How to build customer loyalty using the companion model
Digitally enhancing our support network as a key to meaningful interactions.
We go about our lives as consumers making transactions. Think of the last time you bought a pizza slice or a pair of shoes. A brief engagement with the merchant at the point-of-sale and an exchange of money for value. Transactions are transient and ephemeral; the value you pay for is provided then and there. Whether you will return in the future to the pizza parlor or shoes’ store, depends just as much on factors of chance and circumstances as it depends on your satisfaction with the product.
Sellers don’t like much a transaction-model as they prefer to have more control over the process than rely on the caprice of the customer. This is why loyalty programs exist as a means to keep the merchant in the consumers’ mind and a vehicle to feed him constantly with incentives to buy, by offering a stream of price manipulations typically in the form of discounts. Given that sustaining an existing customer is generally cheaper than acquiring a new one, ‘loyalty programs’ and ‘customer relationship management’ are conceived as key elements in a transaction-driven world.
Given the challenges of retaining customers, many businesses attempt at moving to a subscription model. This is clearly apparent in the world of digital, with Netflix as the notable exemplar, but it is becoming relevant in traditional ‘brick-and-mortar’ businesses as well. For example, where I live in Israel, I pay a subscription fee to a coffee distributor named Beanz which provides me with coffee beans on a monthly basis; I do this to save myself from buying the coffee machine (which is provided to me for free as long as I pay for the service) and of the mental burden to remember to keep my supply of beans. Until recently I used to do the same with my wine. Similar businesses exist today for clothes, meals, niche merchandise etc..
While a subscription-model seems highly attractive from a revenue stream standpoint, it may suffer from a similar lack of customer loyalty as with the transactional model. Given that consumers recurrently pay for the service, they tend to continuously question the value and Return of Investment (ROI) of what they are paying for. For example, they may question whether the monthly delivery of a six-pack wine box worth the overhead in price, the loss of choice or even the giving up of the personal experience of choosing the wine. In other cases, especially when demand fluctuates rather than being consistent, they could feel like they are over-paying to something they are not really using. As an example, “Rent The Runway” pioneered the designers clothing rental service some 10 years ago; today you can easily find many competing services. Like with transactions, services tend to get commoditized and become utilities over time, and customers’ loyalty remains evasive.
Like with transactions, services tend to get commoditized and become utilities over time, and customers’ loyalty remains evasive.
Building Meaning In Our Day-to-Day Life
Let us turn now to look at how we govern our regular actions in our day-to-day lives; interestingly they are not that different from our behavior as consumers. Many of our engagements with the surrounding are transactional in nature; we may politely nod a stranger that crosses our way during a hike, or we may greet the cashier at the supermarket line. In other cases, we might engage in a longer chit-chat with another dad while picking up our child. In all these cases, there’s a brief and ephemeral exchange of “value” which might be paid with the currency of politeness, societal citizenship or some rudimentary level of superficial connection.
Of course, conversations and engagements can, and sometimes do, go deeper than that. We all have our networks of colleagues, friends and relatives at different levels of relationship and bonding, but overall they take the smaller portion of our time. They much more resemble the house that we buy once or twice in our lives then the occasional purchase of a pair of socks. Similarly, we have a network of people we “subscribe” to; it can be the housemaid, a physician or the babysitter; and like with subscription goods, we may engage them for a period of time but we just as easily may switch to others, or cut them off completely if we feel we’re not getting the value we expect.
In some cases we do seem however to strike deeper bonds with people, demonstrating a higher level of loyalty. Consider your family doctor, or your therapist, if you have one, and the depth and longevity of the connection you have with them. As society becomes richer and dispensable income grows in larger parts of the world, we tend to spend a significant share of our savings on all sort of such companions — a personal fitness tutor, a mentor, a private teacher, a healer, a resident cook. In a world that becomes more and more chaotic and disorienting, we seem to work harder, sacrifice more of our personal time, and spend whatever extra income we get on a support network to serve us with the needs we seemed to have relinquished in the first place.
We have moved into the city, and we are now outsourcing the village.
In a world that becomes more and more chaotic and disorienting, we seem to work harder, sacrifice more of our personal time, and spend whatever extra income we get on a support network to serve us with the needs we seemed to have relinquished in the first place.
Weighing in the benefits of this concise choice of craziness is likely to be the subject of a different post, but the important role this support network plays in out life is indisputable. Often, we look at these companions as an extension to ourselves and as an ecosystem that helps is in reaching our goals. It is also why we tend to put a high barrier of entry for accommodating a new one into our network. If you do have a fitness instructor, a therapist, a mentor or an educator, you likely spent a lot of effort to find “the right one” to meet whatever high standards you set for; similarly, the more you are engaged in a relationship, the more value that is created within it and the harder it is to switch to someone else. Whether it’s your physical, mental, behavioral or dietary account, companions learn you over time, adapt to your need, personalize their offer and create a mutual history that can’t be simply detached.
In other words, when it works well, it is a loyal and meaningful engagement.
Software Can Be Your Companion
Given the strength of the companion model to build a long-lasting loyal relationship, it is clear why creating a digital equivalent could be highly lucrative. I previously discussed how the shift to cloud computing and the emergence of SaaS allowed the evolution of software as a streaming service. Indeed, SaaS lends itself to a new kind of sales where conversion funnels, traditionally concluded at a ‘commit’ milestone (i.e. the transaction) are now carried-on well into the lifetime of the provided service. Many SaaS companies recover their customer acquisition cost (CAS) more than a year after a customer has started paying. It is a symbiotic exchange of value where the customer constantly re-evaluates her purchase decision and expects the value to be delivered continuously to her, and not merely at the point-of-sale.
In many ways, SaaS looks much more like a partnership, then like selling.
Within this challenging environment, companies that do manage to position their offering in a ‘companion model’ are likely to incur less churn and by striking a partnership with their customers which is rooted on meaningful connection rather than a manipulative exchange of value can create a quick ROI and a higher LTV.
To explain what I mean by the ‘companion model’ here are two examples:
Masterclass
At the junction of education and entertainment, masterclass.com is a brilliant service that provide classes from all life’s aspects, for education and inspiration, straight from the horse’s mouth (or in their case, a long list of experts/celebs from Steph Curry to Margaret Atwood). Masterclass feeds on the needs of an educated cohort that is too busy working but feel guilty about self-inflicted starvation of their intellectual world. Apparently, there are quite a few of those. With so many distractions around us —social media, smartphones, video games, and almighty Netflix — Masterclass stands out as an exception we are actually willing to invest for our own good karma. Signing-up is not cheap; at a $180 annual subscription, most people will consider this a significant expense. This is by design; the message here is “we are looking for your commitment”, and it is fascinating to observe the growth of this service, albeit so many free or low-cost alternatives. Masterclass is different because it is structured in a way that forms a committing relationship; it’s akin to saying “show me you’re serious and I will make sure to keep your intellect in shape by feeding you content from the best educators in the world”. It’s a companion to your intellectual life.
Peloton
What Masterclass is for the brain, Peloton is for the body. Not discounting the quality of the bike, but what makes Peloton brilliant is the experience they provide along with the gear by giving full access to live and on-demand classes and programs tailored to your needs. Like Masterclass (and unlike a lot of our conventional ‘freemium’ thinking), the barrier to get in is high. You will need to spend some $2000 just to get the bike or tread. Again, this asks the subscriber for a commitment, which in return is then being fulfilled by a service that provides the ‘companion effect’ — that personal tutor that accompanies you and follows and supports your progress throughout your fitness journey.
Both Masterclass and Peloton can afford to charge users high fees to play, since they are built on a promise which is expected to be delivered over a long period of time, and thus churn likelihood is reduced, at least in the short run. Likewise, there exist services such as Talkspace and Betterhelp that build on a companion model for mental help (charging >$200 / month), or similar applications to provide child care, private lessons, cooking etc. These services are more immune to the challenges of SaaS as they very quickly cover their CAC, but even more importantly, they have a better chance to build a strong customers’ loyalty as long as they don’t lose the ‘companion effect’. We are willing to pay a premium to what we conceive to be part of our support network, and services that play strong on the ‘human-factor’, by making us feel there’s someone else on the other side taking care of our needs and interests, are much more likely to get our vote and our dollars.
COVID-19 is Accelerating Digital Companions
Everything I discussed above seems to get further accelerated at the face of COVID-19; as we are being isolated socially and prevented access to large parts of our physical service network, we are much more likely to seek for ‘digital companions’ both as ways to reduce our anxiety level as well as in order to fill our unmet needs. This trajectory is likely to persist even after the virus is contained, as people and businesses alike are getting accustomed to work from home practices, and at least according to most opinions, society is not likely to open up so quickly or at the same levels. All this means good news for digital companions.
As we are bombarded by a plethora of digital services fighting for our attention and wallet, our loyalty turns low, scarce and highly-conditioned, but once gained, it is the most lucrative asset for long-term returns. Just like in real-life, loyalty is given when relationships are trustworthy and meaningful. Building digital services to the companion model, by putting the limelight on the customers’ need and positioning the app as part of the users’ support network, has the potential to recreate digital equivalent to what is becoming a resource on low-supply in a world hit by a pandemic. Companies that take advantage of this companion model, are likely to see future growth.
