Maximising Value for Exit: Robbie Kellman Baxter’s Subscription Pricing Masterclass

Robbie Kellman Baxter, the queen of subscription-based pricing models and author of “The Membership Economy,” brings over two decades of expertise to the table. With a background in strategy consulting and product management, Robbie’s insights on transitioning service-based businesses from traditional hourly rate pricing to subscription models are game-changing. She draws from her extensive experience, including her work with Netflix, to help businesses align pricing with their customers’ desired outcomes, fostering long-term relationships and sustainability. Robbie’s approach is not just about changing pricing; it’s about fundamentally transforming the way businesses engage with their clients, ultimately maximising business value for exit.

In this episode, you will be able to:

• Unlock the potential of transitioning to subscription-based pricing for your business’s growth and stability.
• Discover the insider strategies to maximise your business value for a lucrative exit.
• Learn how to effectively price and package your services for optimal profitability and client satisfaction.
• Explore the secrets to implementing a successful membership model that elevates your business’s revenue streams.
• Uncover the game-changing benefits of subscription revenue in enhancing your business’s valuation.

Transition to Subscription-Based Pricing

1. Shifting from hourly rates to subscription models requires a mindset change towards outcome-focused offerings.
2. Identifying the unique needs of clients and tailoring subscription offerings to align with desired outcomes is crucial.
3. Creating a forever promise to continuously invest in achieving customer outcomes forms the basis for a successful subscription-based relationship.

Watch the episode here:

Welcome to the podcast that’s dedicated to helping business owners to prepare for exit so you can maximise value and then exit on your terms. This is the Exit Insights podcast presented by Succession Plus, I’m Darryl Bates-Brownsword, and today I’ve got Robbie Kellman Baxter joining us. Robbie is the source, I think, of subscription based pricing membership models and started way back with Netflix, I think, Robbie. If I got that correct.

Yeah, absolutely.

Yeah. Look, Robbie’s an author, and I know I’m late to the party, and she authored the book The Membership Economy. And I read it just this year, and I remember when I was reading it, I was thinking, where was this book?  And I know the book was around for years, but why didn’t I read this book years ago and just tracked through how businesses and the whys and wherewithal’s around how businesses and what I’m hoping to get into today is service based businesses. How can they change their pricing model and move away from hourly rate type of pricing, which is just using time as a commodity and just wearing yourselves out, charging for hours? How can we move to a subscription based pricing methodology? And what else do you have to do in a service based business to. To get the benefits of a subscription based pricing model? And so I thought, well, what the heck? Let’s go to the source. Let’s tap into the expert. And Robbie, thanks for agreeing to have a chat with the exit insights audience.

Yeah, it’s my pleasure, Darryl. I’m looking forward to it.

That’s brilliant. Robbie, can you start by just giving us a little bit of background? Was there a big aha moment for you when you were working with one of your clients, going back a few years, that you thought, hang on a sec, we need to change our pricing structure from this to this. How did it all come about for you?

Yeah, so, as you said in the very kind introduction, I was working with Netflix, and this is 20 plus years ago, and I just fell in love with their business model. I had been a strategy consultant. I’d been a Silicon Valley product manager, and now I was know consulting to Netflix on some partnership and acquisition strategies. and I just fell in love with what they were doing and what they were doing, at least from my perspective, was they were helping their customers achieve the outcome in a much better aligned way than any of the other options available to customers at that time. So, you know, if you remember, we used to go to a store to rent a DVD. So you get to the store, you don’t know what’s available. You wander around aimlessly you finally find something that’s not really what you’re in the mood for, bring it home. And then, of course, you forget to bring it back and you have to pay a late fee. And what Netflix did is they said. We are going to provide the widest selection of professionally created video content in the most efficient way possible, with cost certainty a real promise. I call it a forever promise. And they said, and we’re going to continue investing in getting closer to fully achieving that promise over time. And in exchange, we’re going to ask our customers to pay us a fixed, regular monthly price, a subscription. So they earned the right to have subscription by offering a really different type of product, a really different type of service. And I thought, why isn’t everyone doing this? Sort of aligning, aligning the customer’s desired ongoing outcome, the goal they’re trying to achieve, the problems
And that was really where I had my aha moment. And, you know, from there, I haven’t looked back.

And so they did it right from the very beginning, didn’t they? Because in the UK here, I remember before I came aware of Netflix, there was a company called Love Film. And I just remember thinking, well, we don’t have to go down. And for me, I can go back further than DVD’s. And I went to VHS and they’d have all these covers, and they’d have, on the racks, they would have like ten copies of the video, and then they’d have little card slots in them. They’re all out. So it was just a tease and you couldn’t get it. And then, as you say, you’d stroll down and you’d end up picking your 2nd, 3rd, 4th or even fifth choice, and you wasted 45 minutes trying to get a video, and you had to drive there and drive back, and you probably picked up a takeaway on the way. And Love Film. Yeah. I don’t know if they copied Netflix or if there is any relationship there but you had a subscription, you paid. Your three pound five a month, whatever it was, and you could always have three films. And as long as you know, and they were DVD’s that you had, and as long as you had them, you could keep them for six weeks if you wanted, but you could have three at a time. And as soon as you sent them back, they’d send out the next three on your wish list. And it was the key being that they were aware of the problem that they were solving for you as a consumer, your consumer being you’re not getting your first choice. And it’s all this time chewed up. So they’re saving you time and that was valuable to the client, wasn’t it? And so the client goes, I can see value here. Three quid, $5 a month, whatever it is, that’s worthwhile to me.

And as you say, that was like 20 odd years ago. And why weren’t more businesses doing it? Well, over those 20 odd years, everyone, well, not quite everyone doing it, but a lot more people are doing it to the point where we see people now going, we’ve got to transfer our pricing from a time based or hourly rate pricing. What do we do? Well, we’re charging our client three grand, 5, 10 grand a year. Let’s just divide it by twelve and we’ll call it a subscription. And so I’m guessing you’ve seen that before and nothing else changes about their business model, right? And they just go, well, let’s divvy it up by twelve. And there we go. We’ve got monthly pricing, we’re now a subscription business. But then you talk to the clients. And they go, well, hang on a sec. All they’re doing is they just charged me monthly and, yeah, and they’re trying to lock me in. It doesn’t feel like a fair exchange. So I’m guessing over the years, this is your area of expertise, you work with businesses to go, how do you make this transition? What else do you have to change in your proposition to your client? Can you still do hourly weight type work or do you have to have some sort of IP process or proposition that clients are buying? Would love to get your insights of how service type firms can switch to what is really built in hourly rate, to building longevity and certainty, and figure out what their forever promise is.

Yeah, you’re exactly right. So Netflix did it from the beginning, and so they designed the entire model around this forever promise of their customer. And they really aligned the way you pay with what you really want to get, what you’re trying to do. I’m trying to have a good time at home and watch the movies. So if you think about a business that has historically been pay hourly or pay by the deliverable, I fix your toilet, I charge you this month, this much. I create this contract, I charge you that much. What you want to do is get beyond a product focus and really align your pricing with the desired ongoing outcome of your customer.

So, you know, maybe I come to you because my toilet is clogged up, but really I want my plumbing to work. That’s really what I would like, and, you know, maybe I come to my lawyer. Right? Maybe I come to my lawyer to look at a particular contract because it’s especially high stakes. But really what I would like is to never get myself into legal trouble and to protect myself. So that’s really where you start if you want to have, you know kind of a subscription, a membership, a retainer a true retainer based relationship is to start there and say, what’s the outcome the customer wants? It’s probably much bigger than what you’ve been doing, and it’s probably not based on hours. Nobody wants to buy an hour of legal time. Right. They want to mitigate risk.

Yeah.

And so you start there. So when I work with companies, that’s where we start. We say, who is your best customer? So that’s the first hard question, because especially for organisations that have been around for a while, right. You would say, well, Robbie, we have a lot of customers, and some of  them spend a little money, and some spend a lot, and some are really profitable, but really demanding and unusual. And some of them are really easy to work with, but they don’t pay that much. So we don’t know who our best customers are. And that’s the place to start.

That’s a common problem.

What kind of customers do you want more of where there is a big enough available market segment, like, what’s the segment that you really wish you own? Right. And then you look at that group. And you say, what is it that they need from me? And then you start designing. I’ll pause for a second there and see if that makes sense.

So if I was to pull together, the first tip there is, change your mindset from being transaction focused and just going and doing what is asked of you and just. Just responding or reacting to the client’s needs and get on the front foot and be proactive and going, hey, Mr. client, I can fix your toilet this time, but I’ve been here three times in the last six months. Like, what do we need? We need some sort of ongoing maintenance program to prevent this from happening and keep it all clean. You want clean, running plumbing, right. And you don’t want to risk those smells and flooding in your bathroom again. Okay, so here’s what we can do. How about if I do this for you and I get my mindset around the outcome you’re looking for is the first tip you’re suggesting we do. And the second aha. I pulled out of that, Robbie was, okay. And then you’ve also got to segment your client base and just do some analysis on the clients you’ve worked with and identify what your good clients look like and then categorise them and then package something up and approach those and get your messaging right for those clients.

Right. Right. And usually people always say, well, you know, there’s lots of good clients. They’re all different. So there’s a couple of places where a subscription, if you’re going to start with your subscription or start with your membership offering, it’s often either the ones like if you have a problem where you say there’s a lot of people out there sort of standing on the edge and they’re prospects and they haven’t joined yet, they haven’t invested because a project is too big, then you might optimise around your best prospects who don’t make a decision yet. An example of that is Bain and Company, the large global consulting firm. They have something called the NP’s Loyalty Forum net promoter system loyalty forum. And it’s made up of a membership of the senior customer facing executive. So that might be the head of retail, the head of support, that kind of a role, but quite senior. And it’s a monthly or annual membership. They meet periodically. They get data, all kinds of things. It’s not project focused. It’s not a $3 million intervention. It’s more in the six figures, five to six figures. And what it does is it gives companies a way to build connection and trust with Bain, new people who haven’t worked with them on those seven figure deals. And it also works to keep the relationship going in between those very large, lumpy projects. Right. It kind of gives you a steady drumbeat of connection. So that’s one place is sort of your light customers. And the other one that Bain does well is they’re, you know, your ongoing. Customers between the big, the big moments. So those are some places to look for customers. And then the other place to look is your very best customers that are always pushing the limits. So if you’re a doctor, these are the people that are like, I don’t care how much it costs, I want you to come to my house or I want you to be open late or I want you to give me, I know you don’t think I need all the tests, but I want all the tests. I want to give you 21 vials of blood like parsley requires. And I want you to tell me, you know, everything I can do to maximise my healthy minutes, my health span. These people at the very far reaches are often very profitable, but they also often want more than you think. You know, typical professionals in your field would normally provide. And so you can say, okay, I’m gonna go there, I’m gonna try to fully solve the problem. Example of the plumber, right? I don’t even know if I would say I don’t want my toilets to clog  I might say I want everything in my house to just work.

Yeah.

Not just my toilets, my, you know, I have three light bulbs out in my bathroom. I have an issue in the backyard with the irrigation. I have, you know, a hole from where I poked a hole in my wall to put up a painting and it actually was the wrong place. And now I have this hole. I want somebody to make my house always tip top and I’ll pay a premium. So then the plumber maybe should even go and partner with the electrician and the painter and say we’re going to provide, and the gardener say we’re going to provide full service, which is if you have a fine home, we’re going to make sure it’s always enjoyable to live in.

So it’s having that ability to think outside of your conditioning. And as lawyers accounts, we’re conditioned to be good lawyers or accountants or plumbers or butchers, candlestick makers, whatever it is we do, we’re conditioned and we’re trained in our whole training to do our product really well. And it comes back to going, yeah.

But it’s that old training, sales training tip for you that’s been going around for years. No one wants a hole. People buy drills all the time. No one wants a hole. They want to hang a picture on the wall or they want to be able to put, they want the outcome of a hole. We’ve got to think about, stop and think around what is it that the client really wants? Not what they asked for, what do they really want? And then we’ve got to think creatively around what do they value? And because some of the things that I’ve seen is when service providers, what we’re talking about is the annual fee divided by twelve. They go, but I’m adding a lot of value and we’ve got to switch that around from what you’re saying and go what is it that the client really values? Not what do you value? Because they don’t value your time, do they?

No, not at all. A good example of that is many of us have worked with executive recruiters to hire top talent. We do not want to pay them hourly. Right. We pay them for bringing in the right person who stays for a year. Right. And we pay them a lot. And if that means that that person is just starting out and they have to spend 400 hours, right. Calling people, looking up names, doing research, interviewing, right. I don’t necessarily want to pay them more than the person who’s like, oh, I know the perfect person. Let me give her a call, or I’m having coffee with her today. Anyway, she meets all your requirements.

Not only am I indifferent, I’m not even indifferent to those two options. I actually would say I’d like the.second one because it’s going to happen tomorrow. Right. The first one might work very hard. But it’ll take them three months to do their research, whereas the expert can do it immediately. So absolutely, people don’t, you know, we’ve conditioned people to think that certain things should be hourly, but really they should be outcome driven. And most people are willing to pay a premium to get to the outcome faster, easier, with more certainty and honestly, when you ask somebody to pay for an hour, like, I have no idea as a consumer how to value that hour. Does my lawyer, is my lawyer efficient when it takes her 4 hours to write a contract? I have no idea if she says the contract is a $10,000 contract and I’m going to charge you $200 to review it, or even. Better yet, I’m going to charge you 10,000 a year to review all high stakes contracts. If you need me to rewrite them, that’s a different thing. But to review them and make small edits and tell you if it’s safe. To sign, I’m going to do that at a fixed price to mitigate your risk.

And it’s getting, what I’m hearing here. Is getting really precise around what you’re offering. And I’m reminded around a builder that I once knew, and he said, look, Darrell, what I do is I put a contract for the client to build the house, the extension, whatever it is, and I get really tight on the specification. I go, this extension includes these tiles, these taps, these, this kitchen, et cetera, et cetera, et cetera. And so I can put a fixed price on that because I know exactly what the goods cost me and I know. But what happens, I need to put clauses in there because what happens is I can see what that’s going to look like finished. But when clients start to see it taking shape, they change their mind and it’s three months, six months down the track, and then they start going, well, maybe we’ll put in this or maybe we’ll need another two PowerPoints here or light switches there. And so then in that case, the builder said, and that’s, you know, he says, I often make a lot of money that way in the variations. And I just tell the client, variations are charged by time, and here’s the hourly rate, and I can’t tell you how many hours it is, but as long as you stick to what we agreed at the beginning, it’s a fixed price. I know you know exactly what you’re going to get. And so it sounds like it’s the same with I’m doing subscription pricing because a lot of people are concerned around losing profit, and they think their clients are just going to take advantage of them and just abuse the process. What feedback or encouragement can you give to that type of fear or concern that a client might have?

Yeah So there’s a couple of things. First of all, you need to know, you need to have some confidence about what this service might, might cost. So what is the variability, especially when a lot of the value that you’re providing has real variable costs. So, for example, if I am giving you reviews of your contracts or I am fixing toilets, I can’t do that remotely. And I can’t really, there’s no economies of scale, necessarily, because it’s ultimately one person, 1 hour. But if I’m offering templated experiences or monthly visits, you get an hour and I come through and I know I can fix most things in that time, you get a better ability to manage it. I think when organisations are moving from hourly to fixed fee for anything, you have to understand what it might cost. and you also have to understand the variability. Even going back to this Netflix example, they did something that other DVD companies and VHS companies couldn’t, were afraid to do, which is they said unlimited movies. Right? So if what happened with Netflix is that you had a two week free trial, right. And a lot of people were like, I’m just gonna call in sick for the next two weeks and just watch every movie I can think of. So it’s like three out, three day turnaround, right? So I take the three, watch the first one, put it in the mail, that comes back in three days, take the second one, watch it, put it back in the mail, it comes back in three days. And keep doing that so the number of turns, that had real costs, right? It had shipping costs, it had replenishment costs. But they knew really well that after the first two weeks or after the first month behavior, you know, we kind of relaxed into a particular rhythm that was profitable. So they knew if we keep a person for more than, let’s say, two months, it’s profitable. So then they focused on, we only let people in if we think they’re going to be staying for two months. So they didn’t offer a lot of discounts. They were very clear about who their audience was and who they could serve and so they could manage it better. They had more confidence. But even so, you might get twice as many movies as me, and you might be down a rural road and it might be harder to deliver to you. But they charge us the same to keep it simple for us. So to summarise, number one, you want to understand what is the range of costs that you might incur for a particular customer and be willing to have some variability. Number two, you want to minimise the risk on the outside. So, for example, you might say, I’m not going to write a contract from scratch. I’m not going to put in any new piping, but I will cover these things. You try to make it easy for them to understand, but also take the big variables out of the membership. And if you’re actually launching this, what I advise companies to do is you want to test, think about all the risks and test them until you have better answers.

So, for example, I had a company that I worked with that was in heating and AchVac, and they had a system where they could track your home, they could time turning on and turning off your various systems, and they could recognise a problem before the consumer recognised. They could recognise that equipment was on the verge of breaking and then come in and fix it. And so some of the things that they wanted to figure out was what percent of our audience would sign up. And of those people, did they look like the kind of people that would cost a lot to serve, or did they look like the people that they knew didn’t cost a lot to serve so they could just understand who was going to respond to the offer. They figured all of that out before they did the massive launch.

Yeah.

And so, you know, you might want to, if you are considering this right now, you might say, okay, let’s make this available to a few people to see how they use it and how much time it actually takes us to deliver. And maybe let’s bind it by time or bind it by the number of people who can participate and then once we have more confidence, then we can expand it more broadly. And once we see where the risks are, we can, you know, try to fix those, fix those risks.

And I guess with any change, there is uncertainty. And if you’re introducing a new, like you use the Netflix example there, people are going to abuse it to begin with, but then they settle into a rhythm. Is that normal behavior across the board that you can apply that fit?

Well, so I wouldn’t say I would use different language. I wouldn’t. I mean, there are some people that  want to game the system, that want to abuse the system, that are, you know, we always laugh. You know, I do a lot of work with streaming companies, and, you know, we always call it the smash and grab, right? Like, you sign up and then you use up all the content, right? You take all the classes. You, you know, you go to the gym all day. You know, you, you use every single thing. You use all the soaps and everything and then you relax. So there are people who abuse, but there are also people who just have pent up demand, right? Like when you first sign up for something, a lot of times it’s because you have this pent up demand, you have a lot to learn. You have a lot of deferred maintenance. You have a lot of legal questions. It’s often, I mean, when you think about what is the moment of acquisition? When does somebody actually start working with you? You know, the first time you call a plumbing plumber is usually after you. Bought a new house, right? It’s the first time you’re a homeowner and you have to handle these things, right. And probably there’s a lot of things you want them to do. The first time you call a lawyer might be when you’re launching a business. Right. Or conducting an important transaction. So, yeah, it’s going to be heavier early on, most of the time. Some organissations get around that by having an onboarding fee or by requiring that the first period that you sign up for is longer than the ongoing period. So, for example, when we get our phones, right, most of the telcos require us to pay for the first to year, and then it goes month to month or the first two years, and then it goes month to month. So those are some things that organisations do to kind of get around the risk and then, you know, keep some things, some things outside the box. But it is true that early periods are usually heavy periods. And by the way, if they’re not using it heavily in the first few periods, they’re probably not going to use it heavily in the next few periods. And that means they’re probably going to cancel, which we haven’t talked about at all. But one of the things that also comes up in subscriptions is that people you know, some people use it a lot, but the ones that aren’t using it a lot, they’re probably going to cancel. So you need to make sure that they’re also getting value.

Yeah, absolutely. So if you got to make sure the clients are getting value, because as with anything, you know, I think a lot of people want. They want their clients to get value. They, you know, I’ve heard stories in the past, well, you got to get it onto a monthly payment because people don’t see the monthly payments and it just goes on and on and on in the background and they forget about it. I think most small businesses don’t want to do that or a number, whatever number is, but people, they want to the service providers that I’m thinking of, they want to deliver value to their clients. They want their clients to value what they’re doing, so they will genuinely stay with them long term because they are getting value. So they’ve got to think that we’ve got to package something that the clients see as value.

So if there is a lot. So you’ve discussed this. Well, maybe a lock in period to begin with. The first six months is, and then you go monthly, perhaps, or there’s an onboarding fee, which is another great idea that people can run with. Are there any other tips or traps for new players moving to subscriptions, Robbie, that you know, that you’ve seen they need to be aware of?

Yeah, I mean, I think one of the other things is you want to move away from, just as you said at the very beginning, so eloquently. You want to get away from just taking what you’ve always done and putting subscription pricing on it. I mean, you can do a lot more than hourly service to provide great value to somebody. You can do, you know, regular monitoring or periodic audits or, you know, different products like, you know, really changing. You can have templates. You can have, you know, online, you know, support. You can have office hours, things that are much more scalable, you know, higher fixed cost, lower variable cost, which will allow you to build that membership, to build that subscription business. Instead of saying, you know, everybody’s hourly. But we charge monthly, you could say we have all of these other benefits. For example, if you’re providing legal services, you might have regular office hours where lots of small businesses gather at the same time. They can ask their questions, everybody hears the answer. And that is a different way of providing value that is much more aligned with what subscriptions do really well. Subscriptions usually work best for things that are configurable, not customisable.

Right.

And so customisable means it’s, you know, if you’re editing my contract, you know, Darryl and Robbie have a contract, and we’ve been talking for months, and it has a lot of quirky details that might not be as useful for, you know, Lena over there, but if we’re having a conversation about best practices in, you know, business development contracts for resellers that might be interesting to a lot of people.

Okay. And are there any benchmarks or rules of thumb that that listeners can apply and go, hey, look, if I move down the subscription model, I can, I want to aim for keeping my clients for what period?

Yeah, people ask this all the time, and it sort of depends on a couple of things.

Right.

It depends on, the most important thing is it depends on the industry, and it depends on that forever promise that I talked about earlier. So, for example, if I run, let’ say, a bootcamp for people that want to get into sales, for people who want to get better at sales. And there’s lots and lots of these groups out there that are like sales communities where you work on best practices and you connect with each other and you go on off sites. And what often happens is people sign up for those when they’re looking for a new job or when they’ve just been promoted into a new job. And, you know, I think that they leave after they’ve achieved the goal, which is to feel comfortable in my job. They don’t, you know, and the company will say, but it’s a forever transaction, because if you’re in sales, you’re always learning, and you always need to keep your tools sharp. The customer says, that’s not how I see it at all. I see it as I was rusty. I came in, I sharpened my tools, and now I’m ready to go. So long winded way of saying, you really want to understand how the customer sees that promise and whether it truly is forever. Another example, YPO, the young president’s organisation. People routinely stay well past selling their business, well past retirement. They are no longer young, except maybe you know, young at heart, but they love the group because that is truly a forever transaction there where people feel really connected with each other, with their leader, and with the larger organisation. But that’s very rare. Most organisations don’t really optimise for forever. They optimise for a finite period of time. Here’s a funny example. One time I was giving a speech. I think it was at a vistage event. There were lots and lots of business owners. And this one woman owned a business.  Where one of the things that they did was they had a subscription, potty training for toddlers, where they would give you advice, and they had a support group that met, and she said, people keep canceling after two or three months. I’m thinking maybe I should go with an annual membership instead. I don’t know why people aren’t staying. And the whole room just burst into laughter. Because obviously, if anybody out there has ever tried to toilet train a toddler, if they’re not figuring it out in a few months, the vast majority of them figured out in a few months. And if they don’t, you have bigger problems. But you’re not going to be hanging out in a potty training group. So make sure that the promise you’re making actually does, you know, that you can continue to serve them equally well, if not better, over time.

Well. And I think it’s got to be fit for purpose, is what I’m hearing there, and does, by extension. I think what the suggestion is, is you can’t force fit every product or service into a subscription solution. There are some things that just don’t work in subscription, and there’s no point trying to force it because it just won’t feel right, the client won’t buy it, and twelve month training.

Here’s the thing. This is why you really have to take a step back, say, what are my best customers? Why are they here in the first place? And what is it that they really want? And is that path, is that journey that they’re on? One, long enough to be worth my time to create a subscription around it. And two, something that I can credibly. A journey I can credibly go on with them for the entire journey. Or a bigger part. For example, if I sell wedding dresses, if I have a wedding dress store. Right, I could, you know, the obvious thing that I could offer as a subscription is a subscription to wedding dresses. Like rent the Runway, but for wedding dresses, right? Most people don’t want that, right? They would say, hopefully, I’m only going to need one dress, right? And, you know, the ones that get married multiple times are like, well, the second time, I didn’t really want the full traditional dress, blah, blah, blah. But what people might want, you know, if you say, well, why did you buy the dress? And they’re like, because I’m starting a lifetime journey with another person. And if you focus your forever promise on that journey, suddenly all of these opportunities open up and your current product offering may not be a perfect fit. And this is what we were talking about you may have to add other features and benefits. Right. If you said, okay, you know what? Instead of just having wedding dress subscription, we’re going to offer special occasions. Maybe that’s the forever promise, is that when there’s a special occasion, you want to look your best. That’s what rent the Runway does or it might be we’re actually going. To be in the business of helping people have wonderful marriages, and we’re going to have, you know, counseling and child rearing tips. And maybe we’re going to sell you, you know, children’s clothing. Maybe we’re going to have financial services for you. Weddings are expensive, but you have to take a step back and say, why did they come to me? What’s the bigger goal they have, and how much more of that bigger goal can I help them with? My unique strengths?

Yeah. And we’re getting back to getting. Cause, you know, people don’t go in. Well, I don’t think people go into a wedding thinking that they’re going to have five more.

Do I get a discount? Volume discount?

Well, I know one guy, and he’s had. But anyway, so what we might want is payment terms, which is kind of a subscription, isn’t it? So not everything works on subscription. What about those businesses that are already established business, and they want to make the transition from, you know, they’ve gone, okay, so what we’re doing at the moment is just transactional, and we like to have relationships with our clients, and the way we service our clients lends itself that it could be a subscription if they’ve done the work and they realise that. Have you got any thoughts, Robbie, on how you might communicate this trend, that transition period, to your existing client base? If you’re moving from hourly rate or projects or whatever to a subscription type service, how might you communicate that to your clients?

Sure. So the first thing I would advise anyone who’s listening to this, who’s thinking about moving in this direction, is start by making sure that your team treats customers like members. You don’t even need to think about your subscription pricing yet. Just start with that step and what that looks like is, if everybody had your home phone number, would that be comfortable for you? If every customer had your home phone number? It’s like for the doctors out there. When you have a doctor in the family and you’re at a birthday party, you’re like, you know, I’ve had this thing. My heart seems to be, you know, sometimes it speeds up and I don’t know, should I go, is that an ER thing? Is that a cardiologist thing? Or is that just normal? Right? And you start to see, if I treated every customer like they were a relative, like they were a good friend like they already had my home phone number, how would that feel? That’s the first step. And that starts to give you permission to charge on a subscription basis because you’re treating them like they’re part of the family, like they’re a member.

And then let’s say that you do some experiments, as we discussed, and then you’re ready to launch. You have some decisions to make are you going to rip the band aid off and say, guess what, everybody, we are now a subscription based business. It’s 1000 a month. If you don’t like it, go somewhere else? Or are you going to say, hey, we have two offerings. We continue to offer our hourly service or our deliverables based service, and we have this new thing designed for this particular audience, which is a much better value if you fit these criteria. So that’s a second way of doing. Sort of explain and saying, this is for our best customers. Right?

I saw there was an article today about Ryanair, about the CEO of Ryanair, who’s very bold. They have all these extra fees. This is not a subscription business, but they have all these fees if you don’t comply with the rules. If you bring your extra suitcase, suddenly it’s $100 or whatever, really expensive if you don’t comply with the rules. And he said, people said to him. It seems like you don’t care about your customers. And he said, I love my customers. I don’t care about people who don’t follow the rules, though.

And if they have a horrible experience and never come back, that’s okay, because we like people who understand how Ryanajr works and we’re great for them. They love us. So I think that’s also really important is to know who you’re serving and communicate. This is for the people who are most engaged with us.

So Adobe Software company, when they moved from buy your subscription, buy your software in a box, and then you own it and you can use it for the next however long you want to Creative Cloud, you have to subscribe. They had already done a lot of testing. They knew that there was going to be a small segment that was going to be very, very angry about this change because it was definitely worse for them. And those were solopreneurs, weekend warriors, people who like to do their projects on the weekend wedding invitations and restaurant menus, things like that. They didn’t need all the bells and whistles that this new offering had, and they didn’t need collaboration, which this new offering had. But the graphic designers who worked in agencies and who worked in large corporations. That were really high stakes creative projects loved it. So they said, we serve professionals. If that’s not you, we’re sorry, but we’re not going to be supporting that anymore.

But if you’re a professional in high stakes graphic design situations, you’re going to love this offering. So they were super clear. They ripped off the band aid, people were mad, and then their stock price just shot up.

Get clear on your client base. Get clear on your offering and the market you serve and be unapologetic is cause you can’t be everything to all things to all people. It doesn’t work.

And, yeah, I would even say, be honest. I mean, you can be unapologetic, but also be honest. Say, you know what? If I walk into McDonald’s with my husband dressed up, and I say, it’s our 20th anniversary, show us to your finest table and bring me a bottle of your finest champagne. They’re not gonna feel sad or sorry. That they can’t serve me, right? They’re gonna say, we don’t really do that. Do you want a Big Mac? That’s fine, but if you want to go to. I mean, they might say they might be able to make a referral. They might say, you know, if you want to go to a fancy restaurant, there’s one up the block. But many of the people that work. There might not even be able to make that referral. They might just say, we don’t do that here.

Yeah, they’re just going to be confused because everyone knows what McDonald’s is.

Because they’re so clear. They’re not all things to all people. They’re really not. They serve. I mean, all of us have probably been there at least once, but they’re not all things to all people, and they’re optimised for particular use cases and particular people.

So, Robbie, we’ve covered a lot of ground. You’ve shared a lot of fantastic advice. Is there anything that we haven’t covered that you really think is worth adding to the conversation?

Well, we haven’t talked about the impact that subscription revenue has on your valuation as a company when it comes time to sell the business. And I think a lot of organisations have certainly come to me and said, hey, we’re getting ready to sell. We need some subscription revenue so that we look better to potential buyers. Right. And by that point, it’s too late. Because the whole thing about subscriptions is it’s not about a quick change. Transitioning your revenue from product based, deliverable based, to subscription based. It takes some time, and also they’re paying less per month. And you’re counting on that long, long period of relationships. So it doesn’t really start to look good for a few years. So what I would say is, if this is something that you’re thinking about, now is the time to experiment with it and to see if you’ve kind of got the stomach for this kind of investment in the long term value of your business.

Yeah, thanks. That’s a brilliant point. It’s like whenever you’re working on your. Business, you work on the strategic elements of the business. It takes two to three years to land and really hit your bottom line, your revenue line. So you really are working twelve months plus ahead of your business. But that’s where the equity valuation build occurs. So that’s a nice, nice way to frame up an end on. And I think that’s a fantastic conversation, Robbie.

Oh, it’s been fun talking to you. I really enjoyed it. Thanks so much, Darryl.

Robbie Kellman Baxter, thanks for sharing your exit insights with us.

Pleasure.