Memberships

Published on Author Zach Ware

When you sell memberships that guarantee a physical service, you are mostly in the business of financial engineering.

The price you charge has to cover your costs and generate a profit but has to be low enough to make signing up seem like a good deal.

It is in your best interests that customers use your product as little as possible so that you can sell more memberships. The higher the member utililization, the higher your costs. Your business is a promise to provide a service, on-demand, X times per month (or in some cases unlimited).

If you don’t provide the service reliably or if its availability is constrained, your members will be unhappy and stop paying you.

Memberships are very popular in capital intensive categories. Gyms, vehicle use, aviation and now homes.

Don’t be fooled by marketing, the primary goal of any company that sells membership to a physical place or experience is minimizing the amount you use the product. In these capital intensive businesses, costs do not scale in a linear way. If demand outpaces supply, the cost of more supply is generally large and jolting (e.g. buying a new plane, building a new gym, building another house).

Consumers react well to memberships for additional access or a higher level of service. The irrational fear of diminishing returns pushes them to use the product more. This works well for products otherwise available with no membership but more accessible with a premium membership. The most successful example, perhaps in history, is Amazon Prime.

But memberships for access alone are risky. There are few companies in history that have done it well. For reference see the history of the gym industry.

Be wary.

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This post originally appeared at Zach Ware's Notebook.