**Steven Forth** is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talent.

Subscription models keep management focused on value

Mountain Equipment Co-op played an important role in Vancouver. Many people were members and wore MEC branded clothing with pride. We were happy to see it expand across Canada, distressed to see it scale back its own product lines and manufacturing. As the governance board became more ‘professional’ and management dominated by people with big box retail experience we feared it was losing touch with its roots and failing to respect the values of its members.

MEC was founded by a small group of serious mountain climbers who got tired of driving down to Seattle to buy gear. The initial focus was on active outdoors people who knew and were serious about their equipment because it helped to keep them alive. In order to buy from MEC you had to become a member. When I joined in 1987 it cost C$5. This was a one-time fee. Pay once and you were a member of the co-op for life.

Over time the goals of the board and management team changed. The founders left and a group intent on growing the business took over and was eventually able to freeze out most members from running for board positions. The logic was that MEC was now a large organization with 100s of millions of dollars in revenues and that it could not afford to have amatures on the board. The board sought out people with experience growing and operating big box retail stores. As a co-op, it could not raise equity financing and took on a lot of debt to finance growth. By lte 2019 it was in trouble, deep in debt, and needing to refinance. Well, you can read about what is happening on The Logic. MEC had record $23 million in losses ahead of sale to U.S. investment firm. There is even a petition making the rounds demanding that the deal be rolled back.

Listening to all of the discussion of MEC and its business over the past few days got me to thinking about its pricing mode,, specifically, how MEC pricied membership.

Initially the one time, member for life, pricing was meant to create a low bar to participation in the co-op. The first few thousand members were actively involved. As the co-op grew, membership fees were kept as they were part of the cost of being a co-op. They were kept relatively low as the leadership was growth oriented and they did not want a high or recurring membership fee to get in the way of winning new customers (all customers were also members).

For the past decade or so there has been little focus on delivering value to members as members. For management, member = consumer. There was some latent loyalty to the idea of a co-op, among members if not the board or management, and many people continued to buy from MEC even as it expanded its footprint and offerings beyond recognition as it tried to become a ‘lifestyle’ brand. In the sales there was a lot of talk about ‘preserving brand equity’ but nothing was said about preserving value for members, employees or even repaying suppliers.

What would have happened under a different pricing model, specifically an annual subscription? There would have been some legal hoops to jump through to do this as a co-op, but let’s assume that this was a solvable problem.

Playing with some hypothetical numbers, let’s see what would have happened if MEC had introduced a membership fee when it had 500,000 members. Assuming annual growth of 15%, churn of 5% and an annual fee of $97 would have added a lot of cash to the equation.

Of course growth would have been much slower and the co-op would have had programs to add value to members as members, rather than consumers. They may not have been able to do this (but we know they were unable to deliver on their growth strategy). A subscription model would have given them more loyalty and cash to carry them across the Covid 19 chasm. Zuora, a promoter of the subscription economy that operate a SaaS platform for managing subscription businesses, has found that the subscription model has been resilient to the disruptions of Covid 19.

We will never know if a subscription model would have made a difference for MEC. But there are lessons here for other co-ops, and there are already a number of plans for more specialized co-ops to replace MEC. To survive co-ops should

Focus on their members as members and not as consumers
Support their operations through hybrid revenue models in which subscriptions are part of the mix
Have a strong community and membership support function that is measure by renewals

MEC had an opportunity to leverage community value drivers and build a loyal membership, see Karen Chiang’s work on this: Weaving Social Consciousness into Corporate Identity - Community Value Drivers. It chose not to do this, seeing itself more as a brand than as a community of members, and seeing its members as consumers.

Part of the power of a subscription pricing model is that it keeps you focussed on V2C (usually Value to Customer but in the case of MEC better thought of as Value to Community). Constantly delivering value and being rewarded for this creates a more sustainable and resilient business. Sometimes this is more important than pure growth.

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