo Konzok.

Key Takeaways

  1. Members are in a relationship with an organization in which they are engaged over a long period of time – forever transactions that tie customer to company and vice versa. Done properly, membership is a win/win. It provides predictable revenue, builds a direct relationship, provides an ongoing data stream for companies and allows members to get recognition and value but allows them to quit at anytime if they choose to
  2. You must put the customer rather than the product or business at the center. Transaction —> Membership, Ownership —> Access
  3. People are wired to want to be in a community they respect and have good standing in
  4. Membership based companies don’t always have communities, but they often do. This facilitates loyalty, engagement, and referrals, not to mention can tap into network effects
  5. Types of membership based companies – nonprofits, digital subscriptions, online communities, loyalty programs, traditional membership companies (AmEx), small business and consultancies
  6. Strategies to successfully align with membership economies
    1. Build the right organization – culture and attitude are central to making the customer the core
    2. Build a bottoms up acquisition funnel – with a forever transaction, retention is far more important than acquisition. Start at the bottom (with the core value and the ideal members that this would resonate with), and then build up to the top of the funnel
    3. Onboard members for success and super users – first few days are key to the member experience and their long-term engagement. Think about first steps, roadmaps, how they should get started. There are 3 key steps – remove friction, add immediate value, reward behavior and actions you want to incentivize. In other words, make it easy, make it personal, get them involved
    4. Model pricing for simplicity and flexibility – risk is too much complexity too early in the relationship. Value needs to be clear, transparent, differentiated. Cadence needs to be tested as well and see if monthly, annual, consumption based, etc makes the most sense. Some pricing strategies: subscriptions (with or without tiers, typically 3 tiers), ancillary products (swag, things that will make the membership more valuable), partnership streams, aggregated analytics, advertising, free products and service offerings. Beware discounts, pricing too low or too high at the beginning,
    5. Incorporate “free” as a tactic, not a strategy – free is powerful but only if it supports the overall business model. Use it to build awareness and increase size of funnel, build a large community that can aid paying members
    6. Use the right technology and track the right data – social / marketing automation, CRM, engagement, community, customer success, loyalty, billing.
    7. Retain members but know when to let them go – loyalty is vital but the wrong customer will be very expensive
  7. In a membership economy, focus for the CEO shifts from product to relationships , marketing moves to two-way communication, sales are compensated through LTV rather than one off transactions. Every stakeholder is treated as a partner and coordinate to find ways to improve the experience of a member
  8. Innovation is a verb, not a noun. A process,  not a point
  9. Super users do the following:
    1. Check in regularly and often
    2. Create content that others can access and benefit from
    3. Police the community
    4. Have a two-way relationship and feel comfortable offering feedback
    5. Genuinely care and want to help other members
    6. Attract new members
    7. Aid in the onboarding of new members
  10. How to raise prices – grandfather current members, create a more expensive tier with more benefits. Always be transparent about reasons if you do have to raise on current members
  11. Move from free to paid through volume of usage, duration, features, additional services, removal of ads
  12. Some ways to increase loyalty among members
    1. Make it easy – keep pricing simple, give value immediately, make onboarding great, have a free option, build loyalty through the free trial, remind to cancel before paying if they’re not using
    2. Make it personal – periodically give something extra, allow members to connect with you personally, allow members to customize and personalize, experience adapts over time to create increasingly personalized experiences, help create status / milestones
    3. Get others involved – connect others, create stickiness by forming relationships between members, engage customers for inspiration on ideas, content, community,
    4. The forever transaction is the key to retention in the membership economy – favor relationships over transactions
  13. Loyalty programs are incredibly important and effective. Your most loyal customers drive disproportionate profits. Track demographics, preferences, and behaviors
    1. Keep it simple, remove friction, make the member feel special, add value, give recognition
  14. Some huge advantages that smaller companies have include: Focus, exclusivity, and recognition

What I got out of it

  1. I listened and immediately re-listened to this book. A ton of practical advice and thoughts on how to build a robust, loyal community
Books Worth Re-reading

Plain Talk: Lessons From a Business Maverick by Ken Iverson

The Rabbit Hole is written by Blas Moros. To support, sign up for the newsletter, become a patron, and/or join The Latticework. Original Design by Thilo Konzok.

  1. Ken Iverson took over Nucor when he was 39 and compounded the business  at incredible rates for decades. On top of it, he did it in the steel industry which is not known for its attractive returns. Iverson lays out his management principles which center around employee trust and loyalty, decentralization, honesty, limited hierarchy and bureaucracy and aligning the employees and manager’s interest through partnership.
Key Takeaways
  1. “We have little tolerance for politics, the pettiness, the fixation on rank and status, or the insensitivity to employees’ needs that people in most big companies endure as a matter of course.”
  2. “Today’s leader must maintain sensitivity to the views of everyone who has a stake in the company and realize that each one can make a special contribution to meeting the company’s goals.”
  3. “Good leaders must be good followers. Leaders and followers share certain characteristics such as listening, collaborating and working out competitive issues with peers.”
  4. “Specialized management is an enemy of hope and good management. I think what we need, if anything, is deep generalists.”
  5. “What we did was push aside the notion that managers and employees have inherently separate interests. We’ve joined with our employees to pursue a goal we can all believe in: long-term survival”
  6. “Equality, freedom and mutual respect promote motivation, initiative and continuous improvement.”
  7. “Every manager should be something of a psychologist…I’ve found that, as employees, many people want first and foremost to be appreciated for who they are. They want to be acknowledge as unique individuals – each with immense and unrealized potential. All too often, though, their managers cast them as drones.”
  8. “Don’t fall into the trap of ruling out failure. Risk, by definition, carries the possibility of failure. See that possibility. Study it, but never, ever hide from it.”
  9. “You have to realize that your fears and ambitions are the lenses through which you view and assess risks, and that the image those lenses convey may not always be true.”
  10. Central tenets
    1. Choosing the right people and earning their loyalty and trust
    2. Reallocating manager’s time
    3. Letting employees guide their own development (cross-trained to do multiple jobs)
    4. Providing information to employees (share everything)
    5. Letting employees invest in technology
    6. Active listening
    7. As little hierarchy/bureaucracy as possible
    8. Weighing mergers and acquisitions from employees’ perspective
    9. Shaping the work environment is the manager’s primary job
  11. Iverson took over Nucor at age 39 as he was the only one who ran a profitable segment
  12. Whole company shared in the pain during tough times with senior executives taking an even bigger pay cut than the employees
  13. Run company for investors, not speculators
  14. Every single decision made with long-term view – simple but not easy
  15. Never laid anyone off – employee loyalty is of utmost importance (pair with The Loyalty Effect)
    1. “When is laying people off the practical and sensible thing to do? Can we expect employees to be loyal and motivated if we lay them off at every dip of the economy, while we go on padding our own pockets?”
  16. No job descriptions at Nucor – employees can define their jobs in their own way in order to be the most productive possible
  17. Each division is run as its own enterprise – trust your instincts, decentralized, responsibility and accountability for everyone
  18. Try to keep business small (less than 400-500( as management loses touch with employees as it gets larger
    1. Iverson talked to every manager every day
    2. Fan of formal surveys – anonymous and forces manager to think how the current situation truly is
    3. Policy for managers to meet with every employee at least once through the year
  19. Delegation without information is suicide
    1. Delegating gets people to buy in and most likely to a much better job than if the manager was hovering over their shoulder
    2. Streamline information – too much is as bad as too little
    3. Find early warning signals
    4. Differentiate between objective and subjective info – cause and effect
  20. Centralized and decentralized operations are better in certain situations. Uniformity and consistency leads to centralized; innovative and flexible needs more of a decentralized approach. Either way be decisive
  21. Healthy tension in sr. executive meetings is usually a good things – shows people care, have thought about issues, brings up issues early before they have a chance to bubble over
    1. Know that their motives are healthy, objective and coming from a good place
  22. Great management is situational. Hard to take a great manager in a certain business/industry and expect that same result in a completely different situation
  23. Corporate culture sets the tone for interactions between all stakeholders
    1. Nucor removed hierarchy and was very egalitarian. Sustained employee motivation
    2. Eliminates noise to focus on essential – senior management not worried about perks, corner offices and other distractions
    3. Only 4 layers of management at Nucor lead to short lines of communication
  24. People often don’t need answers, simply to be heard
  25. Share all information with employees
  26. Show how much they truly cared and valued their employees by hand delivering birthday cards and had all employees names in the annual report
  27. Pure equality brings out pure effort
  28. People jump on the chance to shape own lives and take responsibility
  29. Nucor’s biggest competitive advantage is its culture and it always will be (has to be consistent)
  30. The work place shapes people’s state of mind – both physical and cultural
  31. Give employees the freedom to innovate – they are the engine of progress
  32. Compensation incentives are vital. Give employees a stake in the company! Partnership aligns values and brings out everyone’s best effort and productivity
    1. Try to make profit sharing timely and immediate
  33. Helping employee’s families is a huge win-win (college bills, medical bills, etc.)
  34. Small is beautiful – can operate on the fringe, innovate and slowly take market share from bigger players
    1. Are able to learn all aspects of the business when small
  35. It’s not easy to change people
  36. No shortcut from big and bureaucratic to small and nimble
  37. Be careful not to criticize failure as this stifles good risks and innovation
  38. Experimenting and failure is necessary before success
  39. Be conscious that senior management tends to be more risk averse, comfortable and complacent
  40. Ethics – look for options that are equitable, right and practical
  41. Peter Principle – people will rise to the level of their incompetence
  42. Simplicity is integral to Nucor’s success
    1. Honesty leads to stability and credibility
    2. No hierarchy or bureaucracy
  43. MBAs tend to lack communication skills, how to relate to and lead people
What I got out of it
  1. Awesome principles and amazing read. Iverson has put The Loyalty Effect into action at Nucor

The Loyalty Effect by Frederick Reichheld

The Rabbit Hole is written by Blas Moros. To support, sign up for the newsletter, become a patron, and/or join The Latticework. Original Design by Thilo Konzok.

  1. Reichheld lays out a very convincing argument for why creating an ecosystem which attracts and rewards loyal customers, employees and investors is the ultimate moat for any organization
Key Takeaways
  1. Loyalty Based Management is essential to create a value-add, profitable, sustainable company and it requires loyal customers, employees and investors.
    1. Loyalty leaders follow two basic precepts – nurture a clear sense of company mission based on value rather than profit; use the power of partnership to align, motivate and manage the members of the business system
    2. A company’s top goal should be to create as much value as possible, never profit. Profit is solely a downstream effect of creating enormous value
    3. Loyalty Based Management is a slow, steady, never ending process.
    4. Loyalty, in every case, must be earned. It is never given
    5. Loyalty is a character trait – can’t be created, only reinforced
    6. Loyalty leader examples – Leo Burnett, Chick-fil-A, State Farm, Lexus, Maryland National Bank, USAA, John Deere, Nike (attracting right investors), American Express
  2. 8 central tenets to Loyalty Based Management
    1. Building a superior customer value proposition
    2. Finding the right customers
    3. Earning customer loyalty
    4. Finding the right employees
    5. Earning employee loyalty
    6. Gaining cost advantage through superior productivity
    7. Finding the right investors
    8. Earning investor loyalty
  3. There are many “hot” management trends but loyalty leaders tend to ignore these and stick to a variation of the Golden Rule
  4. Employee/customer retention
    1. Employee/customer retention is a key gauge of company health. Even a seemingly insignificant increase in retention can have an exponential impact on profitability
      1. Relative retention is a better predictor of profits than market share, scale, cost position or other moats
      2. Defection is often the most powerful hidden force for low profitability
      3. It is much more expensive to serve a new customer than an old one
  5. Hiring well is crucial. Once you get the right people on board, you have to make sure to continually educate, train, inspire and incentivize employees to make creating value for loyal customers their top goal.
    1. Incentives should get employees to want to learn themselves, improve over time and teach others.
    2. Learning leads to value creation which leads to loyalty and back to learning. It is a virtuous cycle and the entire ecosystem must be designed around customer loyalty
    3. Partnership is the best way to align employees goals with company’s – letting employees share in the profits will unlock all their potential, creativity and hard work and put it towards value creation. Sharing value creates value
    4. Try to hire from within to inspire more junior employees
    5. Creating a loyal ecosystem boosts employee morale and energy
    6. Longer employee tenure has supernormal benefits as they become better with their job over time, get to know customers more intimately, can teach the younger generation, make fewer mistakes, volume increases, profit per customer up, referral rates increase, time savings up, motivation/pride in a job well done increase. On top of it, all these effects compound over time
  6. Today’s corporate focus on short-term results almost always works against Loyalty Based Management. Many loyalty leaders often ignore short term results, instead invest for the future wellbeing of their customers and employees which will eventually benefits investors
  7. Measurement
    1. Stresses the importance of having hard numbers which can be measured over time in order to realize the enormous benefits loyalty produces. Break customers down into different classes, view actual defection rates over average
    2. Measurement tough but at the heart of vision/strategy and it helps make the obscure more concrete
    3. Ultimate form of customer satisfaction is repurchase loyalty
    4. Deciding what to measure and how to link incentives is a primary role of management
    5. Most important metric is Net Present Value of current customers (discounted stream of profit net of acquisition investment)
    6. Most companies would not argue against loyalty but few truly understand how valuable it is and therefore under invest in it
    7. Revenue per employee is an important metric to keep track of. The goal should be to lower cost as a percentage of revenue, not lower overall
      1. Cost improvements must eventually make their way to the customer
    8. What percentage of a customer’s wallet (wallet share) you have is a great metric to track overtime
  8. Loyal customers give companies the benefit of the doubt and tolerate occasional mistakes
    1. Some customers are inherently more loyal. Aim for these groups and take into account customer’s age, income, profession, where they live, affinity groups, education, etc.
    2. Carefully choose the sales channel to attract the right (not necessarily the most) customers
    3. Avoid certain customers as they cause headaches and are more expensive in the long run. Price discounts, coupons and other promotions tend to attract these types of customers
  9. “We are all preaching an unspoken sermon with our lives.” What do you want yours to be?
  10. Top draw for attracting the right people is to have character and integrity coming from the top
    1. “Talented people work hardest when they’re proudest of what they do, when their jobs are interesting and meaningful, and when they and their team members are recognized for their contributions and share in the benefits.”
  11. Productivity = pace of creation
    1. Growth of productivity vital and a company improves it through employee education, training, and employment / compensation policies
    2. Goal of automation should be to empower, not displace employees
    3. It is counterintuitive but paying up for the best employees reduces costs in the long run (see benefits of employee tenure above)
    4. In Loyalty Based Management, compensation mirrors productivity – bigger pie is created and it removes unproductive employees
  12. Importance of loyal investors
    1. Many loyalty leaders are private and those that are public have big insider ownership (from 15-50%)
    2. Management has dozens of ways of measuring the value they deliver to investors but few, if any, ways to measure the flow of value from investors to the company
    3. Short-term investors who do not share the businesses’ values impart a high cost on the company
    4. 4 principal ways to attract right investors – educate current investors, shift investor mix to institutions that avoid investment churn, attract the right kind of core owner, go private
    5. Don’t cater to Wall St. and short-term earnings estimates, do things which will help the company long-term even if painful today
  13. True mission of a business is to create value, not profit
    1. Continuous employee learning/training is core to adapting and continuing to add value
    2. Studying failure is vital – must track and dissect when you are healthy or else it is already too late
    3. Must teach people who are aligned and want to learn (importance of hiring right employees)
    4. Success is getting the right customers and keeping them
  14. Reward loyal customers with additional discounts and other perks
  15. Crucial Questions
    1. Why are people defecting?
    2. Why doesn’t the present system deliver better value?
    3. Is the company bringing in the right customers and employees?
    4. Has management built a genuine partnership for creating and sharing value?
    5. Does this partnership align individual and organizational interests?
  16. Do what you say you’ll do, live up to commitments and try to exceed them as often as possible
What I got out of it
  1. Seems to me like setting up an organization, culture and incentives that rewards loyal customers, employees and investors is the only way to run a sustainable, long-term, value-add, win-win company. Highly recommend!
Two great articles on loyalty. One from Bain discussing customer churn and another from Forbes discussing how some customers are more important to keep than others