Business Strategy: The Recurring Income Trap

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So many individuals and businesses see innovation not as an opportunity, but a burden.

People are always asking me about business strategy and business models…

“What’s the best one?” they ask. And, because I was a brick and mortar entrepreneur in the membership-driven fitness world and now operate largely online, membership websites, continuity and recurring income strategies tend to come up a lot.

Folks just love the idea of set it and forget it monthly income.

No doubt, there is something nice about knowing what’s coming in each month. But, there’s also a lot of myth about the certainty of recurring income, along with a dastardy underbelly that nobody ever talks about. Instead of starting online, though, let’s start with an offline example—health clubs, since they represent a multibillion dollar industry run almost entirely on automated monthly billing. Then, we’ll apply those lessons to the online world, more specifically, to membership websites.

Recurring income business strategy and the fitness industry.

The business model for your average mainstream gym revolves around automated monthly billing (some facilities have other profit centers, but we’ll exclude them for now to keep things clean). New members sign up, often pay an up front fee, then agree to have their credit cards hit every month in advance. Depending on the contract, they may also agree to a minimum commitment (classically, a year) or a simple monthly payment structure. To end the monthly billing, a member must (a) wait until their commitment, if any, has run, then (b) send notice of termination by the precise channels laid out in the contract.

The alleged beauty of this model is that it shifts the burden of reselling and re-earning the membership fee away from the club and, instead, places the burden of termination on the member. Put another way, instead of the club having to resell members every month, the billing only stops when the member proactively says, “no more.”

Sounds like a killer business model, right?

Automatic monthly credit cards payments that are charged in advance keep cash flow not only smooth and predictable, but actually leave most clubs in a cash-flow positive position. That’s rare in any industry. And, tons of clubs have gotten by with a 10% – 20% bottom line for years.

But, here’s where it gets a bit ugly.

This same model also fosters:

  • Widespread lack of innovation,
  • Declining emphasis on remarkability and delight
  • Exceptionally poor differentiation that requires non-stop aggressive marketing
  • Uninspired, disengaged staff working for unsatisfactory pay, and
  • A 40% annual drop-out that keeps the sales burden exceptionally high

Why?

Because, with automated monthly payments almost always comes institutionalized complacency.

The sense that you don’t have to consistently blow peoples’ minds, because they’re locked in. It makes you LAZY!

This sorry side-effect often manifests itself in ways that aren’t in-your-face apparent, yet slowly and methodically degrade not only the quality of the business (as seen above), but the joy that anyone at any level gets from working in the business.

And, the myth of a reduced “recurring” sales burden is largely offset by the fact that so many people quit the moment their commitments expire that there is a constant demand for “new money” in the funnel. It’s not easy to replace 40% of your clients every year.

Automated member billing, often hailed as the single most brilliant element of the health club model, has, in truth, become a massive crutch.

Those who care to look under the hood will realize this business strategy all too often undermines the innovation, differentation and impact, the very elements needed to keep members so delighted they’ll continue to pay and make the business model actually work.

But, nobody wants to own up to what’s really going on.

Because, facing up to the fact that automated monthly fees most often institutionalize complacency and lead to a downward innovation spiral would mean one very, VERY scary thing…

Clubs would have to start earning their fees again. I mean really earning their fees.

Getting innovative, relevant, impactful on a level most walked away from years, if not decades ago.

And, the sad fact is, not just in the fitness industry…

Most individuals and businesses see the opportunity to innovate as a burden, not as a gift.

THAT is truly tragic!

Because spending your time and energy relentlessly dreaming up solutions and experiences that blow peoples’ minds is an opportunity that not only fuels massive loyalty and record sales, it makes the journey about a billion times more fun.

In part 2 of this series, we’re going to zoom in on a renegade player in the fitness industry who’s bucked the trend, shunned monthly membership fees, innovated relentlessly…and continually crushed the competition.

Then, in Part 3, we’ll take a closer look at that brick and mortar business’ online presence and see how they’ve built two powerful sales drivers—social proof and scarcity—into their business and marketing models through their websites in a very innovative way and leveraged them to propel sales. And, we’ll look at how their model is so much more powerful from a PR and word of mouth standpoint…and how you can leverage these same strategies.

Finally, in Part 4, we’ll take all this knowledge, translate it to the world of online business strategies, membership sites and automated billing and explore some pretty fascinating options.

So, be sure to keep a lookout out for the next part in this series (make sure you’re subscribed, so you don’t miss it).

Curious what you’re thoughts are so far…


——————–Awakened Shout Outs——————-

  • Another friend, Brian Clark, who you guys may know as the Copyblogger dude, just launched something pretty neat called SEOScribe, which is a plug-in for WordPress bloggers that helps make sure your posts kick some serious SEO ass, get more google juice and organic search traffic. And, he’s got a giant discount offer running this week. You can check it out at SEOScribe (that’s an affiliate link btw, if you sign up, I’ll make enough money to move to Bali and drive a trendy scooter)

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38 responses

38 responses to “Business Strategy: The Recurring Income Trap”

  1. Daniel says:

    Apparently, the current business that I’m working on is serving web hosting as part of the overall model. Yes, the lure of the recurrent income is there, but the bigger picture would be that it’s kinda gonna be a value added service. Like if anyone asks on who or where I get my sites hosted on, then I’ll point them to the hosting site.

    If they like to host it there, awesome; as I’ve been on the server for 2 years and runs smoothly, even the pricing is just nice for anyone who’s looking to run their first blog or mini sites on.

    Selling it at almost margin price means that I’ve gotta up the back end of the service to get any significant form of income, and not have me fall into the recurrent income trap. 🙂

  2. Social comments and analytics for this post…

    This post was mentioned on Twitter by jonathanfields: Business Strategy: The Recurring Income Trap – http://bit.ly/c5Hqej

  3. Mark Silver says:

    I’m really curious to see your examples. It is perhaps unsurprising how folks chase the dream of “set it and forget it,” perhaps spurred on by folks like Tim Ferris and others who advocate creating something like that.

    In my experience, if you really want to have a successful business, you better be in service to people. And being in service doesn’t include falling asleep for months or years at a time. 🙂

  4. Great post Jonathan! Reminds me of the problem of countries that rely on oil revenues, such as the gulf states. Because the rely on recurring income, the fail to foster innovation in their economies, leading to problems

  5. Jonathan, you have just described what happened to labor unions. Intensifying the situation for unions was required membership and the practical inability to move to a different provider (union) or to no provider(union) at all. You are stuck until you leave or your company or your industry dies.

  6. Julie says:

    Great great post!
    Can’t wait to read more from this series because
    1- I run a blog about fitness and lifestyle that I plan to turn into an online business (still thinking about what business model to choose.)

    And ultimately, I’d dream of turning this online business into a brick and mortar (reinvented) fitness/lifestyle center / Health Club.

    So did I say it : I just can’t wait to read more.
    Thanks Jonathan!

  7. This is an excellent post! I’m going to send it to some friends of mine, who I think may have fallen into this very trap in their business (now that you point it out to me).

  8. RJ Weiss says:

    Looking forward to this series.

    You’re right about membership site owners becoming lazy. I joined an internet marketing membership course not to long ago. The course was pretty good. However, it lacked new material.

    If you’re paying $100 or so a month for this information, you want the latest information available.

  9. I’m vehemently opposed to ‘set it and forget it’ payments. Not just to making them, but more powerfully, to getting them. (Some of this is the mild emotional trauma of fighting to cancel this, that, and the other thing more than once in the past.)

    If you’re so unsure of your ability to delight your clientele, locking them into a payment which makes them hate you seems, well, counterproductive.

    We don’t have long-term contracts for our clients. Not for our administrative biz, not for our web biz, not for my coaching biz. We give discounts for some of the hosting and admin services for those who choose to pay for a block up front, but we always always recommend that they dip a toe in the pool before they go off the high dive.

    If I don’t earn you, every single time we interact, I don’t deserve you.

  10. You raise some interesting points. We are currently changing our business model from one-to-one brick and mortar consulting to one-to-many SaaS (Software as a Service) monthly subscription fee-based model. There are many great examples of software companies having huge success with this model. 37 Signals, SalesForce, MadMimi, Pandora, etc., to name a few. The intent is to use the Freemium model as well as engage the happy customer with different price points for premium upgrades.

    I personally would like to see more companies like HubSpot offer more of a hybrid business model where EDUCATING the customer for FREE is emphasized, then up sell customer to products based on “now being informed” and reinforce great customer service with ongoing FREE education.

    Brenda Horton
    Hware – HumanityWare

  11. Barb McMahon says:

    Very good post, Jonathan!

    As I read it, I was thinking of the non-profit that I worked for last year. The automatic monthly donor was their holy grail, one they based almost all their budget on and geared their fund-raising efforts toward.

    It didn’t work and I was let go because they could no longer afford to pay their staff.

    Innovation is key no matter what sector you’re in!

  12. this post is v4ery helpful as I am starting to monetize my blog. I am still trying to figure out exactly what to sell and how to do it. thanks for some insights.
    Justin

  13. I’m glas I ran across this discusion.

    My first though is that I don’t think many people believe that inovation=fun or that even work=fun.

    My second thought is that this advance contract payment would be something that I would LOVE to add to my current mode of pay as you go for services rendered.

    I like the idea of being a consumer who can have a contract, pay a fee, and forget it… though even as a participant on that level fails to remind me the value or importance of it… I go to the gym less not more, hmmm, now you’ve really got me thinking.

    Perhaps a model that keeps peoples information on tap and then they choose to re-up every 30, 60, or 90 days. This would keep everybody on their toes. Providers would know exactly how many people they are loosing/keeping at a time and cross check that with what they are doing in the real time business landscape and consumers get the opportunity to vote yes or no on what they are purchasing more frequently. This would serve as a reminder about where they are spending their money and if it is still valuable to them or not and there.

    I will stay in the loop on this one, I look forward to part TWO.

    – shelley

  14. Peter Mis says:

    Jonathan,

    The “set it & forget it” world is based upon a scarcity mindset. It’s hoarding at a time when perceptions tell the hoarders to be afraid of the future. This, unfortunately, is an ingrained ideal within huge cross-sections of America. In these times of uncertainty (and all times are uncertain), the predictability and stability of “set it & forget it” becomes a very attractive income flotation device. It’s not a solution.

    Those with a scarcity outlook on the universe usually never trust that the better solution lies within themselves.

    Great post, as usual!

    Much appreciated!

    Peter

  15. Interesting advice of which I was not aware. As a beginning entrepreneur, it is good to know this particular pitfall. I don’t know that I could ever get lazy when working at something that is my passion, but this post brings up a great point, and I’ll be sure to keep it in mind as I continue to grow as an entrepreneur.

  16. We all like the idea of easy money. The problem is that it becomes all about the money and not about the client anymore. When that becomes your focus you start down a very narrow path.

    • Jonathan Fields says:

      “The problem is that it becomes all about the money and not about the client anymore” – powerful words.

      I don’t have a problem with the membership model in general, just the way it’s implemented all too often and the impact it can have if you don’t work hard to stay on the edge

  17. […] faktisk tror jeg, Jonathan Fields rammer fuldstændig plet i sit indlæg omkring forretningsmodellen for fitness-centre. Yep, den hvor man bliver lukket inde i et abonnement, og centret bare bon’er løs. For selvom […]

  18. Hi Jonathan,

    Brilliant point. I quit a gym in London a while back because, actually, they’d got so desperate to sign up people from whom they could make money they’d forgotten some fundamental customer service stuff. They still phone me asking me to come back, but that’s the wrong type of customer relationship for me!

    What your post also made me think about was that, not only is the model wrong for businesses, it’s also wrong for clients and customers. With it, you have to decide to sign up for, say, a year or whatever the minimum commitment is. Where’s the opportunity in this for you as a client to constantly check in whether you’re emotionally committed to this service or not? I know a lot of people join the gym, but then end up paying their subscription and never using it. In this sense, nobody wins. You know what I’m saying?

  19. Chuck Smith says:

    Wow, you pretty much nailed why I’ve always joined a gym and then left after the contract ran out. Because there was so little interaction and innovation in trying to keep me motivated to work out and get healthy on the part of the gym, I stopped going after the initial excitement wore off.

    I’ve always toyed with the idea of creating a membership site, but the biggest issue has been the time involved in creating the content that will “wow” the members and keep them coming back. There are so few sites that do this, so it’s a bit intimidating to start the process.

    Looking forward to the rest of the series, and this will definitely help me when working with clients who need to “wow” customers – whether on a recurring billing cycle or just those who serve a regular community.

    Thanks,
    Chuck

  20. Dennis Leger says:

    Creativity is only appreciated in the arts. So great ideas in business and government are suppressed. Creative ideas from lower and middle management never see the light. It hurts us all. Somebody somewhere has to give a bright idea a chance.

    Dennis Leger, the crabby old runner

  21. Debbie Ferm says:

    The other problem with shifting the burden to the customer is that people end up hating the company if it is difficult to extricate themselves from some stupid contract. In 2010, it’s so much easier to blast a company via social media than it was years ago when I went to a health club that auto-billed.

    I did discover that there is one way to get out fast. I belonged to a club in downtown MSP, and a guy kept looking at me in the club and then followed me all the way to my car! I called to quit, and they cancelled me instantly! I guess they didn’t want the mess that could have created:)

  22. Drew Feger says:

    Great Post! Using the gym membership as your example was great. I just canceled a gym membership to one of the corporate clubs due to saving some money on an alternate gym. The funny thing is, I would have continued spending the money if someone in the gym showed any interest in my business. I hadn’t used the gym in several months and I decided to act like a new customer and price the gym out. The cost was now half of my monthly cost with little initiation fee. It would not have been difficult for the club to look my account and do any of the following:
    a.)follow up to see how I was progressing. If I wasn’t happy they could have offered some gym instruction or a fitness trainer at a discount for a few sessions or,
    b.)mention that I could save significant money if I signed up for the year, or
    c.)just contact me to see how I was doing since I hadn’t been by.

    The ideas are endless. Spending just 15 minutes to contact this member would have shown me enough to continue my customer loyalty probably for at least another 6 months to a year. Now they lost their monthly memebership and the potential to sell me a personal trainer, which I’ll probably pick up in the spring.

    Customer attention still shows effort on behalf of the business to help satisfy consumers and make them happy to spend their money on such a service.

  23. […] week, in Part 1 of this series on business strategies, we saw how locking people into monthly memberships has the potential to smooth cash flow, BUT it […]

  24. Shane says:

    Jonathan,
    Great post – but I have to say that I only partially agree here. Your post kind of says that if you want to have a recurring revenue model then you will be lazy. I think this is systemic corporate culture and does not necessarily represent every business out there.

    Take 37signals. I have used their stuff for a long time. My payment comes out and I’m happy I don’t have to deal invoices, etc. They are always providing value and taking care of their customers in new an innovative ways. So in this case, it does work. In my mind, the laziness you describe is not a fault of a model, it’s a fault of the purpose and the people behind the model.

  25. Hi Jonathan (I do look forward to meeting you soon!) —

    Let me take a different tack — I refute your point thus:

    Take a look at http://ryanlee.com, a “guru” in the recurring revenue field. Ryan comes from the fitness arena and has made himself into a leader in the recurring revenue model (or models). He’s a business person, not a “get rich quick” fantasizer.

    The fault is not in the business model, the fault is in the business person. The “set it and forget it” mindset can play out in two forms:

    (a) fully expecting that an online business “should” work because you put up a web site, or

    (b) “maintaining” a membership program like a job-holder rather than “innovating” like a creative entrepreneur.

    Business models are just abstractions of actual successful businesses. You can’t just parachute one into a new situation and expect it to work ipso facto. A business model is a pointer, not a guarantee.

    In fact, innovating at business models is what really distinguishes entrepreneurs! That’s when it gets fun, rewarding, and game-changing.

    I’m going to write more about this on my (new!) blog….thanks for the insightful article!

    Cheers and all the best,

    Susan Kuhn Frost

  26. Teresa says:

    Does recurring income make people complacent? Probably, since there’s a promise of profit without much effort. Maybe a little instability is needed to always keep people on their toes. I agree, it is tragic when the chance to innovate and improve is perceived as a burden rather than an opportunity to add to one’s skill set and grow. However, recurring income or not, we should remember to be responsible for ourselves and our ability to recognize and grab opportunities as we see them.

    P.S. See how overcoming your fears and building self esteem can help you achieve business success, recurring income or none.

  27. Gail says:

    I use this model, but I use many other options for payment as well. We never become complacent, it’s never a set and forget model on both parts, we are constantly upping the ante for our students and for our staff! Maybe if the auto-pay was the only option this could happen, but since it’s not it keeps things interesting always!

  28. […] the last two posts in this business strategy series, we’ve talked about the monthly membership business model and the innovating-without-a-net business strategy as they play out in the offline world. In this […]

  29. I can’t imagine innovation as a burden. If I’m not making new initiatives regularly, I get so bored. The constantly growing online business possibilities make this fun!

    Thanks for a great series.

  30. […] Jonathan Fields on exer­cis­ing new ideas. Scan­di­uzzi noted that the pri­mary mod­els for ACT’s new pric­ing and struc­ture are gym mem­ber­ship plans and Net­flix. Essen­tially, for $25 a month, you can go to any­thing at ACT at any time. What they’ve cre­ated is “the­atre on demand.” In this post, Jonathan Fields walks us through how this kind of plan might work, and how to keep it from becom­ing a crutch instead of a long-term solution. […]

  31. […] I have been unable to stop thinking about it and continue to refer back to it.  The post is titled Business Strategy: The Recurring Income Trap (click for […]

  32. […] Business Strategy: The Recurring Recurring income business strategy and the fitness industry. The business model for your average mainstream … it to the world of online business … you want to have a recurring revenue … […]

  33. Brian Clark says:

    Great blog post. I appreciate your argument and you can’t simply sit around and wait for your next pay check. You have to work your tail off to create so much value that people can’t get enough.

    The biggest companies in the world play the game that the rich play and that is cash flow, not hoping to buy low and sell higher. That is gambling, your building your business off of quick sand.

    Heaven forbid you have salaried employees and they don’t receive their pay check.

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

  35. Poornima says:

    This is a great post! I think too often people thing recurring revenue can be applied to turn key businesses, but that’s unfortunately where there’s a lack of innovation occurring.

    As businesses lose customers they realize they need to change, but these strategies are good insight on how to be wary of getting too comfortable as a business owner.

  36. This article emphasizes every reason for to avoid corporate gyms. I worked at a corporate gym for just over 4 years and witnessed the highway robbery.

    The business model there includes everything you mentioned:

    enrollment fees (aka “gravy train fee”)
    contracts
    credit card – monthly debit for membership dues
    treating the customers as cattle
    ignoring complaints
    putting the burden on customers to get out of contracts (via in-person cancellation or certified letter)
    contract gimmicks – “if you do not cancel by the 4th of the month, we will bill you for another month”

    The fitness industry preys on the customer’s optimism bias. Every year I witness 40% enrollment spikes at the gym. This extra crowd eventually quits working out, but allows their wallet to be worked out for months on end before finally going in and fighting to get out of the contract!

    Be careful about the gym you choose. Tell your salesperson you will pay cash up front. Do not let a gym workout your wallet. Use your best judgement before signing ANY contract. They want your money and could care less about yoru health.

    J.S.