Why you should (and should not) start a membership business
✍️ Ward Sandler
🗓 July 16, 2019
What’s the deal with membership businesses?
Membership businesses are all the rage these days.
It seems like everyone and their mother is launching a course, guide, or video series. The reasons for the recent surge in popularity are many, but the model itself has been around forever (e.g. gym memberships, farm CSA, newspaper subscriptions, etc.)
If you think about it, the ideal situation for a business owner is to have customers who regularly pay you on a recurring predictable basis. And even better if the amount of work you need to do only marginally increases as your customer base increases.
An online membership-based business model is attractive from a common sense point of view, but there were previously many barriers to entry from the technology side. This made starting a membership business difficult unless you had tons of funding.
Things have changed though and now (as of 2019) there are tools (listed at the end) available which allow a solo founder to have a thriving membership business up and running for under $100/month.
What is a membership business exactly?
An online membership business is a model where your customers have to create an account and pay you money (generally on a recurring basis) to get access to specific pages and content on your website.
There are also legitimate and successful membership businesses that charge a one time fee (e.g. lifetime access) or have some sort of freemium model. For example, members could create an account for free and get access to a limited set of pages/content but to get full access to all the pages/content they would need to upgrade and pay for a higher tier plan.
The types of content available to members varies wildly from business to business but it’s usually some combination of PDFs, videos, mp3s, images, text/blog posts, forums, member directories, and webinars.
A key concept of an honest and well-run membership businesses is that members can cancel their membership themselves (ideally at any time). Once they cancel they will lose access to any member-only pages and content they previously had access to. If they want to regain access they simply rejoin (and pay) for the membership again.
Most people would agree that’s a fair system. The customer can cancel or rejoin whenever they want for whatever reason they choose.
Types of membership businesses
There is a wide range of membership businesses in the digital world these days. Here are the most common types:
These typically include a series of modules or sections that members go through at a certain pace (e.g. one module a week) until they have experienced and completed all modules in the course. An example would be a 10-week diet course on how to lower your cholesterol. For more insight, here’s a real example of a course membership.
These are a sort of digital warehouse of content that generally gets updated and increases in volume over time. The content is usually streamable or downloadable and similar to a buffet (i.e. all you can eat). An example would be downloadable graphics real estate agents can use for their social media marketing. For more insight, here’s a real example of a digital library membership.
Scheduled content releases
These usually include a single piece of content (i.e. video) that becomes available on a set time table (e.g. once a week on Mondays). The members anticipate and expect the content drip on this regular basis. An example would be a yoga studio that posts a daily 30 minute flow video for students to follow. For more insight, here’s a real example of a scheduled content release membership.
This generally involves a private forum where only members can go and have various discussions with each other. An example would be a women in tech community who are trying to create startups and need advice and support. For more insight, here’s a real example of a community forum/directory membership.
Member only events are held online or at a location for meeting up in person to discuss ideas, network, hear guest speakers, etc. Often these events are recorded and that will also be available on the website for members. An example would be a meetup for musicians to brainstorm new songs, hear live performances, and network with producers. For more insight, here’s a real example of a meetup/event membership.
Keep in mind, many memberships businesses use a combination of the five models listed above.
Benefits of a membership model
I briefly touched on the benefits of a membership model earlier but I’ll expand a bit here. A membership business model generally means you are receiving some amount of revenue on a recurring and predictable schedule from various customers. For example, $50/month for access to page A, B, and C on your website.
The value of this model is the predictability of revenue and also the fact that you are generally well hedged since no one individual customer makes up a significant portion of your revenue.
Contrast this with a consulting business which usually involves a handful of clients who are each paying you a significant sum and if any one of them were to cancel or fire you it would have a material impact on the business.
Another great aspect of membership businesses is they generally scale up to more customers disproportionately from the amount of extra work and money required from the business owner.
This is not always true in all cases, but the most financially successful models work this way. Video courses are a good example here. As you get more paying members the amount of extra work and costs only marginally increase (e.g. support, hosting space, etc.).
When you have a large pool of customers you also get a large pool of data. You’ll be able to see what content you provide is resonating and receive feedback rapidly so you can evolve your business based on what your members want instead of just guessing.
Downsides of a membership model
It’s not all rainbows and sunshine when it comes to membership business. There are very real downsides that you should take into consideration before going down this path with your own business.
For one thing, they can take a while to scale up to the point of producing significant revenue. In the software world this is often called the “Long, Slow, Ramp of Death”. Here is a video by the CEO of Constant Contact, Gail Goodman who coined the term. It’s applicable to almost any membership business - not just software.
The gist of the “Long, Slow, Ramp of Death” is that it takes a while for any business to get enough recurring revenue to be sustainable and survive in the meantime.
Say you are charging $20/month and you get 13 customers in month one, 17 in month two, and 20 in month three that would feel like nice progress. You got 40 customers in only 3 months!
However, your revenue would only be $800/month. After you take out business expenses there's not much left over. Certainly not enough to cover the cost of an employee (like a support rep) or your salary. And what happens if your growth per month stalls at 20 customers? What about when members cancel? How do you survive cash-flow wise?
These are difficult questions with no obvious answer.
One option might be to charge more. Another might be to find a new marketing channel so you can get more than 20 customers a month. Either way you have to figure out some way to survive and get the business floating until you’re generating enough recurring revenue to comfortably pay yourself and hopefully a small team to help you.
Another major issue with a membership model is support. By definition if the goal is to get hundreds or thousands of customers paying you then you also have to provide support for hundreds or thousands of people.
Depending on the complexity and details of your offering, this could lead to an overwhelming amount of support questions and issues. Since you can’t afford to hire anyone in the early days you’ll be responsible for helping all those members yourself.
How to get started
A good strategy if you’re just starting out is to have a full time or part time job you work while building your membership business on the side. That job could be for yourself (i.e. consulting) or it could be working for someone else.
Either way, you’ll need to have some consistent form of money coming in while you build up your recurring revenue base from paying members.
Here are some helpful links to get you going: