Episode #298 - Third interview with Dr. Paul Thomas

In his previous appearances, Dr. Paul has shared his experiences with subscription based pricing and COVID-19. In this episode, we spend the balance of our time talking about his new book, Startup DPC: How To Start And Grow Your Direct Primary Care Practice.

From the Foreword: We all know that our current healthcare system is broken, especially for primary care doctors and their patients. Primary care physicians have to see more and more patients in less and less time in order to keep up with declining reimbursement from insurance companies. This leads to rushed office visits, missed opportunities for genuine connections between doctors and their patients, frustrated patients, and burned out doctors. But it doesn't have to be this way.

But first…a bit more about Dr. Paul Thomas
Dr. Paul Thomas is a board-certified family medicine physician practicing in Corktown Detroit. His practice is Plum Health DPC, a Direct Primary Care service that is the first of its kind in Detroit and Wayne County. His mission is to deliver affordable, accessible health care services in Detroit and beyond. He has been featured on WDIV-TV Channel 4, WXYZ Channel 7, Crain's Detroit Business and CBS Radio. He has been a speaker at TEDxDetroit. He is a graduate of Wayne State University School of Medicine and now a Clinical Assistant Professor. Finally, he is an author of the book Direct Primary Care: The Cure for Our Broken Healthcare System.

Segment One Questions

• We had you back Episode 286 right as the Coronavirus was just starting to break loose. Let's quick talk about that to get that out of the way so we can move on to the more important things which is your book, what's going on in your neck of the woods with Corona?

• How about your practice, though? Just your practice is good from that perspective. You haven't had too many people come down?

• Your book, released in May is, Startup DPC, how to start and grow your direct primary care practice. How's the book doing?

• What is the difference between direct primary care and concierge medicine?

• One of the questions that we get on a frequent basis is one that you get, which is, what about the hybrid model where you're taking insurance and trying to do direct primary care you recommend against that, don't you?

• One of the things that you talked about at the beginning of the book is that electronic medical records were billing tool, not clinical care tools. And I'd really love for you to explain that.

Segment Two Questions

• I wanted to talk with you a little bit about starting from scratch versus converting your practice now you started your practice from scratch?

• Talk about if you're mid-career, can you start from scratch? Or can you convert? Which one would you lean towards?

• You say that one of the more common criticisms is, “abandoning patients who are not in your practice, and that they'll people will say to you that if every primary care physician became a direct primary care doctor, there would be a shortage.” Do you believe that to be true? And if so, why or why not?

• Yeah. Well, you write that one of the greatest lessons that you've learned as a maxim, “It's not the decisions. It's the decisiveness.” I really love that. I'd like to expand on that for me,

• So I want to ask you something on a very personal note, but you write this in the book that you had to get over your “personal discomfort with money.” Why talk about that struggle? I'm really interested in that that part of your life.

Segment Three Questions

• How did you come up with your pricing model?

• Did you consider a family plan?

• And you haven't had a price increase as of yet, correct?

• And while we're on the subject of pricing, one of the things that you do talk about also is whether or not you should charge an enrollment fee. What are your thoughts on that?

• How's your churn rate?

• Companies contracting with you for it for a group of people, who does that work?

• Talk about Mapper.DPCfrontier.com. Is that your site or is that just a site that you are aware of?

Segment Four Questions

• I want to share this great quote with that you said that a marketing specialist once told you, “If your website sucks, you suck.”

• And you are, as am I, a big fan of Gary Vee Gary Vaynerchuk of VaynerMedia and I want you to expound on his great quote “Document don't create.”

• Do you have you have a newsletter I think that you send out to folks Is that for your practice, but it is and but also for your consulting practice as well?

• And you quote, Benjamin Foley, who said, “Building a personal brand is all the rage right now, personal brands have always been around, they just used to be referred to as a different word, character.” Talk a little bit about that.

• This direct primary care business is all about developing trusting relationships between doctors and their patients, wrap up on that point.

---

Bonus Content is Available As Well

Did you know that each week after our live show, Ron and Ed take to the microphone for a bonus show? Typically, this bonus show is an extension of the live show topic (sometimes even with the same guest) and a few other pieces of news, current events, or things that have caught our attention.

Click the “FANATIC” image to learn more about pricing and member benefits. 

Episode #296: Subscription Pricing at Summit CPA — Jody Grunden

We were thrilled to interview Jody Grunden, CEO and Co-Founder of Summit CPA. The firm adopted a subscription pricing model and we are eager to learn how he grew the firm from $600,000 in revenue in 2004 to $7,000,000 today.

But first…a bit more about Jody
Jody Grunden is the managing member of Summit CPA Group. Jody focuses his attentions primarily on Virtual CFO Services. Jody meets with business owners on a weekly basis to assist them with Cash Flow Management, Forecasting, Budgeting, Debt Restructuring, Cost Accounting, and Cutting Edge Tax Planning. He takes great pride in helping business owner strive in all economic conditions. He strongly believes that a well-run company will excel in both a good and bad economy. Jody is also the author of Digital Dollars and Cents. Jody graduated from Indiana University with a bachelor's degree in accounting. Jody has been happily married to his wife, April for over 25 years. April is an estate planning attorney for Grunden Law Offices where she concentrates her practice on estate planning, succession planning, and business formations. They have two children, Tyler and Lexi.

Here are Ed’s questions from the interview

• You have a fairly unique pricing model, a weekly subscription. But before we get to that, let’s talk about your background. How did you get to Summit CPA?

• For how long did you do timesheets? You started with them when you first started the firm?

• Other than timesheets and hourly billing, why did you want to change your business model?

• Talk to us about the time of transition from billing by the hour for about two years to fixed pricing? How did you change? Did you start with current customers, new customers, how did it happen?

• What was the secret sauce, the magic that helped you turn the corner?

• You mentioned you brought the pricing into equilibrium with what is valuable in the minds of the customers. What conversations did you have with your current customers as you were trying to help them make the transition. Was there pushback from them to the new pricing and just wanted to stay on the old method?

• I noticed on your website, you talk about offering flat-fee pricing, but it’s unique because it’s done on a weekly basis, as well as you offer them choices. Why weekly?

• You have three distinct categories: Transactional, Controller, and Virtual CFO, and priced as of June 12, 2020 at $750/week, $1,000/week, and $1,500/week. Talk to me about how you got to those prices for those three distinct levels?

• You also offer some bundled services on top of those levels, such as individual and business tax returns—listed as optional—and also paying bills, cash flow management, payroll that are a la carte. What’s the difference between optional and a la carte?

• Do you consider this to be more subscription-based pricing than, say, value pricing?

• Do you have a lot of customers who jump on and jump off after they get their mess cleaned up?

• You also mentioned that you teach what you call “profit-focused accounting.” Talk to me about that.

• Let’s discuss marketing. You have a great website, it’s really well organized. You have a podcast, a blog. Talk to me about how you use that as an integrated marketing approach to get new customers.

• One of the things most intriguing on your website is that you’ve created an accountant community, The CFO Community, for CFOs as well as firm owners. Give us a little run down on that?

• If you were to give one or two pieces of advice to someone who has an accounting firm right now and is thinking of going to a new model, either going virtual or to a subscription model, what would it be?

• If you are talking to a recent graduate who has their degree in accounting, and is interested in doing this, would you recommend they go right into it, or should they spend some time doing pain work with a regular CPA?

---

Bonus Content is Available As Well

Did you know that each week after our live show, Ron and Ed take to the microphone for a bonus show? Typically, this bonus show is an extension of the live show topic (sometimes even with the same guest) and a few other pieces of news, current events, or things that have caught our attention.

Click the “FANATIC” image to learn more about pricing and member benefits. 

Episode #280: Subscription Pricing, Part III

What a show! The subscription pricing business model continues to evolve as do our thoughts on the topic.

Here are just a few of the topics and links we helped use to drive the conversation during Part III of our Subscription Pricing discussion.

• Futurist Dan Burrus distinguishes between hard and soft trends. The Subscription Business Model is a hard trend, and every business is going to have to grapple with it, whether they adopt it or not.

• Tien Tzuo dropped a “time bomb” on television—and the NFL—in his February 8, 2020 newsletter, titled “2022: The Last Year of Television?”

• You can see the decline in ESPN subscribers here.

• During segment two and three of the show, we had on previous guest, Justin Lake, @jlaketx (see Episode #245). We discussed how his business is adopting subscription-based pricing.

• Subscription pricing comes to architecture, at Schimberg Group Architects, calling it “concierge architecture.”

Bonus Content is Available As Well

Did you know that each week after our live show, Ron and Ed take to the microphone for a bonus show? Typically, this bonus show is an extension of the live show topic (sometimes even with the same guest) and a few other pieces of news, current events, or things that have caught our attention.

Click the “FANATIC” image to learn more about pricing and member benefits. 

Here are some of the topics and links Ron and Ed discussed during the bonus episode this past week:

• The Nissan Switch program, another automobile company offering subscription.

Episode #279: Subscription Pricing in Law Firms Featuring Matthew Burgess

Is subscription pricing having an impact on the legal profession? Based on our guest — Matthew Burgess — the answer is a resounding YES!

Let’s Start with Matthew’s Biography:
Matthew Burgess co-founded View Legal in 2014, having been a partner and lawyer at one of Australia’s leading independent law firms for over 17 years. Matthew’s passion is helping clients to successfully achieve their goals. Matthew specialises in tax, estate and succession planning, providing strategic advice to business owners and high net worth individuals, and recognised in the ‘Best Lawyers’ list since 2014 in relation to trusts and estates and in ‘Doyles’ either personally or as part of View since 2015 in relation to taxation. In 2017 he was also nominated as Tax Partner of the Year (Lawyers Weekly). In part leveraging off the skills he has developed working in the SME market space, Matthew has been the catalyst in developing a number of innovative legal products for advisers and their clients. As an author, Matthew is widely recognised as an expert in his field, who constantly creates bespoke revenue related strategies for the growth, management and protection of wealth. Matthew is regularly published in Australia’s leading monthly tax journal, The Tax Institute’s Taxation in Australia (11 articles since 2012) and the leading weekly tax journal, Thomson Reuters’ Weekly Tax Bulletin (20 articles since 2012). He is the author of 23 books, and is a Practicing Fellow at VeraSage Institute.

Here are Ed’s Questions from the Episode:

• You have an interesting LinkedIn profile, going all the way back to grade school. Give us the Matthew Burgess background story.

• While you were at Big Law, you read The Firm of the Future and you said it was a two-year journey, what was that process like? Was it a sudden realization, or just over time that you concluded this 18-hours billable per day was nuts?

• So did you try to change it inside the firm for a while?

• Was that the build-up over time, or was there one incident that was the coup de grâce for you?

• Talk to us about the transition, did you have a plan for creating your own firm?

• You founded View Legal in August 2014. Were you solo or did you have a couple of partners?

• Before we move on to talk about subscription, I wanted to ask you about one more bullet point under “Our Approach,” since it involves my experience in project management in the IT space, having to do with quality:

  • Old View: Quality is defined by the law firm

  • View Legal: Quality is defined by the customer

• There are a lot of lawyers, and other professionals, who have a big problem with that one?

• You were well ahead of even Ron and myself and other thinkers at VeraSage on this whole notion of subscription. One of the things I heard at VeraSage Down Under when I did my presentation on subscription pricing was that it could not work in law. What does subscription mean to you, and how is that different from pure value-based pricing?

• What other adjustments did you need to make it sustainable for both you and your customers?

• The whole notion of allowing your price to justify your expenditure of costs in the future, this allowed you to create, from a technological perspective, a better experience for those customers coming on?

• We might have to combine subscription with something Ron has talked about for years, the TIP Clause.

• If you to break your revenue down by percentage of subscription vs. standard fixed pricing, can you give me a percentage on that?

• It’s a dual-gated model, the movie theater popcorn situation?

• If you look at other industries, such as Amazon Prime, or other subscription models that are out there, are there any that you look to that you’re using to base your future on?

Here are Ron’s Questions for Matthew Burgess:

• Your “Why” [Purpose] at View Legal is laid out on your website under “Our Approach.” Describe how you came to your Why:

  • “At View Legal our mantra is to build the firm our friends would choose.”

• Also, “OUR VISION”:

  • “To achieve our vision, we have set out to fundamentally and radically revolutionise access to high quality legal advice, in our areas of deep specialisation – structuring, tax, trusts, asset protection, business sales, estate and succession planning.”

• In a table below the Vision, you contrast the “Old View” of law firms with that of View Legal, with “significant inspiration provided by VeraSage. Partly adapted with permission of George Beaton, Beaton Capital, 2014.” We could spend the rest of the show on this table, but I just want to ask you about a few of the items.

  • Old View: Bill clients on hourly rates (or various, increasingly elaborate, permutations on the theme) and have no particular interest in client perception of value

  • View Legal: Customers provided up front ‘SPS Guarantee’ – that is service and price satisfaction is Guaranteed with all work undertaken following upfront fixed pricing

• Explain how the guarantee works and what impact it has had on your customers.

• When the trigger is pulled by a customer, and you do have to compensate the customer, one of the benefits is you get to fix the underlying problem that happened. Has that been your experience?

• Having that guarantee does make you more selective about who you take on, doesn’t it?

• Another item:

  • Old View: Revenue growth the #1 goal

  • View Legal: Exceeding customer expectations #1 goal

• Another one on this table I just love, since diversity is such a hot topic right now in the professional firm space, you contrast:

  • Old View: Constant focus on the ‘need for diversity’ of gender

  • View Legal: Only focus on diversity of thought

• And I love this one:

  • Old View: Intellectual property is how we make money and should be guarded jealously

  • View Legal: Intellectual property is how we create trust and should be shared freely

  • From Ron: I love that philosophy because I think Paul Arden wrote this in one of his books: I give away all of my intellectual capital because that forces me to replenish it.

• View Legal participates in B1G1, 1.2 million+ impacts on your website, as of this morning. Our VeraSage colleague Paul Dunn is involved with B1G1. Describe that, and how it is seen by your customers, team members?

• You’ve written 23 books. How many of those are children books?

• One of those books, which I just loved, is The Dream Enabler (2014). Ed and I are going to do a show on inequality, and you point out in there that the most common problem faced by high net wealth families is alcoholism? Is that true?

• You cite the rule “rags to rags in three generations:”

  • 1st generation makes the money

  • 2nd generation holds or keeps the money

  • 3rd generation loses the money

• And you quote Warren Buffett: “A very rich person should leave their kids enough to do anything, but not enough to do nothing.” How do you think about inequality? Does it trouble you?

• You also sent me a copy of your Best Ever 101 Lawyer Jokes [2015], and I love the Warning on the cover: “Content May be Considered Offensive (Particularly by lawyers!).” My favorite joke in there is: How many lawyer jokes are there? And people will inevitably respond with, “Millions, infinite.” No, there’s just one, the rest are true stories. 

Need more information?
This was a GREAT episode, no doubt. We also have another episode on a law firm that uses subscription pricing, #274.

Bonus Content is Available As Well

Did you know that each week after our live show, Ron and Ed take to the microphone for a bonus show? Typically, this bonus show is an extension of the live show topic (sometimes even with the same guest) and a few other pieces of news, current events, or things that have caught our attention.

The bonus episode after Matthew Burgess featured……..Matthew Burgess! He was able to stay on with us for an additional hour and it was just as great as the first hour.

Click the “FANATIC” image to learn more about bonus pricing and member benefits. 

Episode #274: Subscription-Based Law Firm — Jon Tobin, Counsel for Creators

Certainly Lawyers Cannot Use The Subscription Business Model, Until They Can!

About Our Guest:
Jon Tobin is a graduate of the UCLA School of Law, where he studied intellectual property, business law and international law under the nation’s top-ranked practitioners. While at UCLA Law he served as one of two editors-in-chief of the UCLA Journal of International Law and Foreign Affairs. Before studying law he worked for years as a designer and software developer, so he knows what it means to work in creative industries and how things actually get done. He deals with matters involving copyrights, trademarks, software, design, licensing, business, art law and contracts. Jonathan speaks and writes regularly about legal issues facing technology and creative ventures and has given talks for the American Institute of Graphic Arts, the California Community Foundation, UCLA Law, and at a variety of design and technology conferences. Admitted to practice in California and before the federal court of the Central District of California.

Ron and Ed touched on a wide range of topics about Jon’s business model over the course of the hour-long show. Here are Ron’s questions:

• Tell us about your history. You moved from a career in technology to law, and then saw how to combine them?

• Did you ever work in a large firm before you started your firm?

• You wrote a great article at Attorney at Work, “We Built an Affordable Subscription-Based Law Firm for Creatives,” where you discussed when you started practicing, you tried many things—seminars, consultations, etc.—but then landed on the subscription plans for businesses and created The Creators’ Legal Program. Where did you learn about the subscription model?

• This model puts the relationship at the heart of the business doesn’t it?

• Before we get into your pricing, one of the questions you must get from your colleagues is “How do you make money like this? What if people keep calling your, or camp out in your office? How do you answer their objections?

• You set a $95 per month price level; it’s very reasonable, and it’s quite a constraint. That forced you to do some very innovative things, didn’t it?

• You developed your own system to handle the volume of subscriptions. Did you develop your own applications, or were you able to buy program off-the-shelf?

• You’re specialized—creative people/industries (writers, artists, app developers, clothing companies, architects). This is a great niche because it’s growing. Talk about how you market to them.

• It’s easier to do subscription if you’re niched as opposed to a general practitioner, isn’t it?

• Pricers have a saying: Innovate for growth and price for profit. In your article, you discussed adding additional services over time, such as live Q&A, free trademark services, and some services you’ve taken away. Talk about the process you use to decide what to keep and what to remove?

• If one of your customers comes to you with a service that’s not covered by the subscription, how do you price for all the other services lawyers do?

• What about litigation? [No chance!]

• Could you see how it would be possible to do litigation under this model?

• When you decide to provide the noncovered service for free, you’re pricing the relationship and not the services. You’re investing in the relationship and building lifetime value.

• You also discussed metrics and KPIs. The subscription model demands different metrics/KPIs—they are future directed, not backward looking. You are obsessed with:

  • Lifetime customer value

  • Net Promoter Score

  • Churn rate

• Are there any others you’ve found valuable?

• Do you find that 20% of your customers utilize 80% of your resources, and many others are paying for that peace of mind?

• Have you found other things you can provide to those who underutilize your services?

• You wrote you want to move from hundreds of members to tens of thousands. How scalable is this model, Jon?

• What advice would you give to a legal firm wanting to convert, or experiment, with this model?

 …and here are Ed’s questions:

• Explain your customer in-take process? Do people come to you with an event, or do they just want access to a lawyer?

• You have four services listed on your website, are the other three services included if you join the subscription service?

• Have people come to you with an event, join, discuss the issue with you, and then leave?

• You flipped the model, charging for the consultation rather than giving it away in order ot get the services.

• Have you found that you don’t need a large customer base, or are you looking for a larger customer base given your price point?

• Are you comfortable at the level you’re at, or do you and your partner have plans to expand

• You’ll stay in your niche, and build additional services for creative people?

• When you refer customers to other firms outside of your niche, do you get referral fees?

• Are you trying to develop relationships with other firms that practice within this model?

• Have you given any thought to offering different levels to your subscription pricing?

• Options would allow you to innovate for growth.

• What were some of the unintended benefits you found in practicing this way?

• How long have you been around, when did you start your firm? [March 2013, brought partner on 2016, subscription revenue became significant part of the revenue around 2018].

• I notice you have a blog on your website. Do you provide those posts to your members before they go public?

• Let’s talk about one of your posts, “What Does California AB5 Do?” Give us the background of this law.

• What should businesses do because of AB5?

• The provisions that affect Uber and Lyft are delayed until 2023, is that right?

• One of the articles you wrote talks about LegalZoom (“LegalZoom Alternative: Businesses Search for the Ultimate One”). What are your thoughts on LegalZoom?

Bonus Content is Available As Well

Did you know that each week after our live show, Ron and Ed take to the microphone for a bonus show? Typically, this bonus show is an extension of the live show topic (sometimes even with the same guest) and a few other pieces of news, current events, or things that have caught our attention.

Click the “FANATIC” image to learn more about pricing and member benefits. 

Episode #269 — The Subscription Model in Medicine

What happens when a smart doctor recognizes that there is a better way?

Is it possible for family physician to operate under a subscription-based business model, priced below what you pay for your mobile phone service? What about services not covered by the subscription? Could those be priced with full certainty and transparency?

For episode 269, we had the pleasure of interviewing Dr. Paul Thomas, founder of Plum Health DPC. Dr. Paul Thomas is a board-certified family medicine physician practicing in Corktown, Detroit. His practice is Plum Health DPC, a Direct Primary Care service that is the first of its kind in Detroit and Wayne County. His mission is to deliver affordable, accessible health care services in Detroit and beyond. He has been featured on WDIV-TV Channel 4, WXYZ Channel 7, Crain's Detroit Business and CBS Radio. He has been a speaker at TEDxDetroit. He is a graduate of Wayne State University School of Medicine and now a Clinical Assistant Professor. Finally, he is an author of the book Direct Primary Care: The Cure for Our Broken Healthcare System.

Below are show notes and questions we asked our guest. Use these to help guide you along when listening to the podcast (embedded above).

Ed’s Questions

• What is Direct Primary Care?

• Based on an interview I saw you do, there’s no wait time for patients?

• Why did you go this route—Direct Primary Care?

• You were burned out in your residency. What was the moment that you said I can’t do what most people are signing up to do?

• Most time patients do get with their doctors is spent with the doctor typing and facing a screen.

• What are some of things that are covered in your clinic?

• What you are capable of doing in your practice is probably 80-90% of what a healthy patient would need in a given year?

• It would cost me personally about $840 in your practice. If you’re so cheap, why is healthcare so expensive?

• It’s said America pays more than the average OECD country, but there’s no price transparency in the system, which inflates those prices, correct?

• What are some of the barriers you see that are still in the way of physicians getting into DPC and patients being able to access DPC?

• When you did start, did you consider other pricing models? Yours is based on age, but did you consider, for example, response times, or different services you would include and exclude?

• Do you have any jumpers, and by that I mean people who pay for a month and then leave, then come back six months later?

• You’re now also offering rates to small businesses in your area?

• And the companies pay your membership as part of the employees benefit package?

• You believe that patients should also have a catastrophic health insurance plan?

• We don’t expect our auto insurance to pay for gasoline but we do expect our health insurance to pay for a blood test. It’s absurd?

• I was struck that in your TedX talk you used the phrase “living my truth,” take us through that, what does that phrase mean to you? 

Ron’s Questions

• In your book, Direct Primary Care: The Cure for Our Broken Healthcare System, you cite a 2016 study performed by Medscape found 51% of physicians experience burnout. Burnout is defined as a loss of enthusiasm for work, feelings of cynicism, and a low sense of personal accomplishment. You felt this in your residency. How long did it take you to work up to 500 patients?

• How did you market your practice, was it social media, word-of-mouth, press. I know you did a Tedx talk.

• I know DPC is in the same family of Concierge Medicine, which has the reputation of being just for the elite, which isn’t true. But the DPC prices are usually less than a mobile phone bill.

• On the cover of your book there’s a picture of you trying to catch sand through your hands. Can you explain that analogy?

• You talk about technology and how there’s too much borrowing from Henry Ford’s assembly line, treating customers like commodities rather than human interaction. It’s not very efficient to sit and listen to your patient read you poetry. It is, however, highly effective. Would you agree with that?

• You also talk how the average of GP doctors have 2,400 patients. Do you think this DPC model will alleviate this GP doctor shortage?

• You talk about the growth of urgent care centers in the US is a symptom of a failed primary care system.

• Do you feel that people who are not licensed could do some of the work now being done by physicians? What’s your view of occupational licensing and how it folds into this model/

• You mentioned to Ed that insurance companies try to get as many dollars passing through the hands. They don’t seem to like the concierge or DPC models, not because they compete with actuarial based insurance but because they compete with pre-paid medical care. Did Michigan pass a law that made it clear that DPC is not an insurance product?

• Just seems to be like insurance companies would like to block this model. Is that a fair statement?

• There’s obviously some education going on with doctors with respect to DPC, but we also need to re-educate patients to see you even when they are healthy, not just when they are sick. Has that been an educational process to get patients to see you even when they don’t have an issue?

• We talk a lot about the market share myth, that growth for the sake of the growth is the ideology of the cancer cell, not a sustainable, profitable business. You phrase it in your book as “Value over volume.” You must be asked a lot that healthcare is different than any other product or service we buy, how do you explain to people that it can be priced like other things we buy

• Your model is restoring the sacred relationship between the patient and doctor. You’re bringing this back to the days of Marcus Welby.

• I’ve read that most calls (82%) are received during normal business hours, that patients don’t abuse your time off. Has that been your experience unless there’s been an emergency?

• Tell us about your new venture, www.startupdpc.com.

• If you could wave a magic wand to reform healthcare, what would you do? [Price transparency and quality scores was Dr. Paul’s answer].

Bonus Content is Available As Well

Did you know that each week after our live show, Ron and Ed take to the microphone for a bonus show? Typically, this bonus show is an extension of the live show topic (sometimes even with the same guest) and a few other pieces of news, current events, or things that have caught our attention.

Here are some links from our bonus show this week. The bonus show, all bonus links, and additional bonus material are available to our Patreon subscribers. Click the “FANATIC” image to learn more about pricing and member benefits. 

So what did we discuss during the most recent bonus show?

• www.carbar.com.au

• https://catalyst.independent.org/2019/11/25/what-south-park-gets-right-about-government-regulation/

• https://fee.org/articles/the-epic-failure-of-the-government-gas-can/

• https://boingboing.net/2019/11/22/sabotage-by-warranty.html

Episode #241: Lessons Learned From Our Subscription Economy Workshop

In memoriam Ken Baker

Ron’s brother Ken passed away recently. Ed and Ron spent the first few minutes of the show discussing his impact as Ken’s brother.

---

Lessons from the Subscription Economy Workshop

UPDATE: “From Fighting Fires to Fire Insurance” - These slides from the subscription economy workshop are now available here.

Ed and Ron recently taught their first workshop in Chicago on the Subscription Economy Business Model. The advantages of this model are many, including:

• Predictable revenue

• Not selling services, but creating annuities with a lifetime value that far exceeds whatever you paid to acquire them

• Collective knowledge of your customers, which is a competitive advantage that cannot be duplicated

• One-to-one marketing

• Not pricing a product or service, but rather customer transformation and peace of mind

• You can predict demand and plan capacity more effectively

• …and it breaks down silos and creates a true “one-firm” model.

So what did Ron and Ed learn from the attendees? What were the most salient points they took away from this workshop? There are lots of great points in the recorded show audio that you can use and frame for your own business.

On a related note…

Ron will be teaching a Subscription CPE course the CAL CPA Education Foundation on August 8. More information is available here.

A big thank you!!!

TSOE Superfan, Hector Garcia, recorded a great video with Ed and Ron. It’s quick and full of information. Check it out here.

Business For Good?

Learn about B1G1 in about 3 minutes. Check this video out. Then take a deeper dive into the program with these slides.  

Finally…

Some of you may have heard Ed reference his tooth extraction. Well, he’s not going to be able to live this picture down.

Episode #230: Interview with Tien Tzuo

Biography

Tien Tzuo is a Taiwan-born American tech entrepreneur. He is the founder, chairman, and CEO of Zuora, and prior to that was chief strategy officer of Salesforce. Tzuo was born in Taiwan, and when he was 3 years old his family moved to the Flatbush section of Brooklyn. His parents were psychology professors, and his father also worked as an importer-exporter and in real estate.

In 2007, Tzuo left Salesforce to launch Zuora as its founding CEO. The California-based enterprise software company creates and provides subscription management software to help other companies with their subscription-based services. Within a few weeks of its initial public offering on April 12, 2018, Zuora was valued at over $2 billion, and Tzuo's 10% stake in the company was worth an estimated $193 million.

Tzuo's book Subscribed: Why the Subscription Model Will Be Your Company's Future - and What to Do About It, written with Gabe Weisert, was published by Portfolio on June 5, 2018.

---

The Most Significant Impact On Your Business

With an entire chapter in his book, Subscribed, dedicated to the income statement and the changes that can be made to account for a subscription business, we didn’t have near enough time to dig into this topic. Here are a few important points to consider along with an example of a “subscription” income statement.

View fullsize

Click for a larger version

 How GAAP and the Income Statement Changes

• The traditional income statement doesn’t differentiate between recurring and nonrecurring dollars

• Sales and marketing are matched to past goods sold

• It is a backward looking picture, not forward looking

---

Collection of Interview Questions

These questions and detailed responses from Tien Tzuo are all available in the audio of the show.  

• Early on in the book, you write:

  • We prefer outcomes over ownership, we prefer customization not standardization, we want constant improvement not planned obsolescence, we want a new way to engage with businesses, we want services not products.

  • By the end of ownership you don’t mean some utopia where there’s no property, right? Talk about the end of ownership.

• Ron and I have been having a lot of fun applying your concepts to professional firms. We’ve talked about how most firms now sell a rival asset—the billable hour—to selling a nonrival asset, such as knowledge. What are your thoughts around applying the subscription model to nonrival assets?

• Do you make a distinction between an “outcome” and an “output”?

• One of things we hear over and over is “I see how architects, lawyers, etc. could do this…I see how any other business beside me could do this.” Are there some exercises or questions you like to plant to get people thinking differently around the topic of Subscribed?

• There’s a concept you talk about in the book, swallowing the fish, which is when my revenue curve dips temporarily below the operating expenses curve as people transition to subscriptions. In your work with professional firms, does this apply more, less, or the same than those that sell traditional product?

• What can we learn from the lessons from some of the oldest subscription companies—The Financial Times, The New York Times, Wall Street Journal, The Economist, all made the transition from the physical to online. What can we in professional services learn from this, since they were going from subscription to subscription (physical to online)?

• Does Zuora have professional firms in its customer portfolio?

• I want to run this analogy by you. I look at the medical profession, some of which are transitioning to a Concierge model—similar to a boutique—or a Direct Primary Care model, which has more volume. Does Zuora have medical practices in your customer base at Zuora?

• What intriguing about this model is your selling insurance, so customers are paying for access, which puts you more in an actuarial pricing model, and perhaps 10% of your customers might use your resources 80%, and the rest are happy to pay for access whether they use you or not, which is the interesting psychology of selling insurance. Does that play a factor in how you sell this model?

• You talked about Deloitte in Australia and New Zealand, so let’s climb Mt. Everest and try to apply this to a Big 4 accounting firm, or a top 100 law firm. Would you see it across the entire group of services, or just some services with other services priced on some other type of model?

• You wrote something in the book that I just love: “Focus on margin and efficiency come at the cost of the relationship between the seller and customer.” So many firms only look at the math of the moment rather than the lifetime value of the customer.

• The idea that we can subscribe to an automobile is fascinating, but you also talked about airlines and how 200 million frequent fliers are up for grabs. How do you see the major carriers adopting a subscription model, at least for their top fliers.

• When you list all the advantages of this model, the one that hit home is how it breaks down silos. Many firms speak of being “one firm” but it’s not the case. This model really does break down the silos, doesn’t it?

• I would imagine you see much more innovation from the companies that have adopted this model [because they are more customer-centric]?

• You talk about three different customer metrics, Recency (last visit), Frequency (how often do they visit), and Volume (how many articles read), in addition, are there other predictive indicators that you’ve ferreted out from your customer base of what predicts a customer won’t churn, or will keep engaging and remain loyal?

• I loved how you took GAAP to task for not being able to report on this model, and some of the new wording you presented. What’s been the feedback from CFOs on this new income statement and its presentation? [See example of this new income statement below].

• What does Zuora do, what do you offer?

• Are you applying any Artificial Intelligence to your offerings?

• Do you offer consulting to help firms with the change management to help them make this transition?

---

In Summary

Don’t dismiss the subscription business model because you don’t think it would work for your business. Tien shared several examples from industries that might not feel like a good fit. It is worth exploring. If nothing else, read the book which made both Ron and Ed’s “best of 2018” lists.

Subscribed: Why the Subscription Model Will Be Your Company's Future - and What to Do About It

By Tien Tzuo, Gabe Weisert

Episode #221: The Subscription Business Model, Part II

Ed and I continue our exploration of the subscription business model. Check out our first episode in this series from November 9, 2018 (Episode #217).

The Automatic Customer: Creating a Subscription Business in Any Industry

By John Warrillow

Buy on Amazon

In this episode, we discussed the book, The Automatic Customer: Creating a Subscription Business in Any Industry, by John Warillow (2015).

The history of the subscription model dates back to the 1500s, when European map publishers subscribed to future editions. Newspapers and magazines began in 17th century Europe. Ron’s first book, The Professional’s Guide to Value Pricing, which was published by Harcourt Brace initially, was sold on a subscription model.

Vijay Ravindran, from Amazon Prime: “It was never about the $79. It was really about changing people’s mentality so they wouldn’t shop anywhere else.” Nothing has been as successful in getting people to shop in new product lines

Nine Subscription Business Models

1. The Membership Website Model—Wall Street Journal, New York Times, The Economist, Financial Times, etc.

2. The All-You-Can-Eat Library Model—Spotify, Rdio, Rhapsody, Netflix, etc.

3. The Private Club Model—Ongoing access to something rare (networking clubs, etc.). Disney’s Club 21 [and Club 33] at Disneyland.

4. The Front-of-the-Line Model—Priority access to a group of your customers  (turnaround time, etc.).

5. The Consumables Model—A product that needs replenishing (razors, diapers, socks).

6. The Surprise Box Model—a curated package of goodies, sometimes samples (wine, cholates, etc.). Requires big supply chain, variety products, etc.

7. The Simplifier Model—Hassle Free Home Services takes care of your home maintenance, $350/month. Bigger jobs are provided, 50% of revenue. Don’t need to bundle all your services, just the ones your customer needs regularly (Q&A, tax, compliance, etc., in professional firms). Check out the Porschepassport.com—you can subscribe to a car company!

8. The Network Model—Partial access to expensive infrastructure, value increases as more people subscribe (Zipcar, acquired by Avis).

9. The Peace-of-Mind Model—Insurance against something your customers hope they’ll never need. Tagg is a pet tracking service, or IRS audit representation offered by accounting and law firms, Turnover Insurance, LoJack for laptops and Alzheimer’s sufferers, etc. You earn an underwriting profit, which is equal to the premiums less claims paid, plus the investment of float). Calculating risk biggest challenge, so go slow, only offer to handful of customers, limit your coverage to a dollar amount (# incidents, etc.), reinsure.

Episode #217: The Subscription Business Model

Subscribed: Why the Subscription Model Will Be Your Company's Future - and What to Do About It

By Tien Tzuo, Gabe Weisert

Buy on Amazon

We used to know the people we bought from: the butcher, baker, blacksmith, barber, farmer, etc. All that knowledge got lost when the Industrial Revolution ushered in the product era. That knowledge is coming back in a big way!

The idea is turn customers into subscribers—the Subscription Economy, according to Tien Tzuo in his book, Subscribed: Why the Subscription Model Will Be Your Company’s Future—and What to Do About It.

World is moving from products and services to subscriptions, favoring access and outcomes (Transformations) over ownership and deliverables. Customization, not standardization, constant improvement, not planned obsolescence. Lock-in and Switching Costs effects.

According to McKinsey, the subscription ecommerce market has grown by more than 100% a year for past five years. Subscription-based companies are growing eight times faster than the S&P 500 (17.6% vs. 2.2%), and five times than US retail sales market (17.6% vs. 3.6%). Companies running on subscription models grow their revenue more than nine times faster than the S&P 500.

Tzuo argues this model is industry agnostic:

Health Care, Concierge, Direct Primary Care, Amazon Prime and Rx, Education (it fires their customers after four years); Insurance; Pet Care; Utilities; Real Estate; Finance; Automobiles; Newspapers, etc.

Subscriptions are a forward-looking revenue model, as seamless as buying a book on Amazon. It changes the question from “How many services can we sell?” to “What does our customer want, and how can we deliver that as an intuitive service?”

Competitors can steal your service features, but they can’t steal your insights you gain from an active, loyal subscriber base.

Salesforce and Amazon don’t have customer segments, they have individual subscribers (Prime has 90 million subscribers who spend an average of $117 billion per year). Other businesses that have subscription models, either in total or in part:

• Apple: Earnings call Feb 1, 2018: service revenue $31.15 billion in 2017, growing at 27% a year, more than half of Apple’s growth

• Spotify: 50 million subscribers > 20% global music industry revenues

• Netflix: Spends $8 billion a year on original content, providing new and innovative services to its subscribers

• Gillette: Market share decreased to 54% (2016) from 70% (2010), because of Harry’s and Dollar Shave Club

• Warby Parker: Averaging $3,000/sq. ft. retail space (slightly less than Tiffany’s), because 85% of foot traffic has done extensive browsing online

• Uber/Lfyt: 60 million riders (testing flat-rate subscriptions, no surge)

• Starbucks: More than 13 million Starbucks rewards program

Old business model: Products/Services > Channels > Customers

New business model: Services > Subscriber > Experiences > Channels

From linear transactional channels to a circular, dynamic relationship with your subscriber.

Fender guitars, 90% new users quit within one year, so Fender launched subscription-based online video teaching, Fender Play. By simply reducing the abandonment rate by 10%, it could double the size of its market (applying a service-oriented mindset to a static product).

Instead of margins and unit sales, thinking about subscriber bases and engagement rates.

Other industries where subscription business model is happening:

Automobiles

Hyundai’s new hybrid, Ioniq, you can subscribe to for $275/month. Makes owning a car as easy as a mobile device.

Porsche’s Passport, half dozen models, covers maintenance, insurance, and vehicle tax and registration, starting at $2,000 per month.

Cadillac, $1800/month, switch out vehicles as frequently as 18 times per year.

Volvo: XC40, $600/month.

One out of five autos are expected to be subscription by 2023. Here’s the differences between subscribing to a car and leasing one: 

• Not bound to specific vehicle

• Signing up with the company, not the car

• R&M, etc., go away

• Can’t buy the car at the end (company’s interest to keep car in good condition, not yours)

Data and services associated with vehicle > vehicle itself (Spotify, Sirius, OnStar). From car manufacturers, but transportation solutions (Ford: make that “bed to bed” journey as simple as possible). 

Airlines

SurfAir: Uber of the skies: limitless flights for a flat monthly fee, western USA and Europe (more than 200 million frequent fliers up for grabs!).

Newspapers

169 million US adults read newspapers online, 70% of the adult population.

• Financial Times metrics: Recency (last visit), Frequency (how often do they visit), and Volume (how many articles read)

• The Economist: Charges for digital and print, increased revenue 25%

• New York Times: 60% revenue comes directly from readers, more than $1 billion, digital-only subscription revenue exceeded print advertising revenue in the second quarter of 2017.

Software

Gartner predicts by 2020, 80%+ software providers will have shifted to subscription-based models (no growth left in on-premises software).

Swallowing the fish: as the revenue curve temporarily dips below the operating expense curve before climbing back upward again.

Adobe launched Creative Suite, a perpetual license in 2012. The new metrics (not GAAP): AAR = Annual Recurring Revenue (ARR); ACV (Annual Contract Value).

Digital subscriptions in May 2013 (Adobe Creative Cloud), let customers know, no longer updating Creative Suite: from 0 to 100% subscriptions in three years, inspired Microsoft, Autodesk, Intuit, and PTC. Today, over 70% Adobe’s revenue is recurring

Microsoft, Office 365, IBM, Symantec, Sage, HP Enterprise, Qlik: IT buyers prefer opex to capex.

Creates deferred revenue, so quarterly GAAP metrics can take short-term hit.

Hardware companies, too: Cisco is swallowing the fish.

IOT and Manufacturing

What can’t your subscribe to? A refrigerator? Roof? Tease out the service-level agreement that sits behind the product! 

•  Refrigerator: fresh, cold food

•  Roof: solar energy

Selling the milk, not the cow.

Komatsu uses drones to survey a site in 30 minutes, which changes the question from: How many trucks can I sell you? To How much dirt do you need moved?

Advantages

• Predictable revenue

• Customer lock-in and Switching costs

• Not selling services, but creating annuities with a lifetime value that far exceeds whatever you paid to acquire them

• Collective knowledge of our customers is a competitive advantage can’t be duplicated

• 1:1 Marketing: Changes the 4 Ps of marketing (pricing is most important). We’re not pricing a service, we’re pricing an outcome and insurance (peace of mind)

• Monitor usage, solve problems, pursue opportunities, and provide Transformations 1:1

• Shift to a long-term relationship focus rather than delivering tasks

• Allows for faster growth, as will attract new customers (rather than just selling more to current customers)

• We can plan capacity more effectively

• Moving beyond efficiencies and into possibilities (don’t solve problems, pursue opportunities, Drucker, otherwise starve your successes and feed your failures)

• Breaks down silos, mold organization around needs of customer

• Actuarial approach to risk pricing, work planning, etc. (20/80 rule)

• Tears down silos: Portfolio approach to analyzing profit, rather than silo DCM and Realization Rates,

• Truly “one-firm” model (this doesn’t just talk about one-firm, it achieves it!)

• New metrics (not GAAP): AAR = Annual Recurring Revenue (ARR); ACV (Annual Contract Value)

• Recency (last visit), Frequency (how often do they visit), and Volume (how many articles read); to keep customers renewing and re-engaging, have to provide real value

• Dynamic cycle of action: renew, suspend, upgrade, downgrade, etc.

• Experiment with different value metrics: tied to: seats, boxes, events, gigabytes, locations, texts, family members, you name it

• Companies that employ a small amount of usage-based pricing in their revenue mix (less than 10%) grew more than twice as fast on average, with lower churn rates.

Episode #190: Interview with Economist Michael C. Munger

Professor Michael Munger received his Ph.D. in Economics at Washington University in St. Louis in 1984. Following his graduate training, he worked as a staff economist at the Federal Trade Commission.

Early Career

His first teaching job was in the Economics Department at Dartmouth College, followed by appointments in the Political Science Department at the University of Texas at Austin (1986-1990) and the University of North Carolina at Chapel Hill (1990-1997). At UNC he directed the MPA Program, which trains public service professionals, especially city and county management.

More recently

He moved to Duke in 1997, and was Chair of the Political Science Department from 2000 through 2010. He has won three University-wide teaching awards (the Howard Johnson Award, an NAACP "Image" Award for teaching about race, and admission to the Bass Society of Teaching Fellows). He is currently director of the interdisciplinary PPE Program at Duke University.

We focused mostly on his latest book, Tomorrow 3.0: Transaction Costs and the Sharing Economy, published this year.

Tomorrow 3.0: Transaction Costs and the Sharing Economy (Cambridge Studies in Economics, Choice, and Society)

By Michael C. Munger

Buy on Amazon

Ron’s Questions

You say book grew out of conversation with Russ Roberts on EconTalk in 2014, one of our favorite podcasts. How did the book germinate?

The main thesis of Tomorrow 3.0 is: “Reduced transaction costs foster permissionless innovation to make more efficient use of, [and commodify] excess capacity.” Explain?

You date this approximately to 1997 with eBay, where we began selling not more stuff but reductions in transaction costs for access to existing stuff.

Uber and AirBNB don't sell taxi and hotel services, they sell reductions in transaction costs.

You describe three types transaction costs:

1. Triangulation—matching buyer with seller, agreeing terms

2. Transfer—of product/service and payment terms

3. Trust—Honesty, performance (ratings and brands fulfill this role, among other traits).

You make the excellent point that to the consumer, all costs are transaction costs: time, search, inconvenience, payment terms, trust, etc. A reduction by 10% is the same as a reduction in price of 10%.

From the buyer’s perspective: all costs are transaction costs. Consider Uber’s surge pricing: You either pay in money or time. The father of transaction cost economics is Ronald Coase.

The sharing economy is:

1. Entrepreneurship applied to reducing transaction costs rather than production costs (Biology active agent: natural selection; economics is entrepreneurship = imagine an alternate reality

2. Working through new software platforms

3. Operating on smart, portable hardware

4. Connected over the web

The Value Proposition is: selling access to excess capacity. In the US, Self-storage is roughly 50,000 facilities, containing 15 billion cubic ft. of stuff. The desire to “own stuff” could decline.

Cars and houses are obvious areas where there is excess capacity, but how about clothing (closet in cloud), appliances, etc. What will 3-D printing allow in the future?

This struck me: You believe Uber not a threat to taxis as it is to Amazon—the ability to reduce transaction costs of renting vs. buying.

I want to go to the day after Tomorrow 3.0, what’s the threat to Uber? Couldn’t Blockchain, autonomous cars, and cryptocurrency disintermediate Uber completely?

Mike’s three predictions:

1. Third great economic revolution innovation in digital tools, reduce transaction costs, not creation of new products

2. Better use of excess capacity, sold rather than stored

3. People will collect “experiences”

You talked with Ed about permissionless innovation, and here in California the courts just ruled that Uber drivers are “employees.” You wrote that saying that is like saying Rotten Tomatoes makes movies. Are you worried that government regulations will slow down some of these innovations?

You write that the purpose of an economy is not to create jobs but consumer surplus.

Ed’s Questions

From another work of yours, you have this concept of Euvoluntary: it’s sort of voluntary, but not really. Philosophers believe people can be coerced by their circumstance, so transactions are only voluntary if there are many buyers and sells, and if the buyer is not desperate and has alternative choices.

Is Uber surge pricing, or hotel rooms during hurricanes, voluntary or Uvoluntary?

When we get into a market that significantly reduce transaction costs, do you think the government should do something about the short-term effects of this transition.

In Spain at the conference I’m at, the number one growth stock on the NYSE since 2010 is Dominos. The reason: because 60% of its sales come from its mobile application—a reduction in TCs. They are shooting for 100% in 3-5 years. Your thoughts?

Why is 19th century Governor of Pennsylvania Daniel Hastings a hero? Because Hastings vetoed an 1896 law that the Pennsylvania General Assembly passed—the "red flag" law, found in US and England. Any self-propelled vehicle be proceeded by a man on foot walking 50 to 100 feet in advance, waving a red flag in warning.

Of course, it was done ostensibly to “protect the people”—but in reality it was to save jobs related to horses. In 1915 there were 27 million horses in the USA and 100 million people, while in 1970 there were only 5 million horses.

What does company profit and a giraffe’s neck have to do with one another?

George Gilder labels profit as an index of your altruism. Comment on that point of view?