Vindicia Helps Subscription Providers Keep a Bird in the Hand
(Page 2 of 2)
the card had been compromised, or because the bank just wasn’t online that night. Typically, a rejected charge would mean a lost customer. But given a little time, eMusic found, many of these situations would resolve themselves. “It’s partially a question of when and how often you try the charge again,” Hoffman says. “We pretty much had to learn from scratch how to do this right.”
Universal Music bought eMusic in 2001. Having built their own music billing system “at scale and under pressure,” in Hoffman’s words, he and his eMusic peers Mark Elrod and Brett Thomas were ready to go off and create a general subscription platform, one that would be completely customizable to fit various types of products and customer bases. “Do you run the card number updater three days before the billing cycle or six days after? Do you optimize for credit cards or debit cards? Is it payday? These are the kinds of changes we wanted to make configurable,” Hoffman says.
It was good timing, given that a tsunami of new consumer and business services was about to sweep the Web. The company’s current product, called CashBox, was in the works for several years and finally debuted in early 2008. It has spread to three core markets, all in the business-to-consumer mold: software such as Intuit’s Quicken and Symantec’s Norton Antivirus, games such as World of Warcraft and Star Trek Online, and digital content from the likes of Bloomberg, Vimeo, Boxee, Encyclopedia Britannica, and SpeedDate.com.
CashBox deals automatically with credit card billing snags, but it’s also a platform for testing new subscription plans and measuring which ones are most profitable. That’s a complex question that used to take forever to answer. Say you’re the creator of an online game world with both free and premium memberships. What’s the right price for the premium version?
If you were to charge $3.99 a month, you might get 100,000 people to convert from free membership to the premium plan, but a lot of them might be dabblers who are likely to let their subscription lapse after a couple of months. If you were to charge $15.99, you might get only 20,000 signups, but they might be more committed players who are likely to stay around for 12 months, meaning their lifetime value would be far higher. (Netflix likely went through a calculation like this when it doubled the price for its combined streaming-video and DVD-rental plan last year.)
“The only way to sort that out is to have data,” says Hoffman. But you don’t want to spend 12 months gathering that data only to find out you made a costly mistake. Vindicia can predict, based on the early response to an offer, whether the mix of buyers includes right number of high-lifetime-value subscribers. “You don’t have to wait 12 months or even one month to see which curve a customer is on,” Hoffman says. “Anything we can do to make that a week instead of a month becomes a tremendous value.”
How can Vindicia make such predictions? Because of its scale. Not only does it have lots of data about what worked for other customers in its network, but it has purchasing records on individual consumers showing how long they tend to stick with their other subscription plans. “I can tell you right now how subscription-worthy they are—it’s the exact inverse of fraud risk,” Hoffman says. “If we’ve seen this customer before in multiple subscription services, and we know he is more likely to exceed your average subscription time, that’s all you need to know.”
Vindicia has a simple business model: it keeps 2 percent fee for all of the revenue that passes over its subscription-management platform. The company’s largest customers are an exception, Hoffman says. “Two percent is a hard pill to swallow for a billion-dollar customer, so we dial that number down and instead take a larger percentage of the lift,” meaning the revenue Vindicia recaptures by preventing credit card lapses and optimizing subscription prices. “If we turn your $500 million [in subscription revenue] into $550 million, we might take as much as 20 percent of the difference. The client is still walking away with 80 percent of the lift.”
But it’s the ability to prevent passive opt-out that really attracts clients, Hoffman says. If you turn on a new subscription-based service like a game and you get 100,000 subscribers in your first month, you can think of the new credit card accounts like freshmen just arriving on a college campus: they’re young, fresh, and clean. But within 12 to 18 months, a lot of the accounts start to look tired and overworked. Some neglect to do their homework. A good portion drop out. That’s when Vindicia’s technologies start to make a difference. “The real reason people love is us the ongoing retention piece,” says Hoffman. “We tend to increase in value over time.”
Hoffman says Vindicia keeps adding to its bag of tricks. One of the latest is the ability to use data from partial credit card authorizations—like the ones that occur when a consumer reserves a rental car, or buys something using both a stored-value card and a credit card—to figure out what’s really going on with a customer’s credit-card account. If a passive opt-out occurred simply because there’s a large authorization hold on an account, for example, that’s a sign that retrying the charge a few days later will bring the customer back.
Thanks to such techniques, Vindicia is “getting closer and closer to cash-flow positive” and has been able to slow down hiring while increasing revenues per employee, Hoffman says. One of the company’s biggest recent successes came on Christmas Day 2011, when hundreds of thousands of kids woke up to find new LeapPad tablets under the tree. LeapFrog, the Emeryville, CA-based maker of the educational tablet, outsources billing for its app store to Vindicia. “We handled 80,000 user activations per hour all day, basically until around 5:00 pm East Coast time, when it started to slow down,” Hoffman says. That was so much traffic that it made the simultaneous launch of the NBA League Pass, a subscription TV service that Vindicia also administers, look like “a footnote,” Hoffman says.
If digital subscription trends continue, it could be Christmas all year round for content providers—but only if they can hold on to their new customers after the first few months. After all, keeping an existing customer is far cheaper than finding a new one. “That’s the core vision behind Vindicia,” says Hoffman.