Membership Has Its Perks - for B2C and Marketplace Startups
It's time to promote your customers to "members" - Why and How
Boxcar Background
In 2017 Boxcar launched our commuter service, and immediately our biggest question from riders was “can I get a multi-ride discount or monthly pass?”
Everywhere we looked for comps we saw that there were really only two extant models for selling transportation:
The first was buying multi-packs of tickets, like the LIRR does - Buy 20 tickets for the price of 16
The second, like NJ Transit offers, is unlimited monthly fares. These generally pay for themselves after someone rides more than 15 days a month.
Bulk passes help with cash flow, monthly passes incentivize frequent ridership - we wanted to find a way to blend the best features of both.
We considered the idea of a “membership program”, one where people paid a nominal monthly fee, which earned them discounts on bus tickets and other perks (free rides on birthdays, advanced booking windows, later cancellation options, ability to see how many seats remain on a bus).
In looking around the landscape in 2017/2018 this idea didn’t exist anywhere with the exception of country clubs or Amazon prime. There was no precedent for asking customers to pay a monthly fee and then still charge them for the good or service being provided. Everyone I talked to said that this didn’t make any sense but we plowed ahead anyway.
We launched our membership structure in February 2019 to an initially confused customer base.
We provided two options:
$5.99 a month for 20% off ticket prices
$74.99 monthly for 50% off ticket prices
We had to answer lots of questions and explain that yes they were going to be charged every month for this membership privilege and that if they rode a few times a month the cheaper membership would make sense and if they rode 12+ times monthly they should purchase the more expensive membership.
Once we got our messaging down the uptake was really incredible.
Boxcar Membership Revenue
In the past few years we’ve also seen larger marketplaces like Uber, Lyft, Grubhub, and Doordash roll out similar membership models.
This model has buoyed Boxcar so much that I thought I would take a minute and outline its virtues to any other marketplace/B2C founders or leaders who might be listening.
First Order Membership benefits:
Recurring Revenue - Probably the most obvious, but recurring SAAS-like cash streams flow are preferable to non-recurring ones. This is pure net revenue as well, so if you run a 25% margin business each of these dollars is worth 4x a typical dollar of goods sold.
Customers buy more frequently - Monthly members who pay a regular fee are much more likely to use your service over a competitors, forming habits and becoming power users.
One incentive is merely math this idea of a sunk cost where if a membership fee is $X monthly then every time the customer makes a purchase during that month, his purchase price is (purchase price) + [ ($X) / (monthly purchases) ]. The result is that the more purchases he make the lower his per-purchase price becomes.
Second-Order Membership Benefits
Better Customers - Our members have buy-in to Boxcar, they know we will prioritize their satisfaction and from what we’ve observed they return the favor.
84% of our rides are purchased by members but member customer service interactions account for only 53% of bus interactions. In other words, non-members are 4.65x more likely to need to interact with customer service as members.
They’re actually nicer when they do interact with customer service. This is anecdotal but makes sense, if you have a membership program, your members are predisposed to give you, the company, the benefit of the doubt because they have chosen to trust your company. They also know that this isn’t a one-time interaction, they’ll talk to this customer service person again.
Less Lumpy Revenue - In slow periods of the year (December, April, and August for us, also every time there’s a global pandemic) members generally don’t cancel their memberships - this helps make our revenue troughs a little less severe during those times.
Also, as you can see from the chart above, our membership fell for a long time - this coincides with the pandemic and demand for our product falling by 100%. After it was evident that commuting wasn’t going to return in a matter of weeks, we started emailing our customers saying “hey, make sure to cancel your membership if you’re not commuting” and from a number of our members we’d hear something to the effect of “it’s okay, I’ll pay another few months - I need you to survive to the other side of the pandemic or I don’t know how I’d ever deal with the commute again!” In addition to warming our hearts, this helped us keep the lights on. While demand for our core product fell 99%, our memberships only fell 60%-70% and much more slower pace than demand for commuting.
Potential Virtuous cycle - Once membership revenue gets big enough it can support staff, partnerships, or initiatives with no other purpose other than reducing member churn and increasing membership attractiveness.
Core sales of parking (orange) and transit (blue)
The Hidden And Most Important Benefit
The most important thing, if you have an interest in building a company that outlasts your own tenure: membership models align your incentives with the customers you need to keep happy in order to survive and thrive long-term. As Charlie Munger says, “show me the incentives and I’ll show you the outcomes.”
If you’re a consumer-facing company, then your customer, the individual human being who is paying you for a good or service is the person you need to keep happy - full stop.
If membership revenues contribute significantly to your company’s bottom line, every level of the company will be motivated to keep membership revenue growing, which means they’ll be working on how to innovate in ways that please the customer and not some other stakeholder.
In this way, creating a robust membership program is like giving your company a virtuous poison pill - any future executive who wants to move the company in a new direction will have to contend with the move’s impact on membership revenue and customer satisfaction.
Imagine if Kodak, instead of being addicted to the fat margins of their film manufacturing, was instead beholden to a membership model where their customers received discounts on film, early access and discounts to new cameras, and, I don’t know, “other Kodak perks” - I picture the same exact executives who decided to not pursue the digital camera that was invented by one of their engineers would have made very different decisions.
There are, in fact, countless examples of successful consumer companies that die because they identify more lucrative short-term revenue streams from sources other than their traditional customers.
Cautionary Tale: Angie’s List
“Angi” (nee Angie’s List) is a case study of a company currently in a spiral where they got caught serving the wrong side of their marketplace.
The company started off as a way for homeowners to share reviews of service providers and in order to access these reviews customers needed to pay a monthly or annual membership fee and they also collected revenue from service providers for leads generated through their platform.
Similar to Amazon selling ads to the top spot of their product searches, the collection of money from contractors rather than customers created an inherent conflict of interest between pleasing customers and pleasing suppliers.
Since 2013, membership dues from Angie’s List customers have remained flat at roughly $60-$70 million annually while “service provider” revenue has increased from $180M to $1.2B annually. Seems great, right?
I’d argue the opposite, that in fact Angi is between a rock and a hard place now - their current offering won’t attract lots of new customers who just know that they’ll be getting served the contractors who pay the most and meanwhile the contractors won’t keep paying top dollar for access to a shrinking marketplace of customers.
I expect that when Angie’s List is out of business or acquired in 5-10 this narrative will be the post-mortem taught in business schools: A consumer company cannot serve two masters. It will eventually merely tolerate the one, and slavishly serve the other.
Advice on starting
Just start, you have very little to lose. You can constantly tweak and add perks and see what works and what doesn’t. Picture if you could get 10% of your customers to start paying you $1.99 a month for some extra perks, would that make a difference?
Bring new perks to the table - you don’t know necessarily what your customers are going to value, so don’t be embarrassed to add things like “free X on your birthday,” “invitation to quarterly happy hours.” or “ability to see remaining inventory of items” - some of these will cost you nothing whatsoever, it’s a purely digital good and is of some value to your customers.
Keep it simple - We now offer only 2 membership levels, while grandfathering in old members at the old levels. The relatively new “Boxcar commuter” level of $29.99 a month for 25% off tickets and a host of other digital goods struck a chord with our customer base.
I believe that membership, eventually, can be broadly helpful for not just startups but small businesses like coffee shops, delis, and other local small businesses. With an absence of development resources, these small companies will need some off the shelf software to come along that serves their purpose and for all I know some may already exist. There is nothing stopping any consumer-facing business from implementing a membership mode.
Down the road I’ll write more about a new type of startup that I expect will make a big impact in the coming 5-10 years, one that is enabled by these types of membership programs.
Instead of trying to sell everyone in the world a single good or service (Casper), these companies will serve a specific community and give them lots of goods, services, social interactions, and sharing economy opportunities. For the customers they serve they’ll resemble a super app or “Concierge as a service.” From the perspective of their suppliers - the businesses and service providers who are catering to their customer base, they’ll almost be an “Audience as a service” - devoted customers who perceive a benefit to making their purchases through an existing platform to which they are very devoted and already have saved address, payment, and other information in.
This is Boxcar’s long-term vision for our business. We will do $4M+ in sales this year and only have 2 full time employees. If you’d like to join our team we are hiring and you can email me at joe@boxcar.com. Thanks for reading!