Robbie Kellman Baxter on Making the Transition to a Subscription Model

Amanda Setili (00:06):
We all want to do work that we love. And as leaders, entrepreneurs, and employees, wouldn’t it be great to create workplaces where work feels like play, where people are tuned into the changes going on in the world, around them, where they’re constantly learning, starting new opportunities and taking action to go after them. I’m Amanda Stilley. And this is the fearless growth podcast where my guests and I will explore the mindsets and choices that lead you and your organization to outstanding performance. Today. My guest is Robbie Kellman, Baxter author of the membership economy and the forever
Transaction to pioneering books in the field of subscription businesses. Robbie is a strategic thinker, a thought partner, and an expert in everything subscription and everything memberships. She lives in Silicon valley, and I’m just thrilled to welcome her today. And so Robbie exploring this territory, the fearless growth book, my second book was about how companies and people can kind of overcome the uncertainty and fear that holds them back and being able to do new things when the market is really changing fast, when the world around them is changing really fast. And one of the things that I think is important to understand when you want to go somewhere new is where did you come from and what do you really value in life? What really makes you tick? What makes you you know, what, what is really the thing that brings you strength?

Amanda Setili 2 (01:39):
And so a question I wanted to ask you is what did you really love doing when you were 11 years old?

Robbie Baxter I loved making money. I not, because not because I loved the money, cause I didn’t even like to spend money, but as a way of keeping track. And I loved coming up with, you know, I did babysitting, I did mother’s helper. I organized carnivals with chalk on my driveway. I sold my old stuff. I had garage sales. I organize things where, you know, four moms could bring all of their kids to me and two friends and we’d babysit all the kids together. And I just, I always loved, like before I became a terrible teen, that was what gave me the most joy was organizing projects around, you know, some kind of a business endeavor.

Amanda Setili It’s so interesting because that’s what you do now. Not the money part, not that you’re so money focused, but you help companies to figure out what can they bring a value to customers that customers really, really want. And it’s just so interesting that that’s something that you enjoyed even as an 11 year old, but I don’t believe that you were a terrible team. You weren’t really a terrible team where you,

Robbie Baxter – I don’t know, you could ask my parents.

Amanda Setili (02:54):
I can’t believe that about you, but anyway, I guess we’re all terrible in we’re exploring new territory when we’re teens. So speaking of exploration, this is an area that really interests me a lot because I think that companies need to keep exploring. They need to explore constantly in order to find new ways to expand their businesses, new ways to solve customer problems. And that’s something that you’re, you’re very good at. But what about from either an intellectual point of view or just in your life? What do you wish you could explore more if time were no issue? If you had infinite time to explore, what would you explore?

Robbie Baxter Oh gosh. There’s, there’s so many things. I mean, I love school and I was a good student and I in, you know, when people would ask me in high school, what do you want to study?

Robbie Baxter 2 (03:43):
Or even in college, what do you want to study? You know, there were so many things that I found interesting. I studied poetry in college but I could’ve just as easily studied, you know, government or economics or German or Russian or history. And I feel the same way now. You know, we’ve, we’ve had these bird feeders over COVID we have a couple of different bird feeders, and we’ve been watching the birds in our backyard quite a lot. And I’m surprising myself by how interested in, I think it’s ornithology and you know, bird behavior it seems so random, but it’s fascinating. So I guess in summary, that’s not even on the, on the business side, but kind of on the personal side I’m finding that that really fascinating. And on the, on the professional side, there’s so much happening right now.
Robbie Baxter 2 (04:36):
I feel like I’m always a little bit behind. Like, there’s always some other book to read. There’s something to dig into more thoroughly. There’s just so much, so much to learn.

Amanda Setili Yeah. I think that it’s quite fascinating how, you know, Google set this objective, however many, 15 or 20 years ago to bring all the world’s information available to everyone. And it is totally true. Now, anything I am wondering, I can find out so quickly and I can actually remember when I was young, I really enjoyed reading the encyclopedia, which is kind of ridiculous, but that was like where you went to just find stuff like random stuff where you could just open the pages, open the page randomly and see what you saw and you’d go like, oh, that’s interesting. And then you turn to a different page. So I think that people nowadays are so lucky that we’ve evolved to the point where you can answer any question you want so easily.

Amanda Setili 2 (05:31):
An exploration is something that’s so accessible to so many people. And I, I shared your, your interest in birds. I’m not learning the names of all the birds, but I’m very proud of ourselves for having attracted a pair of blue birds to nest right outside our kitchen window. So that’s my bird achievement for the year. So I’m exploring the idea of fear. And I think if you went and asked an executive, what are you afraid of? They might say, well, not really afraid of anything, but yet I’m seeing that fear does hold companies back from being able to do what they need to do. And perhaps you see this in your business as well, where you’re helping companies to, to try something new in the subscription arena. And let’s first just talk about your own experience. Can you tell me any kind of story of a time when you were afraid to try something or afraid to head a new direction, but you ultimately overcame that fear and how did you do it?

Robbie Baxter 2 (06:32):
Well, one of those, Amanda, I think you were along for part of the journey, which is my journey to writing my first book. I really, you know, I knew I had, I don’t want to say I had to write a book, but I knew that that was a really important step in my work. I’d been focused on subscriptions for several years. I think when I actually wrote the book, it was 10 years that I’d been a hundred percent focused on working with businesses that use membership models or subscription pricing. And yet I didn’t feel like I was ready to write a book. I didn’t feel like I knew enough about book writing. I didn’t feel like I had enough to say I wasn’t sure that it was going to be different enough or valuable enough. And I was afraid that I would fail.

Robbie Baxter 2 (07:13):
I had these these thoughts of what if, what if my, my friends and colleagues bought my book because they’re my friends and said, I’ll read Robbie’s book. And then they said, wow, that wasn’t very good. I’m kind of surprised I would have expected more from her. Which is, you know, frankly, what, what I, what has happened to me in my life where, you know, I go do something for a friend and either I say, wow, that’s great. Or it’s not as good as I would have been. And that really helped me back in my process. I’ve kind of come to terms with it over the years is that I’m a toe dipper. I don’t dive in. I want to learn. I want to be confident. I want to figure out how to do it. Right. I want to see enough of it to see what the best practices are.

Robbie Baxter 2 (07:55):
And sometimes that means that I miss the opportunity to be the first mover. But as the second mover, I know I’m going to have a solid entry. And that’s, that’s, I think been, been my, my journey. I’m not the first mover. But when I, when I, when I’m ready to go all in and dunk my head, metaphorically speaking, I’m pretty confident that all that I’ll do a good job thorough which is a real asset.

Amanda Setili – You know, one of the things that is in fearless growth that I’ve really spent a lot of time thinking about is trust. And what strikes me when I listened to some of your videos that you put out and in your books that establishing a subscription business where customers really, really trust you is so essential because you want them to just do what you can explain it better than I, but you want that when I have a subscription, that’s just like necessary for my life.

Amanda Setili 2 (08:52):
Like I would never cancel it because it’s just so essential what I do. And I trust that company to continue to evolve and expand, to provide everything I need in that arena. That’s a particularly wonderful thing. So I was wondering if you could talk a little bit about how you work with companies to figure out what that value proposition is, what is that forever promise?

Robbie Baxter – Yeah, it’s a great question. And I think it actually dovetails pretty nicely with your rule. Number seven, build trust into all you do. A lot of businesses historically, are based on getting somebody to make the buying decision getting them to getting them to, you know, walk into the store, getting them to pick your product and take it off the shelf, getting them to plunk down their money. And then that’s the end. And in the membership economy, that moment of transaction, isn’t the finish line, it’s the starting line for the relationship.

Robbie Baxter 2 (09:44):
And if you don’t earn their trust again and again, every day the customer can cancel. And so you don’t maximize the revenue. And in fact, in many businesses, you lose money in the first couple of months of a subscription before, you know, you become net positive. So it’s really critical that they stay with you. And so you have to build a relationship that is ongoing, and you have to think about the long-term. You can’t go for that quarterly capitalism. I got to hit my numbers. So I’m going to trick the customer into spending more than they wanted, because then you lose that customer. And you lose your revenue stream and you risk, you know, your, your future revenue. So it becomes really, really important that you, that you established trust and that you have a value proposition that goes beyond your headline benefit, the benefit that gets them to join you, or sign up with you or spend money with you in the first place it has to go on.

Robbie Baxter 2 (10:45):
So to answer your question, when I’m working with an organization that is really good at transactional business, they sell a product or sell a service, and they’re trying to move into subscription. The biggest challenge is we have to figure out what is the ongoing benefit that you’re providing, not the one-time benefit, but what beyond that headline benefit that gets them to join? What are the engagement benefits that are going to make them use your product as a habit? And what are the retention benefits that are going to make them think twice before they come up? Ah, so tell me more about the retention benefits. Somebody in your I was listening to, I was participating in one of your group events the other day, and somebody was talking about how they were grandfathered into an old price. And that was, that was why they were retained.

Amanda Setili 2 (11:35):
And I know that’s true with me with LinkedIn. Not that I wouldn’t, whatever, cancel my LinkedIn subscription, but I sometimes think of upgrading, but I’ve got this really good deal that I got like 10 years ago from LinkedIn. I don’t want to change anything about it because I’ve got this grandfather deal. So what, what causes the retention are there tricks to it? Is there some essence to it that’s that you’ve found really effective? So at a high level, the secret to retention is providing somebody with ongoing value that either helps them achieve an ongoing goal. So goal that’s not going away. Like I want to be healthy. I want to be informed. I want to be connected with my network, which might be the LinkedIn reason. So an ongoing goal or to avoid an ongoing problem, right? I want to have, you know, the exterminator come by.

Robbie Baxter 2 (12:24):
Like we have the, the, you know, the guy that comes to our door and says, what’s bugging ya. And then he goes around and sprays everything every month because that’s a problem I don’t ever want to have. I want him to solve that problem on an ongoing basis. So I think that’s the high level way that you, that you manage retention. Tactically, you know, what I see with a lot of organizations is they invest in the acquisition benefit. A lot of product teams are incented to come up with a new feature. That’s going to get a new group of people to buy. And that’s what they measure is who bought because of the new feature we built in, as opposed to who stayed or who stayed longer because of the new feature we built in. And some of the specific features that, you know, our retention and engagement benefits might be making something into a habit, helping them figure out what the next step is.

Robbie Baxter 2 (13:16):
So you watched, you know, if you watched Hamilton, you’ll love the sound of music, right? It’s, you know, if you’re enjoying your Netflix subscription, share it with your children or your roommates or your friends, because that’s how you’re going to get more value. And that’s, what’s going to make you likely to stay. I think the example you provided about getting, you know, better pricing, because you’ve been around for a long time, that kind of loyalty that an organization shows to you in exchange for your loyalty to them, that can be really sticky. Like, oh, I don’t want to cancel because if I come back I’m not going to get the same great price. But it can also backfire, as you said, because maybe you’d be a lot happier with an upgrade with additional LinkedIn features, but you don’t want to touch anything because, you know, you have a really good deal.

Amanda Setili 2 (14:01):
So that would be a question I’d have for LinkedIn. I’ve had that problem with other products as well. I had a funny one the other day with A T&T where I had this international plan. And I was, it was actually that we weren’t living at that house anymore. So I was going to cancel this international plan. And so I called at and T like, what other plans are available or whatever. And the guy could not find the plan anywhere in their database. Like it was such an old plan that it didn’t even exist anymore except on my bill. So I think that some of these subscription businesses, they just come out with different deals every day, every month. I don’t know how often they test them and then some fizzle out and they discontinue them, but they end up, I would imagine with a lot of grandfathered customers for one reason or another, I think that I encourage organizations to do when they’re thinking about is kind of the opposite of that, which is, you know, stick with a few simple subscription pricing options, because I think it’s very hard for the telcos, the gyms, the news newspapers that have a thousand different promotions to really understand, you know, they’re trying a lot of things and some work and some don’t, but it’s very hard to come out with clear conclusions of what works and what doesn’t work.

Robbie Baxter 2 (15:18):
And also what it does is it educates consumers to game the system, right? Wait for the right promotion. And maybe if you don’t like your, your current deal, cancel because if you cancel, you can come back in on a promotion or they’ll try to save you. There’s often, you know, call centers have these save teams where you call and you say, I’m ready to cancel. And they say, but wait, we’d love to save your business. What if we gave you 20% off? What if we gave you a free toaster? And what that does is it teaches smart consumers to threaten the companies that they’re working with. And back to your point on trust, if I’m trying to gain the system. And I’m trying to think about how I can trick you like that. I know that it’s a game. If I want to get a fair price, I have to threaten you.
Robbie Baxter 2 (16:01):
That’s not going to do a lot for trust, right?

Amanda So you mentioned a few minutes ago that when companies introduce a new offer or whatever, they often measure themselves based on the number of new customers they get, but they should also, or maybe even more importantly, be measuring themselves based on the number that they retain. But it’s very difficult to tell how many retained because of that feature or because of that offer. So how do you advise them in that case? I’ve seen that happen a lot where retention is undervalued because it’s so hard to measure.

Robbie Yeah, it’s, it’s a great point. Re retention is undervalued because it’s hard to measure. And the other metric that’s really hard to measure is lifetime customer value. What is the value, how much money, and this is true, not just of subscription businesses, but you know, it could be true in, in retail or air or, you know, airline travel or hotels, or what have you, you know, you want to understand, you know, is Robbie just going to come in one time to our hotel or are we gonna be able to get her to come to the hotel a hundred times or to our chain?

Robbie Baxter 2 (17:03):
And is she going to buy food when she’s there? And is she gonna get a massage you know, pay for the tour, rent a car from us. And so organizations, you know, they often, you know, track, what’s easy to track instead of tracking what’s important to the business. And technology is making it easier. It’s making a heart, you know, it’s easier to, to track. But if you have a million different promotions that you’re trying to track all at once, it’s hard to do good. What I would call cohort analysis. So you can’t really look at all of the people on their first month and say what works best in the first month of someone’s subscription, because Amanda got a toaster and Robbie got a 20% off coupon. So it’s, if Amanda behaves differently, it’s like, well, did Amanda really need a toaster Robbie?

Robbie Baxter 2 (17:50):
Really? You know, we’ve given Robbie a toaster. It’s just very hard to, to reach conclusions when there’s too many variables in play. Yeah. I guess that as we get smarter with data analytics and machine learning and things like that, companies will get better at that, but there’s always so much noise. In addition to what you mentioned, which could be considered to be fields in the database. Like, did we give toaster or not? There’s also just, what kind of person does this? What do they value? You know, who do they ask to do they know that told them about it? Yeah. Source of lead is really important. Initial behavior is really important. What did they do when they joined? So for example, if we all join Disney plus, because we want to watch Hamilton, right. That’s great. But what’s the second thing we do.

Robbie Baxter 2 (18:39):
And what’s the difference between the people who cancel after one month where all they watched was Hamilton and the people that discovered, oh, I can also watch princess movies. I can also watch national geographic. I can also watch, you know, action pictures. What is, you know, understanding how people use your product, especially in the early days, we’ll tell you a lot about, who’s likely to stay and who’s likely to cancel. There’s a lot of analytics in this business isn’t there.
Amanda Setili – Yeah, absolutely. When people, when companies are considering moving to a subscription model and maybe you want to pick one particular type of company and describe it for us, so we can kind of get our heads around what you’re talking about, what is it that they’re most attracted to about subscriptions and what are they most fearful about regarding the transition to a subscription model?

Robbie Baxter 2 (19:28):
I think they’re most attracted to recurring revenue, predictable two things, predictable recurring revenue which is great for a whole bunch of reasons for, for cashflow management for evaluation, both in the public markets and among venture investors. And I think the other thing that they really value is disruption proofing the relationship loyalty. If somebody subscribes every month, they set it and forget it, and they’re not looking at your competition. So that’s, that’s, what’s in it for the company. I think the biggest risks that companies see I think the one that they bring up first is that they’re going to, that the only people who are going to use their subscription, it’s going to be their best customers. And they’re going to end up decreasing the lifetime value. So if, instead of let’s say buying two video games for $60 each now I subscribe for a hundred dollars a year.
Robbie Baxter 2 (20:21):
If I buy two a year, two games a year for $60 each at $120. If I go with the subscription, that’s a hundred dollars a year. If the only people that go from buying games to subscribing to games are the people that buy two or more games. You’re losing money on your subscription. The subscription is a bad idea. You have to be attracting new people as well. And so a lot of businesses are really worried about that. The other thing that they’re worried about is kind of the crossing, the chasm to the new business model, then kind of referred to as an open fish you know, where, where your costs are going up while your revenue goes down the first few months, instead of getting the whole amount of money on day one. Now you’re getting, you know, day one month, two month, three month four.
Robbie Baxter 2 (21:05):
So you have to wait longer for the full amount of money. And there’s a bigger risk that they’re going to leave at any point. So those are the big things that I think hold companies back,

Amanda Setili
I would think that would be very scary for many companies. If you’re in a transaction business, you’re used to money flowing in every single month and you’re used to that end of month push to bring in additional sales or whatever. And if you, I mean, a recurring revenue is right, nice, but initially it’s lower. So how do they, how do they get away with that with their investors, with wall street and does wall street understand that? Or is it such a small thing that it kind of bleeds in slowly? And it doesn’t really impact the income statement as severely as what I worry about.

So it absolutely impacts the income statement very severely, unless they’re doing it off in a corner of the business, then doesn’t really matter, which is what a lot of them do to start.
Robbie Baxter 2 (21:58):
What I’ve seen is, you know, I’ve been in the subscription world for a long time, 15 years ago, nobody wanted, I mean, very few companies were brave enough to do it for these reasons. And it was happening in Silicon valley. I think because venture backed companies have a longer runway, right? We don’t have to, you know, you don’t have to show any, any, any revenue, you know, for the first 5, 6, 7 years, that gives a nice long runway to build those trusted relationships that become golden geese. On the other hand, if you’re a public company you’re responsible for quarterly numbers, and it’s hard to educate your shareholders, that your numbers are going to go down for a few years, maybe before they, they go up. I think today, most investors understand the magic of subscriptions subscription businesses, pretty reliably enjoy valuations of, you know, on the multiples of their revenue that are like five to seven times that of their transactional peers, their episodic peers.
Robbie Baxter 2 (23:00):
So most investors know that. So they want subscription revenue, even if it’s part of the business. But on the other hand you asked, do they really understand it? They, they push their companies to move to subscription, but then they expect the transformation to happen instantaneously. And that’s, I think what’s really hard if, if I were a CEO at one of your big companies that you work with Amanda, and they were getting pressure to move to subscription, that would be the thing I’d want to make sure that my board understood that time horizon before I went down that path.

Amanda Setili
Do you know of any examples of companies that have transitioned from transactional to subscription and have had a different revenue that was not punished by wall street?
Robbie Baxter 2 (23:53):
I mean, in my book, I talked about Adobe. That’s probably the kind of best and most longstanding case.
They did a ton of experimentation before they moved, they really understood and could anticipate what the behavior of their different customer segments was going to be. And they were very clear in communicating to their board, which customers were okay to lose and which customers were not okay to lose and what they were doing to manage that. So that was a really good example. I think Apple’s done a really good job of moving to subscription revenue. You know, they, I think people understood that they’ve done. I mean, it’s a lot late. I think Adobe did it. What is it like seven, seven or eight years ago? Whereas, you know, Apple’s story is a little more recent. And there’s a lot more glow around subscription models today, but those are two examples.

Amanda Setili What about Microsoft office 365? That that’s a pretty big shift, isn’t it?

Robbie Baxter 2 (24:41):
I mean, it’s cloud, which is kind of the definition or they’re so tightly linked to subscription, but I didn’t even realize they they’ve just done well in the markets all through everything, all through transition. Yeah. Well, they had some low points, you know, 10, 10, 15 years ago, but I think Satya Nadella has been very, very their, their CEO has been very customer centric and very focused. And once you start focusing on the long-term relationship with the customer, whether or not you use subscription pricing, whether or not you utilize cloud technology to enable ongoing relationships with your customers if you just think about your long-term relationship with the customer, as what guides you in your pricing and product strategy you know, you’re, you’re kind of already doing membership. Microsoft is an interesting example, office 365, I’ve done a fair amount of work with that organization over the last several years.
Robbie Baxter 2 (25:39):
And they’ve had subscription pricing for quite a while. For a pretty long period. You could, it was, I’m not sure if you’re still able to buy the box software, but for a long time, they allowed you to do both. So unlike Adobe who kind of ripped off the band-aid and said, we are moving to the cloud, and if you don’t like it, you know, maybe there’s another product from another company that you would prefer. Microsoft took us, took a slower and more measured approach. But they continued to layer in more and more value for their subscribers and really tried to make it a more a more valuable experience for the people who are subscribing so that people chose to move to subscription rather than being forced.

Amanda Right. Well, one thing that I like about it is it’s just constantly updated.
Robbie Baxter 2 (26:26):
So I feel like I’ve always using the best stuff. That’s good. That’s one of the, the great things about a subscription is they, they keep on giving you more if they do it right, the way you advise.

Robbie – Yeah, absolutely. And that’s the thing like if, if if somebody is listening to, and they’re thinking about moving to subscription, one of the things that you might not realize that you need to do is to think about the product itself. A lot of, a lot of businesses, just slopped subscription pricing on their existing offering, Hey, we have content, let’s say, it’s all you can eat. And we’re going to put a monthly fee on it, or, you know, we have a car we’re going to let people subscribe to that car. It’s the same car, it’s the same deal. You, you have to think differently about the offering itself.
Amanda Setili 2 (27:12):
And as you said, you have to keep layering in value. And you have to keep innovating all the time. Well, I can tell that you would be a fabulous thought partner for any company who’s struggling with these issues, because each one of these questions that you just posed is easy to say hard to, hard to answer for most companies, they need to think really, really hard and to have a partner like you, who can really, who has the exposure to many other people who are struggling with the same thing must be really valuable.

Robbie – I’ve, I’ve seen so many subscription businesses that I’ve been able to see patterns and frameworks, you know, much in the same way that you’ve focused on, on growth and innovation over time. I think that having the luxury of really looking at a lot of different organizations and drawing best practices allows you to be really helpful at sort of saving.
Robbie Baxter 2 (28:10):
Like, I always think that I’m saving my clients from the bumps, that the people that have come before them have experienced.

Amanda Setili – Right. I’m sure you do. We’re just about out of time, but I asked, I want to ask you one thought question before we wrap up Robbie, what do you think the future holds that most people don’t realize?

Robbie I feel like people don’t always see is that we’re always operating on these continuums, right? And we go, we go way, way, way over here to technology. And then we go way, way, way here, back to the simple, right? And then we go way over here to man-made and then way over here, back to nature. And I feel like whatever it is that we’re doing a lot of now, we’re going to go in the opposite direction. And, and, you know, in the last couple of years, we’ve moved so much in favor of artificial intelligence and so much in the world of making it easy, making it, personalized, sharing all your information.

Robbie Baxter 2 (29:00):
And I think now we’re seeing a big swing back the other way. I don’t think either of those is permanent. I think we’re constantly recalibrating to try to maintain an equilibrium as a, as a community of people. And so I think that’s what people don’t always realize is that, like, it’s not like we’re going here and we’re never coming back. It’s right now, we’re moving this way. And at some point in the near future, you can be a hundred percent sure we’re going to move in the other direction.

Amanda Setili – So wise, so wise or Robbie, thank you so much for joining me today. It’s been really fun talking with you and I wish you all the best with your next steps, and I’m sure that we will continue to collaborate as we both go forward. Thank you so much for me today. Thanks for having me. This was really a fun and provocative conversation.
Amanda Setili 1 (29:47):
Thank you for listening to fearless growth. You can find out more about the show at [inaudible] dot com slash podcast, and you can listen on apple podcasts and Spotify. If you like what you’ve heard, please take a moment to write a review and give us a star rating reviews matters so much in helping others find us. Thanks for your support.
Robbie Baxter 3 (30:15):
[Inaudible].