What is a membership business?

We get asked this question a lot, so I’d just like to share what one is, and the many advantages of having a membership model for your business.

A membership business is one where you have customers who are either purchasing a service or product on an ongoing basis.  There are a couple flavors of membership fees:

• Pay a fixed amount on a monthly basis such as a gym membership or a cell phone plan.
• An initial deposit then followed by a fixed amount monthly, similar to paying rent.
• Pay a lump sum in advance for a year or longer.  There is usually a discount associated with paying in advance.

The benefits to offering memberships are the following:

• Predictable revenue stream. You know can easily estimate how much money you’re making off of active memberships each month.

• Memberships build relationships. Your business will become a power community as you develop a loyal base of members who visit your business periodically.

• Knowing when you need to run promotions. This is less obvious, but if you know when a group of members are about to expire you can send them a promotion.

There are of course a few hurdles to overcome when offering memberships, and its easy to fall prey to the recurring revenue traps:

• Customers don’t like to commit. Anytime a customers has to sign a contract they are more likely to not use the service, unless you give them some time to try out your service, with something like an introductory special.  You will want to make sure that people aren’t just signing up for a introductory special to get a free service.

• Easy cancellation policy. Customers want flexibility.  They want to be able to easily cancel a service if they move away or pause it if they go on vacation.  This of course makes it harder to predict your revenue, but if you are too rigid in the cancellation process or charge fees you might lose out on gaining a valuable customer.

• Members get comfortable with prices. There are times when you have to change your prices.  Long time members don’t want to have to pay more especially since they’re used to the membership price you gave them.  Its up to you to determine whether or not to apply the new price to old customers or just to new customers.  In either case, you should have be tracking the number of memberships you have at the old price vs. the new price.

To get over some of these hurdles you can try the following:

• Show savings by offering a discount. You’ll need to change the pricing for other packages you offer and then show them the savings by comparing the two.  For example, if they sign up to pay $100 for unlimited monthly visits that’s $1200 annually  vs. $150 each time they want to purchase unlimited monthly visits = $1800 Savings with signing up ahead of time with the unlimited monthly is $600!

• Work out the unit cost for them. If people aren’t sure how often they’ll have time to frequent your business, ask them how many times do they think they could come?  And do they want $20 a visit or do they want to pay $10 a visit? This will also encourage them to come more often!

• Offer rewards! If people have pay you on time for more than a year, you should offer them a reward, maybe a free service or a one-time upgrade.  Your service is valuable, and so is acknowledging the long term commitment a member made to your business.

Memberships are a great way to build a community around your business, but before you decide to switch make sure it makes sense for the type of business you have.  Most importantly, be sure to keep track of expirations, and be sure to follow up a few days or weeks before a member expires!

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