The Automatic Customer: Creating a Subscription Business in Any Industry

Over the weekend, I read The Automatic Customer: Creating a Subscription Business in Any Industry by John Warrillow. I loved it! In this post, I’m going to summarize book highlights so you get a taste of the power of subscriptions.

Why should I build a subscription business?

Here are the top reasons:

• If you plan to sell your business one day, subscription businesses are valued higher.

• The lifetime value of each customer is higher.

• You can smooth out demand.

• You can cut the cost of customer research because your recurring customers will supply you with lots of organic data. Building for them just get easier. For example, Netflix has lots of data on what we like to watch and keeps giving us more of what we love.

• You can automate your income easily.

• You’ll lock in your most loyal customers who want a great price

• It triggers your customers to buy a broader selection of your goods. Once they’ve purchased one thing from you, they’re more likely to purchase another.

• You’ll stay top of mind with your customers.

• You can better protect your business during a recession.

How do I build a subscription business in my industry?

There are nine types of subscription businesses:

1. Membership Website: selling access to unique knowledge and industry expertise

2. All-You-Can-Eat Library: a large library of evergreen content that customers want on-going access to, i.e. Spotify or Netflix

3. Private Club: access to a premium network, i.e. country club access

4. Front-of-the-Line: paying to be the first to get premium support or access to a desired feature

5. Consumables: receiving goods on a monthly basis, i.e. Blacksocks.com

6. Surprise Box: receiving a curated box of assorted goods, i.e. Birchbox

7. Simplifier: giving consumers access to a service each month that decreases their stress, i.e. bookkeeping service

8. Network: selling something that increases in value as more people adopt it, i.e. Zipcar, WhatsApp

9. Peace-of-Mind: selling something that gives consumers peace of mind, like the on-going monitoring fee for your alarm system

In his book, John dives into each of these models in-depth with lots of examples and ways to make these models work in your industry. One of my favorite examples from John’s book is the example of the flower shop.

Traditional florists have a lot of constraints. For example, they typically have to rent expensive retail space in high-end areas to get foot traffic. Second, their business relies on seasonal trends like Valentine’s Day or Mother’s Day. And last, their inventory dies quickly. If not enough customers come into their store in a given week, they have to throw away inventory (flowers).

You might be wondering how a florist could switch to a subscription. Here’s how:

They start calling up restaurants and hotels in their neighborhood offering a recurring flower delivery to keep fresh flowers on their tables and decor. For a monthly package, these businesses won’t have to worry about regularly ordering flowers and tracking their delivery. Instead, this can all be done for them. They sign up and now this florist has a subscription business, and therefore consistent recurring revenue.

Are there any downsides to building a subscription business?

Building a subscription business is usually great over the long term, but there are some short-term downsides:

Less cash upfront

Building a subscription business will likely mean less revenue today, in exchange for more revenue tomorrow. Let’s say you previously charged your customer $1,000 for your product and then you start charging $99/month instead. In month 1, you’ll receive $99 instead of $1,000. This is a large trade-off in the first month of securing the customer. However, the LTV (lifetime value) of your customer will likely go up. If your average customers stays on board for 24 months, you’ll receive $2,376 for that customer instead of just $1,000. If your business needs cash up front, then you likely need multiple streams of revenue instead of just one subscription.

Subscription fatigue

Consumers are used to subscriptions. This can be a good or bad thing. On the one hand, they’re familiar and normalized, so saying yes to them is not that strange. However, customers are racking up quite a few subscriptions these days, which means on each credit card bill, they’re having higher and higher locked in costs each month. Adding a new subscription is often heavily weighed by consumers these days.

Monitoring churn

Churn rate is the percentage of customers who cancel each month. Assuming your churn rate is reasonable, your business will remain profitable.

Absolutely recommend this book

I highly recommend this book for anyone who is running a business or wants to one day. It’s a great look into a bright entrepreneurial mind. John is full of creative ideas for turning businesses into subscriptions and selling them successfully to your customers.