Vindicia Helps Subscription Providers Keep a Bird in the Hand

Cloud commerce is here to stay. The advent of subscription-billed digital delivery has brought massive, recurring revenues to the media and content industries, as well as makers of consumer and enterprise software. So if you asked software companies, media giants, and game publishers whether they’d prefer to go back to the days when they sold their wares on physical media in shrink-wrapped boxes, you’d get a resounding no.

But this new economy comes with its own headaches. One of the biggest is customer retention. Whenever a recurring subscription is tied to a credit card account, there’s a certain amount of falloff when renewal time comes around. Sometimes it’s because the customer has decided not to renew, but often it’s simply because the credit card number on their account has changed and the merchant doesn’t have the updated one. Or it could be because the credit limit on the customer’s card has been temporarily exceeded, so the charge is denied.

Merchants who do nothing to address these accidental varieties of breakage—“passive opt-out,” in industry jargon—lose 10 percent of their customers per year on average, according to Gene Hoffman, chairman and CEO of Belmont, CA-based Vindicia. Luckily, he and his colleagues have spent the last eight years working on a solution.

The core technology at Vindicia (the name is pronounced vin-DEES-ee-ya) was forged in the fiery, competitive world of MP3 downloads at subscription music service eMusic, which Hoffman co-founded in 1998. He says Vindicia has grown to its present size—it manages 120 million automatic-payment accounts for clients as diverse as Activision Blizzard, Bloomberg, Intuit, Pearson, Symantec, and Encyclopedia Britannica—by building on that early experience to become the world authority on retention techniques.

Vindicia co-founder and CEO Gene Hoffman

“If your credit card should have been billed and it fails, we can get 30 to 60 percent of those back,” says Hoffman. That translates into many fewer lost customers. He says the company has also gotten pretty good at helping clients identify their most reliable customers—those with the highest “lifetime value,” to use the industry phrase—and tailor their subscription plans to maximize profits.

That’s a canny place to be at a time when more and more digital media and software companies are offering subscription plans, and more consumers are signing up for them from their mobile devices or smart-TV appliances. Back in the dot-com days, companies often built their own e-commerce infrastructure to handle recurring billing, but according to a 2011 study from research firm Gartner, 40 percent of subscription-based digital media companies will have switched over to hosted management services like Vindicia’s by 2015. Hoffman puts it this way: “If you’re Star Trek Online, do you want to be an expert in how you retain customers, or in how to convince people to buy virtual Klingons? The answer is obvious.”

Founded in 2003, Vindicia has 100 employees and has raised just over $37 million in venture capital, including a $20 million Series E infusion led by FTV Capital, ONSET Ventures, and the digital media investing wing of Bertelsmann in late 2010. The startup has three big competitors: Aria Systems, Zuora, and Recurly, all of which happen to be headquartered here in the Bay Area. But Hoffman says Vindicia has the lead in when it comes to business-to-consumer billing. (The other companies mainly serve clients in the enterprise software market.)

Vindicia’s backstory starts with the first dot-com boom, which was a tumultuous time to be in the music business. EMusic sold tunes for 99 cents each—at least until Napster’s free, peer-to-peer file sharing system came along in 1999. (Remember, it wasn’t until 2003 or so that companies like Apple began to train millions of consumers to buy music by the song.) “I like to say that we were selling water when Napster was giving beer away for free,” Hoffman says now. “It was way too painful. So we switched to a subscription model.”

Under its first subscription plan, eMusic charged $19.99 a month for unlimited MP3 downloads. (Since then, the company has tried hundreds of different billing plans, and now offers anywhere from 24 to 73 downloads per month at monthly rates ranging from $11.99 to $31.99.) It was while building eMusic, Hoffman says, that he began to realize that not all subscription management technologies are created equal.

“A good billing engine was now strategic to how you acquired customers,” he recalls. If a monthly subscription charge got denied, it might be because the customer’s card had expired, or because they were over their credit limit, or because 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

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.

Wade Roush is the producer and host of the podcast Soonish and a contributing editor at Xconomy. Follow @soonishpodcast

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  • Very interesting article on subscription billing. Just a quick note to say that there are some other systems that companies can look at, if they are in the market for a subscription billing solution. They include:

    – Chargify –
    – SubscriptionBridge –
    – Spreedly –
    – and others
    Costs and level of features provided vary from provider to provider. Vindicia and Zuora (mentioned in the article) tend to be more expensive and cater to companies with more sophisticated needs. SubscriptionBridge, Chargify, Recurtly, etc. are less expensive and  target smaller businesses.

    For a complete list of subscription billing system, please see this wiki-style post on Quora:

    Disclaimer: I am a co-founder of SubscriptionBridge.