Episode #330: In Search of Relationship Value

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This topic was inspired by Fender, founded in 1946: It discovered that 90% of new guitar players quit within 3-6 months, many within 30 days. Those who stick with it for one year become a customer for life.

So it created the Fender Play app, a digital library of over 3,000 online video lessons on how to play the guitar. It attracted around 130,000 subscribers within 3 years, with a 95% retention rate.

Subscribers spent 40% more on Fender products.

During COVID Fender offered a free trial to Fender Play, and attracted 1 million subscribers within several months. We can learn three lessons, according to Tien Tzuo’s newsletter:

  1. Practicing experimentation makes perfect—It’s OK to admit you don’t know what you don’t know. “You find holes by falling into them. Then you fill them and you never do that again.” Constantly tinker with pricing and packaging.

  2. Stay in tune with the customer: understanding the qualitative human elements of the customer experience

  3. Listen to the analytics: retention is important, but so are harder-to-quantify metrics like engagement. People are messy and complicated

Even Value Pricing 1.0 pays lip service to the customer relationship, relative to the subscription business model. There is no better outward-focused business model than subscription. The relationship is at the center of the business. It also does the following:

  • No silos, smashes bureaucracy (timesheets have no place)

  • Bakes innovation into the model

  • Constantly adding value, surprise and delight

  • The empirical evidence is overwhelming, from Unicorns and John Warrillow’s examples [Episode #327], to the many Direct-to-Consumer brands and B2B subscriptions, and the overall growth in the subscription eclipsing traditional transactional businesses.

  • Higher valuations upon selling the business when it has annual recurring revenue and a track record

Words Matter

We don’t have an adequate vocabulary yet to describe all the aspects of this model. As National Review’s [and previous TSOE guest, Episode 316] Jay Nordlinger wrote: “The more experience I have, the more I think that definitions are virtually the whole ballgame. What do you mean? What do you mean by that word or phrase? Once this is sorted out, conversation can proceed.”

We talk about price the customer in VP 1.0 and price the relationship + the portfolio in VP 2.0. But the insurance analogy has been taken too far. 

We are really spreading activities among a portfolio of customers (some use more, some less, etc.). This is why one-off services is such a powerful objection and hurdle to implementing this model. We will figure this out through trial, error, and experimentation.

A “choice architecture” business model

The psychology is different with subscription compared to transactional. You are entering a relationship that requires an action to cancel.

Convenience + Peace of mind + front of the line service are powerful drivers of value, even if not fully utilized.

Simplicity, Frictionless, and Transparency, fosters Trust

There is too much friction in the VP 1.0 model. If the customer needs something different, a Change Request process needs to happen [read: hassle, bureaucracy, and friction for the customer], whereas simplicity, frictionless service and transparency in pricing fosters trust.

All of VeraSage’s work has been around increasing pricing power:

  • It’s why we work with sellers, not buyers

  • Penetration/Neutral/Skim pricing strategies, with our focus on Skim (not that the others are invalid)

  • Branding, strategy and positioning, from our colleague, Tim Williams

  • The Adaptive Capacity Model (Are you busy? Raise prices!)

  • Unlimited Access/Value Guarantee/Perpetual Fixed Price Agreements

  • Niche, Innovation

  • Business advisory services: pricing, KPIs, etc.

  • Customer profit focus/lifetime value vs. transactional profit to the firm only

More Vocabulary

Joseph Pine and James Gilmore refer to buyers as aspirants—they aspire to be someone or something different. Here is where “Transformations” enter the model, and how they explain them in their book, The Experience Economy:

  • “Without a change in attitude, performance, characteristics, or some other fundamental dimension of self, no transformation occurs.

  • “Transformations are individual. No individual can undergo the same transformation twice; the second time it’s attempted, the individual would no longer be the same person. With transformations, the customer is the product!”

And they explain the various aspects of insurance, depending on the nature of the offering:

  • Services Insure: Secure payment in the event of a loss.

  • Experiences Assure: Secure confidence, encouragement, trust, or feeling of satisfaction.

  • Transformations Ensure: Secure event, situation, or outcome.

“Think about the emblems aspirants purchase [or receive] to commemorate the transformations they undergo. Rings, crosses, flags, trophies, pennants, medals, badges, medallions, insignias, diplomas, certificates, and other such emblems all tangibly signify that their bearers have transformed themselves in some way: from single to married, from team to champion, from civilian to soldier, from soldier to hero. Transformations cannot be extracted, made, delivered, or even staged; they can only be guided.”

This economic offering requires three separate phases: diagnosing aspirations, staging transforming experience(s), and following through.

Other Resources

Net Revenue Retention (NRR) rate: https://www.klipfolio.com/metrics/saas/net-revenue-retention-rate 

Harrys sale was blocked by the FTC; They also blocked a women’s razor brand sale. Chilling effect on the DTC model?

Bonus Content is Available As Well

Did you know that each week after our live show, Ron and Ed take to the microphone for a bonus show? Typically, this bonus show is an extension of the live show topic (sometimes even with the same guest) and a few other pieces of news, current events, or things that have caught our attention.

This week was bonus episode 330 - “AOC, Texas, and Cookie Dough”
Here are a few links discussed:

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