Can I Make Money with Membership Sites?

Can I Make Money with Membership Sites?

Membership sites are one of the best ways to make a great income online. Subscriptions are a great way to increase your cashflow, igniting your growth and boosting the value of your online business. If you can get some kind of subscription going, you could be looking at a lot of regular income, but it’s maybe not as easy as it first seems. Here’s a little detail of the various different types of Membership Model.

There are about 9 different types of membership model:

  1. Membership Website Model
  2. All-you-can-eat Library Model
  3. Private Club Model
  4. Front of the Line Model
  5. Consumables Model
  6. The Surprise Box Model
  7. The Simplifier Model
  8. The Network Model
  9. The Piece of Mind Model

The History of The Subscription Model

The Subscription Model began in Europe in the 16th Century when map makers issued updated maps as new lands were being discovered by explorers of the day. A little later, newspapers and magazines adopted subscriptions and it become the accepted distribution model for publishing. The money from subscriptions added to advertising revenue covered the expenses and mailing costs to each reader.

The whole system fell apart for publishers when the Internet came along. People started to expect their information for free. This changed later as the business model no longer worked for publishers. They started putting their valuable content behind paywalls, and it became the default way of protecting published content of value.

1. The Membership Website Model

If you have particular expertise in something, no matter how obscure it is, there may be people who are prepared to pay for access to what you know. This is probably the most well known Membership model and the simplest to set up.

2. The All-You-Can-Eat Library Model

This model allows you to pay a fixed monthly fee to get access to the whole library of goodies. A good example is Spotify, where a single subscription gets you access to millions of songs.

3. The Private Club Model

The Private Club Model is one which needs to exude Exclusivity. It’s a matter of ‘Who’ rather than ‘What’. This needs to have a high barrier of entry to make the exclusivity work. This can be incredibly lucrative, but attracting members is the biggest challenge.

4. The Front of the Line Model

The Front of the Line Model can be used to get a privileged advantage over a service you already offer. You must already offer a good baseline service, this is the Gold or Platinum Advantage subscription.

5. The Consumables Model

This is the Model that provides a regular delivery of consumer items that would often run out, or that are annoying to replenish. Things like toilet roll, grooming products, perfume, socks, underwear, washing powder, food etc. You’ll be competing with Amazon though, so it’s not easy to dominate.

6. The Surprise Box Model

This Model allows you to send a ‘Mystery Selection’ of products to your subscriber, usually from a tightly defined range, such as clothing and fashion for example. With this model, you’ll have to be able to handle the distribution of physical products, which may come from different suppliers.

7. The Simplifier Model

The Simplifier Model is suitable if you provide a regular service for cash-rich, time-poor clients. It’s usually Personal Services like Tutoring, Book-keeping, Pet Grooming, Massage or Cleaning. It has a strong potential  of you upselling or cross-selling other services, so could be very lucrative.

8. The Network Model

The Networking Model lends itself to whose power increases as more people join in. It works best if you provide a remarkable experience that people will feel compelled to share with others. If your subscribers are tech savvy and social media active, your business will expand faster.

9. The Peace of Mind Model

The Peace of Mind Model is an insurance system where you would cover something that is difficult, expensive or impossible to replace. You need to already have the equipment to provide the service, so you can provide it if required. It is a reactive service, unlike The Simplifier Model, which is pre-emptive.

The list is NOT exhaustive. There may be Subscription models that haven’t been mentioned, or others that fall between and incorporate two or more of these.

Establishing Some Vital Numbers

If you are thinking of starting a Subscription business, the numbers you need to measure your business by are different from a conventional business.

Monthly Recurring Revenue (MRR)

The foundation of your business is based on your Monthly Recurring Revenue (MRR).This is the recurring revenue that appears on your Profit and Loss report every month.

When a customer subscribes to your website at $240 per year, it gets entered on the Profit and Loss Report as $20 per month ($240 divided by 12).

So, in this example MRR = $20.00

Lifetime Value

The next number you need to establish is the Lifetime Value (LTV) of a Subscriber. This is calculated by multiplying the MMR by the number of months the customer is expected to stay with you.

If your average customer stays with you for 18 months, the LTV of the customer is $20 x 18 = $360.

Customer Acquisition Cost

The third number you need to know is your Customer Acquisition Cost (CAC). This is the amount of money you need to spend on advertising and marketing to gain a new subscriber. If you spend $1,000 and gain 20 new subscribers, then your CAC is $1,000 divided by 20 = $50.

Once you know how much a customer is worth and the cost of acquiring one, you can test the viability of the business. Those who evaluate subscription businesses (companies such as Matrix Partners) have produced a metric to judge subscription businesses by:

LTV > 3 x CAC

So, in our examples above

LTV = $360

CAC = $50, so 3 x CAC is $150

So clearly this business example satisfies as a viable subscription business, as the LTV / CAC = 360 /50 = 7.2

Churn Rate

The Churn Rate is vital to know. This is the rate at which subscribers leave your business. To calculate your MRR at the beginning of the month and divide it by the lost MRR during the month.

Let’s say you have 500 subscribers who each pay $20 per month. 18 of those customers leave during the month.

Your total MRR at the start of the month is 500 x $20 = $10,000

Your lost MRR during the month is 18 x $20 = $360

Therefore the Churn Rate is 360 / 10,000 = 3.6%

The Churn Rate isn’t an absolute measure of success, but the lower the better for a subscription business. The higher the LTV:CAC ratio, the more robust the business and a higher Churn Rate can be borne.

Summary

Yes, it’s certainly possible to make money from Membership Sites.

The numbers above will give you an idea of whether a Subscription business is going to work for you. There are a lot of other considerations to make and this is just a brief synopsis that has been derived from “The Automatic Customer” book by John Warrillow, which is essential reading for those interested in starting a Membership site. It’s available at Amazon below and I heartily recommend you get a copy if you are interested in starting a Subscription business.




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4 thoughts on “Can I Make Money with Membership Sites?”

  1. Thanks Dave, this is a great introduction to membership sites. There are many other types and so much more to how to create a membership site.
    Will you be creating a “how to” for creating a membership site? That would be awesome.
    I am seriously considering a membership site myself. Just working on the subject of the site to make sure it is viable.
    Thanks again for this useful information.

    • Thanks for the comment Curtis.

      There’s a lot more to setting up a Membership site than most people imagine. Each of the different types have their own pros and cons and barriers to success, but setting one up and getting a good subscriber base is tantamount. As with most businesses, problem 1 is attracting a customer, problem 2 is keeping them.

      Good luck with your site.

      Dave

  2. I am happy I stumbled upon this post.

    I had no idea there were so many models for membership sites wow.

    I have an expertise which I am using to help people online (dancing) as personal trainer coach.
    I had been thinking of setting up a membership site particularly the The Membership Website Model.
    I just do not know how to get started, do you by any chance know how to do this, Maybe you can make it as one of your future posts?

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