Communities can be great businesses. The best communities have clearly defined customers, network effects, and strong brands, built on a base of highly-engaged members, making them more valuable as they grow. Communities are strengthened when members themselves do much of the work which creates the opportunity for predictable, high margin, and defensible businesses to emerge. However, achieving this state is not certain or easy.
Community leaders are faced with both this big opportunity and an uncertain path to get there. The “Ideal Community Business” framework proposes four goals that, together, indicate that a community is large, valuable, diversified, high margin, predictable, and defensible. In short, a great business. Our hope is that this framework will give community leaders some goals to strive for, whether they’re optimizing for community quality, cash flow, or their exit value through an acquisition.
Being the largest and most valuable community in its niche
No community lasts forever, but large and valuable ones stand a much better chance at persisting due to network effects and strong brands. If given the choice, would an accountant join an established group with all of their peers that has more extensive offerings, or a small upstart? A small percentage of people may choose the latter, but most will select the former, creating a positive flywheel.
The advantages of a large and valuable community come with corresponding risks. By focusing on breadth, a focused, nimble competitor could start with an underserved segment of the market and expand to compete head on with the incumbent community if community leadership fails to adapt and respond to the needs of the members.
Earning more than 50% of revenue through recurring sources
Recurring revenue is beneficial to communities in many ways. First, a subscription membership creates an ongoing relationship with the member, where there is an expectation of continual value exchange. Second, a canceled subscription is a clear message from a member that they are no longer receiving enough value from the community. Finally, recurring revenue makes a community business more predictable, which allows for investments in product and growth with higher confidence.
Recurring revenue is not right for every product, and communities should not pass up opportunities to create sustainable revenue streams where a subscription is not the right economic model. However, those opportunities should have to meet a higher bar to ensure they are good for members and good for the community in the long term.
Achieving more than 50% EBITDA margins
Building moats is one step to building a valuable business, but the business must also capture a portion of the value it creates in order to survive and return value to its owners. Due to their scalability, low fixed costs, and low variable costs, EBITDA margins in excess of 50% are within reach for great community businesses.
High margins tend to get competed away in the absence of a sustainable competitive advantage. Communities’ network effects and brand power can help a community retain its advantage even in a competitive market. For a community to survive, its leaders have to be able to continue to dedicate their time and energy to it - no small task, given the 24/7 nature of operating many communities. We’ve seen many community leaders burn out or have to abandon their communities because it’s no longer financially sustainable for them to run it. High levels of profitability help to ensure that this doesn’t become a problem for the community.
Having diversified revenue streams (defined as at least three revenue streams that make up more than 20% of total revenue)
No community can be truly diversified, since it exists for a specific customer segment, but capturing value through multiple revenue streams make a community’s business more robust. For example, a recession may harm a community’s recruiting revenue line, as companies slow hiring, but out-of-work members may take the opportunity to upskill or network to enhance their abilities to gain a new job, or they may have more time to engage with community content and strengthen relationships with other members.
Having three substantial (defined as 20% or more of total revenue) revenue streams helps to defray some of these risks. With that said, diversification for its own sake isn’t good: it’s far better to create one amazing product than three mediocre ones. We’ve also seen many communities expand into new products quickly before stalling, due to moderate adoption and the high cost of continuing to service these products. The decision on when to diversify and in what direction is a difficult one, deserving lots of thought and preparation.
How Do Community Businesses Become Ideal Community Businesses?
The ways that communities create value fall into four major categories, which we will refer to using the acronym RICI.
Categories of Value
Relationships
Does the community help members form new relationships or strengthen their existing relationships through their interactions with the community?
Example: by helping members connect 1on1, the community helped Marc and Shireen kindle a professional relationship and friendship that meant a lot to both of them.
Identity
Does the community deepen members’ attachment to their core identities in a healthy way or allow them to discover their identities in new ways?
Example: Wearing the community’s branded hat makes Sarah proud to be working in such an interesting industry, gives her confidence, and sparks connections with people that work in tech.
Compensation
Does the community help members earn more for their work?
Example: The community helped Jerome train in the core skills of a sales leader, which helped him get hired in a new job that pays him 50% more than his prior job.
Information
Does the community provide new, useful information to its members through their affiliation with the community?
Example: The community’s newsletter clued Edgar in on a new trend in his industry that led him to rebrand his product, resulting in 17% higher sales in Q4 than he had initially forecast.
These categories correspond to the various revenue streams that a community can build as outlined below:
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