(Readin’ time: I’m embarrassed to say. Maybe read this anyway. I think it’s pretty good. It definitely is long.)
David C. Baker published an excellent article on monthly recurring revenue (MRR) arrangements yesterday: www.davidcbaker.com/why-monthly-recurring-revenue-arrangements-may-not-be-ideal It’s excellent and y’all should read it.
David’s article got me thinking. I’ve been a fan of MRR, in my own business particularly, but also for client businesses that are at a maturity stage where MRR could be beneficial.
My article today is not really about MRR, and I’m not pro-MRR and David anti-MRR. If you read David’s article you’ll see that it’s a very nuanced, very informed take on the pros and cons of MRR, and today I just want to add my marketing perspective to David’s points about MRR. So don’t get lathered up for a battle of the articles between me and someone I respect. 🙂
Here’s where I’m going with this: I do think the “should you offer MRR services or build an MRR business?” question illustrates an underlying tension in our world. One of several, actually.
There are two such tensions that have been really interesting to me lately. We can think of them as:
- Direct response marketing vs. brand brand marketing
- MRR revenue stability vs. 1-off/custom project profitability
These aren’t strict dualities or polarities. Reality is more complex than that! But if we simplify reality enough to model it in simplistic ways, I think these dualistic models are useful, or at least they give us a way to think through our decisions and create better alignment between us, our goals, and our chosen methods.
The best context in which to consider these dualities is that of genre. I think we all have a rough sense of what a genre is, but allow me a Wikipedia quote anyway, since it does give us a good launching-off point:
Genre (from French genre, meaning ‘kind, sort’) is any form or type of communication in any mode (written, spoken, digital, artistic, etc.) with socially-agreed-upon conventions developed over time. Genre is most popularly known as a category of literature, music, or other forms of art or entertainment, whether written or spoken, audio or visual, based on some set of stylistic criteria, yet genres can be aesthetic, rhetorical, communicative, or functional. Genres form by conventions that change over time as cultures invent new genres and discontinue the use of old ones.
“Conventions”. Kind of like standards. That’s the key aspect of genres. Well, that and “socially-agreed-upon” and “cultures”. Those are other important aspects of genres.
I highlight the social and cultural aspects because that’s often the most frustrating part of genres for innovative thinkers and do-ers. The culture is not always supplying us with the most helpful genres to work in, so we sometimes have to invent new ones, which is difficult work that requires patience and persistence, or we settle for operating within somewhat outdated genres.
Technology is often at the leading edge of the culture, so as folks working in and innovating in the world of tech, we’re not always totally aligned with the culture, or the center of gravity of the culture. And that causes some of the frustration we feel when we think about genre. They can seem limiting.
And that’s the problem, because fitting into a genre can be a wonderful shortcut. Primarily a marketing shortcut. Fitting into a genre can also be a problem for your business.
So I hope you see–or at least trust me long enough to make the case that–being intentional about what genre you fit into is very important.
A quick example.
My wife and I (and our cats) recently decamped from Sebastopol for a month-long stay in Colorado Springs that looks like it’s going to turn into another month in Santa Fe. We want to experience these places for longer than a quick visit so we can make a better decision about where to relocate to. We drive a rear-wheel drive car, and so as part of preparing for this trip we looked into replacing our car with an all-wheel drive car.
This turned out to be more complex and disruptive than we wanted to deal with, so we kept the RWD car and hoped for little or no snow on our trip.
But in the midst of talking to multiple car dealers, I remembered Volvo’s “subscribe to a car” program. You pay a premium monthly price to subscribe to a car; something like $900/mo. You get to drive the car as much as you want, and ongoing repair and maintenance costs are 100% covered by Volvo. And here’s the really unique part: you can exchange the specific car you’re driving with (if I’m remembering correctly) any other car Volvo makes. Or maybe it’s a subset of their product lineup. Either way, you can easily exchange the car you have with a different car as part of this subscription. You could be driving a sporty 2-door car one week and a more cargo-friendly station wagon or SUV the next. And if I remember correctly, the Volvo dealer will bring the car to your house to effect this switch.
Anyway, you can see how this kind of setup would be really appealing to someone who did not want to spend multiple hours inside a car dealer in order to get a car better-suited to his 2-month road trip. The Volvo subscription program would have made that into a trivial phone call or website visit.
But! Volvo is stepping outside the genre that defines how cars are distributed. More for business than aesthetic reasons I’m sure, some of their dealers sued to stop this program. They’re not hyped about Volvo building a direct-to-consumer (D2C) capacity that cuts dealers out of the relationship. The better Volvo gets at creating a compelling D2C experience, the less dealers are needed.
Additionally, some car buyers are going to look at the specifics of Volvo’s subscription program and laugh, probably with a healthy dose of scornfulness reverberating through their laughter. “$900 a month and I don’t even own the car!?!?! That’s like buying one iPad Pro a month but I never own the 12 iPads I’d have after a year!! I’ll have some of what you’re smoking, please.”
It’s reasonable to assume they’re laughing at what they see as a piss-poor value. But I can assure you they are also laughing at what they see as an unacceptable departure from the genre of how cars are distributed.
We seem to be straying away from the idea of MRR, but we’re not because, again, this tension between MRR and custom/1-off project profitability is about genres almost as much as it’s about business models.
As David points out in his article, there are some purely business aspects to service offerings or entire businesses that use an MRR model. One aspect is that the MRR model can really push you in the direction of hands work and away from the direction of brains work.
Spend a moment thinking about every thing that you pay a monthly or yearly subscription for; things where the billing is opt-out by default rather than opt-in by default. You’ll find several commonalities:
- They tend to be commodities. They might be useful–even indispensable–but they are at some level fungible.
- They tend to be low price.
- They tend to be digital goods, consumables, or intangible goods, not assets. Remember, a subscription is an open-ended thing, not closed-end like a term loan, lease, or other scheme that has an end date and ownership transfer or release of a lien at the end of the deal. So most subscriptions don’t end up with you owning a tangible thing or asset at some future date.
These commonalities between the things we subscribe to create a set of assumptions. These assumptions are woven into the fabric to the subscription genre, and when you create a service offering using the MRR model, you are inheriting the client assumptions that are part of this genre. Another way to look at this: when you create a service offering using the MRR model, you are sending a signal, and that signal telegraphs the assumptions of the genre.
That’s why your choice of genre matters. The assumptions that come with the genre and the signals it sends aren’t defined entirely by you. They’re also a social/cultural construct, and that stuff can be changed over time–and it does change all by itself–but this change is rarely easy or fast.
The closest thing we have to a rule of thumb here is: if you, your business, or your services don’t fit into a genre, then you need to think long and hard about why. The corollary: The genre you operate within comes with expectations, and you need to think long and hard about whether to violate those expectations.
Sidebar: Isn’t this at odds with the idea specializing and becoming a category of one? Doesn’t this kind of specialization just let you create your own genre?
No. You do that specialization within the genre you choose. Really, the genre is a sort of meta-context around the specialization.
Elon Musk is actually a great example. He gets a raft of shit (from me too!) because he’s not a “conventional” CEO. And so much so that he routinely gets in trouble with regulators.
But in a way, it works, because he–very intentionally, I believe–is working within a different genre than “serious businessperson”. His chosen genre is “iconoclastic genius innovator”. His choice of genre means his wacky CEO behavior–for those that are fans of the “iconoclastic genius innovator” genre–is a feature, not a bug. For the SEC, not so much. They’re not fans of this genre. 🙂
You are not stuck with one genre for the life of your business or the entire span of your career. In fact, I think this is an important point, and one I want to end on.
Different genres are appropriate at different stages of a business’s growth and maturity. This is how I mostly resolve the tension between direct response and brand marketing and between MRR and 1-off/custom project profitability.
None of us–unless you’re literal royalty or the child of a celebrity, in which case what the frack are you doing on my email list–is born as a brand. And definitely none of us is born with economically valuable expertise or a relevant point of view. We have to build these things.
And as we do, we sort of bootstrap our way up a ladder that starts at “competent survival” and hopefully takes us to “thriving in expertise and authority”.
The genre of competent survival has different assumptions and sends different signals than the genre of thriving expert.
I should elaborate on this more, and I probably will later, but I see direct response marketing as most consistent–meaning it doesn’t create a WTF-level misalignment between what you’re doing and the expectations of the genre–with those of us at the competent survival stage of business.
But as your business matures, and as you cultivate a distinct point of view and economically valuable expertise, you move into a different genre.
The Platonic ideal of an expert–the “genre of expert”–is one for whom their expertise is so valuable, and so needed, that they are in a position of considerable strength.
So once you’re within the thriving expert genre, using a lot of direct response marketing tactics sends signals that are inconsistent with the assumptions of the genre. Brand marketing becomes more appropriate for one in the thriving expert genre because there’s less inconsistency between the cultural assumptions about the genre and the signals that brand marketing sends.
A MRR model also sends signals, and the company offering the MRR service doesn’t entirely control what those signals are. Some of the signals are built into the genre, which again, is a social/cultural construct.
What signals does a MRR model send? Two things:
- Reflect again on the patterns you see when you think about all the other stuff you subscribe to in your life. Your buyers might pay $900/mo to subscribe to a car, but they probably don’t, and they probably don’t exist within a wildy different culture than you do, so their assumptions about the subscription genre will be pretty similar to yours.
- Read David’s article. He describes some of the signals that MRR models send: www.davidcbaker.com/why-monthly-recurring-revenue-arrangements-may-not-be-ideal
I think you’ll come away from this question with the same perspective that I do, which is that you should be thoughtful about MRR models, and make sure they don’t send signals or burden you with assumptions that conflict with the genre you want to work within.