Archive for February, 2010

Virtual Goods & Accounting

Tuesday, February 9th, 2010

A recent post by Bill Gurley on his blog summarized accounting rules for virtual goods as laid out by Mick Bobroff of Ernst & Young and discussed the benefits of “rental models” for online game and virtual world companies. The main points made are:

  1. Virtual currency cannot be recognized as revenue when sold – it can only be recognized upon use (purchasing virtual goods with the currency)
  2. Virtual goods should be classified as consumable or durable depending on their usage
  3. To properly manage revenue recognition, companies will need to track and manage each virtual item in their system as well as customer statistics such as average customer lifetime value (ACLV)

Of course, everyone should check with their accounting team to set their own policies, but these rules are common sense and mirror the rules in use for prepaid cards.

The second part of Bill’s post talks about the major benefits of renting virtual goods, thereby transforming all virtual goods into “consumable” ones. This does help with the accounting complexity, but takes away the ability for users to collect and hoard which has proven to be an excellent motivator.

My main caution about using the rental model for virtual goods is that basing decisions on accounting rules is probably not the best route to take in the hyper-competitive online game and virtual world industries.

Jeremy NusserTags: , , ,
Posted by Jeremy Nusser in Data Geek | No Comments »

Managing Involuntary Payment Failures

Thursday, February 4th, 2010

Compound growth is a wonderful concept–especially when it applies to subscription-based businesses’ customer-retention rates and, by extension, their average customer lifetime value (ACLV).  The flip side–a declining customer-retention rate–is a daunting challenge, particularly given the recent economic travails that have impacted online merchants of all stripes.

On a recent trip to the Midwest, I met with a number of prospective clients, all of whom had witnessed customer-attrition rates climb north of 15 percent.  Even more troubling to them, the attrition in many cases resulted from not only voluntary opt-outs, but also from involuntary payment failures.

Just how important is managing involuntary payment failures to a merchant?  We at Vindicia recently ran reports on our client base to determine how well we are helping clients tackle this issue.  We discovered that, across various markets, our clients can raise their transaction success rate by over two percent on a monthly basis.  Assuming a one-year CLV, this two-percent monthly number becomes very significant annually, exceeding 20 percent.

Keep in mind that attrition for yearly subscriptions can be a lot higher.  Among our clients who offer them, payment failure rates on the initial transaction sometimes reach 30 percent.  Learning the best practices of how to minimize payment failures and maximize customer retention is one of the most important aspects of running an automatic payment, subscription-based online business.  The impact can be eye-opening.

Sanjay SarathyTags: , ,
Posted by Sanjay Sarathy in Marketing Fury | No Comments »

Pricing, Macmillan, and Disintermediation

Tuesday, February 2nd, 2010

The book industry is doing some things right and some things wrong. On the positive side, it appears that most of the book publishers have decided to embrace disintermediation by internet enabled digital channels. They’re correct that, for now, piracy of books isn’t as easy as it has been for movies and music. By making compelling digital editions available they are staving off some piratical demand.

However, the Amazon/Macmillan price spat speaks to a darker side of the problem. Some commenters imply that everyone will lose money should the price of an ebook be less than the traditional hardcover. The reality of the matter is that consumers do expect to make direct monetary gains from the cost savings of digital distribution. There is certainly an argument that the ebook is a superior user experience (just have a hankering for a few new books and take a multi-leg round trip with only carry-ons to see what I mean) but there is no real economic argument on the other side that publishers have the same cost structure that they had in the physical book.

Unsurprisingly, price elasticity is in full effect and Amazon has shown publishers that the lower prices for which they are advocating sell more books. The usual economic rule here is that the unit increment (with no additional print/storage/ship/over inventory costs) increase will more than offset the revenue per unit decrease. Unlike the music industry, there is no historical bundling issue where the music business was selling you 1 song for the price of 12.

To assume that Amazon “taught” users that ebooks should be cheaper simply ignores the intelligence of the average book reader. Books are now going to be a full participant in the Napsterization of commerce and I predict book publishers and retailers will start to have to think about how to create longer customer lifetimes and higher customer lifetime value. I look forward to ebook subscription services.

Gene HoffmanTags: , , , ,
Posted by Gene Hoffman in CEO Blog | No Comments »

How Complex Can Sales Tax Be?

Monday, February 1st, 2010

Brett Thomas, our CTO, occasionally jokes that if he knew in advance how complex building a sales-tax module in Vindicia CashBox would be, he’d never have done it. Given how much change is afoot as states gear up to tax digital content, Brett’s decision to include that feature in CashBox boded well for our clients.  At last count, 18 states have explicitly imposed tax on digital content and many more state legislatures are contemplating it.

The nuances of sales tax are complex: What comprises nexus? How do you classify your service or product? How do you calculate VAT or GST for global transactions?  What’s the difference between use tax and sales tax?  Also, speaking of nexus, did you know that having data centers in some states can expose you to nexus there?  Texas is a good example.  If you have distributed computing facilities (for example, if you’re a cloud-computing provider of some sort), do heed the ramifications.

To learn our approach in determining and computing sales tax for online businesses of intangible goods and services, read this white paper [PDF].  Calculation of sales tax might not be the most exciting topic on the cocktail circuit; however, our clients deem it a critical one as they navigate through the requirements of selling content online.

Sanjay SarathyTags: , ,
Posted by Sanjay Sarathy in Marketing Fury | No Comments »
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