How the Membership Business Model Is Changing the Way We Buy

07/11/2016 02:38 pm ET Updated Jul 12, 2017

The idea of a membership business model, in which customers pay a subscription to gain unlimited access to a product or service, is nothing new: gyms and country clubs have been doing it for decades. In the past several years, however, member-based businesses have taken exciting new directions -- and have the potential to change everything, from the way we dress ourselves to the way we buy groceries.

Netflix and its meteoric rise to prominence is perhaps the most obvious example of how powerfully member-based businesses are transforming our purchasing habits. Gone are the days when watching a movie entailed driving to the nearest Blockbuster: Netflix's subscription-based service proved wildly attractive to consumers, and pretty much single-handedly put traditional brick-and-mortar video stores like Blockbuster out of business.

New apparel startups like Stitch Fix and Trendy Butler suggest that clothing may be the next realm in which membership business models will dominate. Currently, over 90% of retail transactions take place brick-and-mortar stores, but as people become more comfortable getting their clothes mailed to them, traditional retailers may find themselves on thin ice.

As Trendy Butler co-founder Ali Najafian explains, member-based clothing businesses work because of the power of data. "It's hard for clients to articulate what it is that they like and don't like," he says -- but algorithms do a much better job. Here's how it works: as consumers select the clothing they like, algorithms build a profile for that person's particular tastes. As these algorithms get to "know" a client -- based on hundreds of data points -- they produce recommendations for clothing that fits that client's particular profile.

As a result, member-based clothing services produce more accurate recommendations the more they're used -- similar to personalized radio stations like Pandora and its Music Genome Project. "There's still a human at the buying level, but those decisions are based on real-time analytics," Najafian says.

But do these algorithms actually get it right? Based on the enormous growth of both Stitch Fix and Trendy Butler (the former was valued at over $250M less than 5 years after its inception), the answer seems to be a resounding yes. In addition to providing customers with apparel suggestions that match their tastes, there's no denying that it's incredibly convenient to simply get your clothing mailed to you -- in the same way that it's incredibly convenient to simply load up Netflix instead of driving to a video rental store.

The reach of member-based businesses seems almost limitless -- from Dollar Shave Club, which mails razor blades to 2 million subscribers every month, to grocery delivery services (like that of membership goliath Amazon) that are making a dent on the $600-billion-per-year grocery industry.

And it's not just big businesses that are taking advantage of this model.
Pamela Carpenter, founder of Website Rescue, a service that offers unlimited website support on a monthly basis, says that using a membership model has been a key factor in growing her small business. "This type of model not only enables me to provide a service that is often cost-prohibitive to many individuals and small businesses, but it also provides me with a recurring stream of revenue and has allowed me to expand my offerings," reports Carpenter.

Indeed, member-based businesses seem to provide an ideal mix of convenience, quality, and value. As the rapid growth of companies like Najafian's shows, it doesn't seem like the membership business model is going to end with Netflix. Far from its humble roots at country clubs and gyms, the member-based business model is expanding at a breakneck pace in broad directions -- and has the power to drastically transform the way we purchase.