Tuesday, April 7, 2020

The Forever Promise - The Key to Lifetime Value...and Profit

How to Build a Subscription Model So Compelling, Your Customers Will Never Want to Leave 
That is the accurate subtitle to The Forever Transaction, the new book by Robbie Kellman Baxter, consultant and author of The Membership Economy.

Baxter refers to "a forever transaction, as an outgrowth of a forever promise of value." That forever promise "is focused on a long-term customer need or desire." She draws on subscription models like Netflix to say:
I want to show you how to create your own forever transaction. It’s about orchestrating the moment when customers remove their “consumer hats” and don “member hats,” commit to your organization for the long term, and stop considering alternatives. For many companies this is the holy grail: loyal recurring customers, often paying automatically, indefinitely. 
To earn a “forever transaction” you must offer a “forever promise” in return. You commit to deliver a result, solve a pain point, or achieve an outcome for your members forever, in exchange for their loyalty.
Baxter's first book, The Membership Economy, was an introduction to subscription models and why they are increasingly important -- this book is intended to dig deeper into how to do them well. As such the new book provides excellent advice, and expands the list of essential reading on exploiting recurring revenue business models (along with important books by Anne Janzer and Tien Tzuo that I have commented on in this blog and listed in my Resource Guide.)

I reviewed a pre-press version of this new book, and had some dialog with Baxter on how my work on FairPay builds on and extends her ideas in new directions that can potentially transform B2C relationships. (My thanks to Baxter for including a reference to my own book, FairPay, on page 122.)

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TL;DR: The forever promise is the future of business, as Baxter ably explains. We are just beginning the journey. The promise will be stronger and more durable when it becomes more balanced and mutual.
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The why and how of a forever promise

To encapsulate The Forever Transaction, I cannot put it better than Charlene Li's blurb: "Recurring revenue is the holy grail, and Robbie Baxter is giving us the map to find it. Building on 15 years of experience in Silicon Valley and beyond, Baxter provides fresh case studies and practical tools to disruption-proof your organization."

Businesses of all kinds have realized that digital business enables continuing deep relationships with customers, and that it is far more profitable to retain customers than to acquire them, lose them, and acquire others. They study "customer journeys" and build "loyalty loops."

Baxter emphasizes the forever promise as the critical bond that builds loyalty to retain customers. She explains how you can plan what promise you can offer, to what customers, and the importance of ongoing experimentation to test, learn, and adjust. Then, with many examples from her consulting with varied companies, she gets into the details of scaling, including technology, pricing, and metrics, and building for continuing leadership and evolution in whatever promise you are offering.

I find it hard to recommend a single one of these books to the exclusion of the others. I recommend studying all of them -- each offers a wealth of ideas in very useful form, based on varied experience in this space, and each provides unique insights.

Building the best possible forever relationship with each customer

The forever promise is the future of business. We are just beginning the journey. The promise will be stronger and more durable when it becomes more balanced and mutual. The idea of the forever promise is very resonant with my work. My perspective builds on the foundation of this book (as well as the other books mentioned). What FairPay adds is to suggest a focus on mass-customizing forever relationships by designing individualized value propositions to suit the values and behaviors of each customer -- in ways that adapt dynamically, as the relationship unfolds. (Right now, FairPay is especially relevant to digital content and services, and to other low-marginal-cost offerings, but over time it can apply far more broadly.)

The big-picture of this perspective is outlined in my post, The Relationship Economy -- It's All About Valuing Customer Experiences. Modern business is returning to a focus on long-term relationship-building, as opposed to the transaction-focused mass-marketing mind-set of the past century or so. But most business-people have yet to see how we can return to a forever promise with each customer that mass-customizes value propositions just as humans once did in village markets. It is true that we cannot scale traditional transaction-level haggling, but few realize that we can structure a new form of forever promise with customer participation. That can be done with what I call an invisible handshake in which both provider and consumer promise to cooperate in seeking a a value proposition, and a price, that is fair for each customer, and for the business.

Baxter's chapter on pricing is an excellent summary of best-practices in subscription/membership pricing, as generally understood. FairPay points to ways to go beyond currently understood best-practice, and to give the consumer more say in what pricing model works for them -- and to change that whenever changes in desires, needs, and usage warrant. We can create forever transactions that apply modern e-commerce technology to return to the more flexible trust and fairness-based forever relationships of the village bazaar -- but in a new way that works at Internet scale.

Perhaps the simplest statement of how the full form of FairPay changes the forever transaction/relationship game is this:
  • From today’s conventional repetition game: “Here is our monthly price, take it or leave it. We hope you will take the risk — and be satisfied enough to continue this game.”
  • To the FairPay game: “We will grant you the power to pay what you think fair for you after each month’s use — but we will continue that game (beyond a few trial cycles) only if we agree that you are being reasonably fair.”
That changes everything -- from a one-sided game of loyalty to a more win-win game of fairness and trust – on top of which a whole range of features can be layered, at many levels. It creates a new kind of haggling: not over price at the time of a given transaction, but over the criteria for what is considered fair value exchange over the relationship. It give the customer some new power to to shape the forever promise, but lets the business frame the terms, and retain control over whether the relationship remains beneficial enough to continue to offer that promise to that customer.

Baxter's pricing chapter raises the valid concern that “the more complex the pricing, the less customers trust it” (paraphrasing Einstein: “Keep your pricing as simple as possible, but no simpler”). FairPay may at first seem complex, but I submit that it offers a deeper simplicity. It seems complex because it is a change in perspective, but it is simple at heart: “our forever promise to each other is that we both agree to continually seek a price and a value proposition that is fair for both of us” – what could elicit more trust (if it is done transparently, in good faith)?  Instead of zero-sum games in which both sides view the other as being inherently unfair (back to Einstein, who was the master of rethinking perspectives), I suggest that most pricing is actually simpler than is possible to avoid unfairness.  The result is resentment, alienation, and a ongoing zero-sum battles over who extracts value from who.

Instead, FairPay seeks to motivate customers to cooperate with the vendor, to motivate the vendor to create more value to be shared fairly.  The customer will (as Baxter recommends) “know how the pricing works and why they paid what they did.”  Pricing in the village bazaar was intuitive, in a way that had nuance across a full range of value metrics. Baxter explains that the idea (again) is to establish a forever promise so trustworthy that "people say things like 'I don’t even care exactly what I’m paying because this organization solves my problems and helps me achieve my goals. It’s like they know exactly what I need. I trust them.'” Conversely, the business takes it in stride if an customer known to usually be fair might seem to be a bit out of line once in a while.

Baxter also has a helpful chapter on metrics. Those metrics combine with pricing to get to the broader issues. FairPay shifts our perspective on the entire value exchange, and how balanced and fair it is. Recurring revenue business understand that what matters is not the short-term value of transactions, but Customer Lifetime Value (CLV) -- perhaps the most important metric in current best practice. Baxter concludes the book with a very important Venn diagram: "Operate at the intersection of 'what’s in it for the customer,' 'what’s in it for us,' and 'what’s in it for everyone else.'"

That intersection is where FairPay brings a new focus. This was addressed in a chapter in my book, and in a post that discuss value from the vendor to the consumer, and the risk of not getting the value expected:
…Subscription providers seem to ignore this. They focus on customer acquisition and customer retention (and its converse, churn), but how many of them consider the dynamic value propositions of value/risk to each individual consumer? They optimize for CLV, the Customer Lifetime Value to them, but not for VLV, their Vendor Lifetime Value to the customer. How many businesses really think about how they justify their share of the consumer's wallet?
While VLV may be hard to quantify, it is important to seek to view the lifetime value proposition through the customer’s eyes, not just the vendor’s. Baxter observes: "Because you’ve made a forever promise, you need to ensure that products and pricing continue to support the value you’re creating for the people you serve."

Of course giving customers the amount of pricing power that FairPay suggests is daunting to many, even though FairPay provides mechanisms to enforce fairness (downgrading or declining to make further offers to those who free-ride). But there are many component elements to FairPay, and many ways to apply some of those elements while retaining full price control. That is addressed in two of my posts:
  • The Elements of Next-Gen Relationships and Pricing -- A Unifying Framework – an overview of the individual elements that can be mixed and matched, and applied in stages, to be as conventional or radical as desired.
  • "Risk-Free" Subscriptions to The Celestial Jukebox?  -- highlighting one of those simpler elements. That is a simple change to a more adaptive customer-value-based pricing model that maintains full pricing control for the business, but finds a new way to blend the best of all-you-can-eat and of usage-based models.  This seeks to largely eliminate consumer pricing risk, and thus avoid subscription fatigue.
But businesses are missing an opportunity when they fear giving customers more say about pricing and value propositions. More businesses have been beginning to realize that -- and COVID-19 has triggered new openness to dropping paywalls and gaining goodwill by trusting customers. Voluntary membership payments have proven successful in important use cases, perhaps most notably The Guardian (which recently turned a profit with voluntary memberships at user-selected prices).  Patreon and similar services have had notable traction in some markets. Some small consulting services (including a law firm and another and a CPA firm) have found success with simplified forms of the same kind of user participation in pricing with intuitive forms of enforced fairness much like what FairPay proposes to be automated.  Studies have shown that even simple forms of PWYW (pay what you want) can outperform conventional pricing in some contexts.

As companies grow more customer-value centered, and gain a better understanding of digital products/services (and other low marginal cost services), the line between voluntary and enforced payments will blur, and will depend on the specific value proposition at issue. The invisible handshake is especially relevant to digital because there is no scarcity of distribution once a content or service is created. The invisible hand of traditional economics does not work because of digital abundance ("information wants to be free") -- so we need a new social contract to sustain creation of future content and services. This will increasingly be seen as best practice for low-marginal cost services (or low-marginal cost components of costly services) -- and will become more familiar and widely applicable as automation and robotics enable low-cost replication of more and more services.

So, as I said at the start -- the forever promise is the future of business. We are just beginning the journey. The promise will be stronger and more durable when it becomes more balanced and mutual.

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More about FairPay

A brief introduction is in Techonomy"Information Wants to be Free; Consumers May Want to Pay"
(FairPay is an open architecture, in the public domain. My work on FairPay is pro-bono. I offer free consultation to those interested in applying FairPay, and welcome questions.)



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