Digital + Recurring Revenue = Win. Easier said than done, right?
As we discussed last week, digital products and services plus subscription revenue are The Two Components of The Perfect Online Business Model. Let’s talk a little more about the subscription side of things.
This week, author and entrepreneur John Warrillow joins me as co-host, and we’ve got three models for you to contemplate when piecing together your perfect business. John is the author of The Automatic Customer: Creating a Subscription Business in Any Industry, and the founder of two recurring revenue businesses.
In this 32-minute episode John and I discuss:
Listen to The Digital Entrepreneur below ...
Brian Clark: This is Rainmaker.FM, the digital marketing podcast network. It’s built on the Rainmaker Platform, which empowers you to build your own digital marketing and sales platform. Start your free 14-day trial at RainmakerPlatform.com.
Brian Clark: Hey, everyone, and welcome to another episode of New Rainmaker. I am Brian Clark, your host and the founder and CEO of Copyblogger Media.
We have a really cool episode today because I have a really cool co-host, as has been our practice lately. Instead of having to listen to me ramble on monologue-style, we get smart people to join us and talk about smart things.
Today, we’re talking about subscription revenue models. Last week, we kind of set the stage for the perfect online business model, which would be a combination of recurring revenue and digital products and services. We’re going to continue on that theme today with a guy who wrote the book on the topic of the power of subscription models in general.
Today, we’re going to focus on three models in the digital realm that are extremely powerful for any entrepreneur or business person looking to create a recurring revenue stream. Today’s guest is John Warrillow. He is the author of The Automatic Customer: Creating a Subscription Business in Any Industry.
John, thanks so much for joining me today.
John Warrillow: Thanks for having me, Brian. It’s a pleasure to be here.
Brian Clark: Yeah, absolutely. I know you currently run a successful subscription-based business, and I know that you had one prior to that, which is pretty good credibility, I would guess, for the book that you wrote. Tell us a little bit about how you got started as an entrepreneur, and take us through to how we got here to today.
John Warrillow: Yeah, sure. I used to run a subscription business. I sold it to a Fortune 500 company in 2008. I wrote a book called Built to Sell back in 2011, and the idea was, how do you structure a business and make it more sellable? One of the themes in the book was the importance of recurring revenue as it drives up the value of your business. With this book, I really wanted to do a deep dive into that idea of recurring revenue and how important it is to the overall value of your company.
Brian Clark: We talked last week. I had either the privilege or misfortune of having two months of conversation with private equity investors. It’s gotten to the point where all they want to hear about is recurring revenue. That, to me, is a remarkable shift given that most of the world still operates on a transactional basis.
John Warrillow: Let me give you an example because my day job, what you mentioned, my current business, is called The Value Builder System, where we estimate and help business owners improve the value of their company. It’s a subscription business, but we have now 14,000 users that have gone through and filled out our questionnaire.
What we see is that the average business on that questionnaire gets an offer that’s around one times top-line revenue, but if you’ve got recurring revenue, you can get as much as six times top-line revenue. It’s a huge impact on the value of your business. Why? Because acquirers want to know, “Well, what’s this business going to do once the owner hits the beach?” They want to know that the revenue’s going to continue to go on.
Brian Clark: Yeah, absolutely. Of course, we’ve seen scenarios where that gets up to 10X revenue, which is amazing. If it’s the right company in the right market with recurring revenue, you can get into a strategic acquisition bidding war if you have more than one suitor, which of course is ideal. Still, five to six times revenue compared to one or two — huge difference in the capacity of that beach house that you end up in.
John Warrillow: The size and square footage, exactly.
Brian Clark: All right, as promised, I want to talk about a few different models here. We’re speaking specifically about digital products and services and with the advent of things like Netflix and other recurring models, based on purely, now, digital distribution. Of course, Netflix, at one point, did ship — or I guess they still do, but who does that anymore? — the actual DVDs, which was a smart play. They were in it for the long term, but I recall an interview with their CEO that says if you look at the brand itself of Netflix, it was always going to end up pure digital.
John Warrillow: It’s a very good point. The logistics of managing shipping stuff in a subscription business, you just have to ask the guys at Dollar Shave Club how difficult that is to actually ship a physical product on subscription. So they’re moving in the right direction making it digital.
Brian Clark: Now, I know one of your other models — and we joked around about it last week — not that it’s not amazing and viable, but the stuff in a box thing, I find this amazing that you have all these businesses popping up serving relatively affluent people with everything from a collection of cosmetics to an outfit for a guy.
John Warrillow: Right, yeah. BarkBox is one of my favorite. This is the one for dog parents where they send the dog parent — the dog owner, but they call them parents — a collection of dog treats. What’s really interesting about those models, Brian, is that the key to making them work is less the subscription and more the sales on the back of the subscription.
At Birchbox, as an example — $10 a month and you get a box full of cosmetic samples, mostly women who subscribe — half of their subscribers have now bought a full-size version on their website. The real opportunity that a lot of people are chasing is the back-end sales on the website, on the back of the subscription. The subscription in and of itself is a bit of a Trojan horse.
Brian Clark: Yeah, and that’s something we’ve been preaching forever, whether you call it a gateway product or acquiring a customer. It’s the continued sales, whether in a recurring model or on a one-off transactional model, but yeah, I did note that about Birchbox. I thought it was brilliant. It’s old-school direct marketing, but brought forward into the digital — the world we live in today where you have to be much more trustworthy and transparent in our marketing. Yet it’s still the same principle. When you acquire a customer and you take care of them, you’re going to get the opportunity for more revenue.
John Warrillow: Absolutely, yeah.
Brian Clark: Okay, so let’s talk about our first model today. This one is the first one that pops into many people’s minds when they think of the combination of digital and recurring revenue. That’s the tried-and-true membership website model, probably pioneered by people in the porn industry in the ’90s, but much more legitimate these days.
Why don’t you walk us through the model in your mind and, also, if you’ve got some off-kilter examples. Everyone knows that training people in marketing and these very meta business models are using the membership model, but there’s really just a broad range of people who are benefiting from the model.
John Warrillow: You bet. To define it, the membership model is where you take your expertise, what you know better than 99.9 percent of the world, and put it behind a pay wall and charge people a subscription fee to access that.
A couple of good examples that are a little bit out of the ordinary would be DanceStudioOwner.com. If you own a dance studio, they’ll give you the templates and tools and insight on how to make that a profitable business. They were acquired recently by Revolution Dance, who are one of the fastest growing dance apparel companies, because it was a gateway product for revolution. That’s one example.
Another good example would be Mark over at The Wood Whisperer. At The Wood Whisperer, they teach hobby woodworkers how to build cabinets — again, very deep passion for a lot of people — and Mark delivers a great membership website over there for them.
The key is that you’ve got to find something that people are passionate about. The best membership websites, the ones with the most longevity, are actually helping you make money. It’s like RestaurantOwner.com, how to run a successful restaurant. Joe Crisara at Contractor Selling is helping plumbers and electricians be better sales and marketing individuals.
The ones that are a bit harder to make go are the real consumer-like ‘everything you wanted to know about Italy.’ Maybe there aren’t enough people that are really passionate about that topic, but it’s very hard to get them to break out their wallet if they don’t see a direct line to revenue.
Brian Clark: Yeah, and I think you’ve made the point that the membership site model works when you’re solving real problems, which is usually in a business or financial context, more or less. Of course, in any market, it’s either passion or a true problem, let’s say weight loss. Of course, there are many programs that do really well there because that’s a serious problem. You can at least keep the customer until they reach their goals and maybe even maintain beyond that.
The other side of it, like the woodworking thing, is passion. It’s got to be intense. You want to master whatever it is. I think maybe that’s the ingredient that separates something that’s going to work with that model and something that’s probably not going to go over as well.
John Warrillow: Yeah, and the degree of complexity of what you’re teaching and also the visual nature of what you’re teaching. If what you’re teaching requires screen-grabs and video tutorials, and for people to get it, they got to see it — that’s the perfect circumstance for a membership website. Obviously, with membership websites, you can usually upload video and show people screen grabs. The higher degree of complexity, the more need they have for the information.
Brian Clark: Excellent point. Before we move on from this model, you touch on this in the book. This is something we’ve advocated since 2007 with our Teaching Sells program with online training specifically — multiple modalities of content in that you provide text, you provide audio, you provide video, or some sort of visual when it’s necessary to communicate the ideas, but more or less serving all the different learning styles.
John Warrillow: Absolutely. That’s very, very important in a membership website where you do have people that are better at watching, better at reading, et cetera, et cetera.
Brian Clark: It’s also odd — and we’ll talk about the psychology of selling these things in a little bit — but when you transform something, say, from text into video, all of a sudden people want to pay more money for it, which is odd, but it’s a truth.
Okay, the next one that I want to talk about is the all-you-can-eat library model. That’s an interesting descriptor, but doesn’t that describe what we opened with, with Netflix?
John Warrillow: You bet. Basically, the all-you-can-eat library model is where you take your digital content and you put it in the Cloud. You put it behind a pay wall, and you say, “Here it is. It’s in a library format, search for it, and use it.” It’s evergreen information, while Netflix is always adding new content, the base of its database, its library is these thousands of titles they have access to and that you get access to in real-time. Netflix is the ultimate all you can eat.
You don’t have to be Netflix, though, to use this. There’s an example in the book about New Masters Academy, and they’re an interesting business. They help people learn how to acquire a new skill in art, so if you want to become a watercolor painter or a pottery maker, et cetera, you can subscribe to New Masters Academy. I think it’s $30 or $35 a month, and you get access to literally hundreds of tutorials on how to learn a new discipline in the world of art. It’s all you can eat because the library is up there, and you can pick and choose like a Chinese menu. People are buying access to more content than they could ever possibly consume.
Brian Clark: To give another example of something we’ve been talking about quite a bit lately since LinkedIn spent a billion and a half, Lynda.com is this model as well. Do you have any behind-the-scenes insight on Lynda? I’ve been tracking that site for a decade, but I never quite figured out what their model was for paying contributors.
John Warrillow: I don’t. At New Masters Academy, for example, their model for paying contributors is interesting. There’s a pool of revenue that goes in that basically gets split up between all the contributors, but most people do that on a number of usage basis. So the people who have popular programs are getting paid more in the payout model than those that have obscure ones.
With New Masters, what they were interested in was depth of content as opposed to really just three really popular things. They wanted to be able to have lots of content, so they pay out based on number of submissions, number of tutorials you, as an artist, upload.
That’s the key point about these models like Uber and Facebook. They don’t necessarily own the content. They’re providing, basically, a platform. At New Masters, they don’t hire or employ all the artists. They’re hiring artists that are teaching at community colleges and so forth today and saying, “Hey listen, let me come and record you for a day or two. We’ll build out the tutorial, and then we’ll do a revenue share on the back-end.” That’s how they’ve accumulated lots and lots of content very, very quickly. They’re not buying it. They’re doing rev-share deals.
Brian Clark: Nice, and I suspect Lynda did something similar. What we’re talking about here with this all-you-can-eat library is massive