Posts Tagged ‘payment failures’

Launching A Digital Business – Customer Lifetime Value

Friday, June 10th, 2011

Launching a digital business is complicated, but when done right, can yield great rewards.  Online services are increasingly the dominant channel to inform, educate, entertain, and even protect consumers.   This digital explosion has spawned new sectors, business models, and successes, as recent IPO filings may indicate.  Our clients and prospects often inquire about how to best expand and manage their digital businesses, so I thought it would be beneficial to highlight three key topics every digital merchant should consider:  Customer Lifetime Value (CLV), global expansion, and Payment Card Industry (PCI) compliance.

What is Customer Lifetime Value (CLV) – and why should digital merchants care about it?

CLV measures the net present value of the cash flows attributable to an individual customer or potentially the customer segment.   Businesses naturally want to increase their average CLV across their different segments.  The formula noted in the link above highlights a few different variables that businesses can control:

  • The contribution margin generated by each customer (or customer segment)
  • The retention rates for those customers
  • The marginal cost of serving that customer

There are numerous calculators you can use to determine your organization’s CLV, and this example is just one of them.  Whether your business model revolves around subscription billing or is microtransaction-centric, providing a compelling service that people willingly pay for is the first step in establishing that customer relationship and ultimately that contribution margin.

Improve retention rates = increase CLV and revenues

Digital merchants can find easy “wins” to improve CLV, especially around retention rates.  Retention rates are affected not just by clients who actively opt-out, but also by payment failures.  A payment failure can happen, for example, when the Visa network goes down, or the customer is temporarily over his credit limit, or from other causes.  Understanding the reasons behind and overcoming these payment failures can add 10-12% to a digital merchant’s revenues, based on data from our broad digital merchant network.

CLV helps digital merchants determine customer acquisition processes.

Since CLV accounts for both the gross revenue and the cost of serving that customer segment, it provides an excellent mechanism of understanding the relative value of your various customer acquisition channels.  The channel that generates the largest gross revenues may not necessarily be your most profitable because of the inherent costs of that channel, whether in the form of fraud or even customer service costs.  Therefore, CLV is valuable for long term planning and acquisition optimization, and should be a key metric to track.

In upcoming blog posts, I’ll address the two other key topics to think about when launching a digital business:  (1) global expansion, and (2) the role of PCI and its effect on your digital business.

Sanjay SarathyTags: , , , , , , , ,
Posted by Sanjay Sarathy in Best Practices | No Comments »

Subscription Billing’s Opposing Forces

Monday, December 6th, 2010

When going to market using subscription billing there are three diametrically opposed forces fighting you, the person who owns the active subscriber count as you try to acquire and retain the most customers possible. These forces are PCI, Account Updater, and customer data ownership. I want to focus on the balancing act between the first two.

These days, one of the primary mechanisms (other than using something like HOA on CashBox) to lowering the compliance burden and the actual risk of card disclosures is to use tokenization of those cards from your merchant acquirer, or gateway. Tokenization is simply an infrastructure at, for example, your gateway that will take the card you obtain from your customer on your checkout page, encrypt it for storage in their database, and hand you back a ‘handle’ to that card for future use. It doesn’t remove much of the compliance burden as credit cards still flow through your webserver and thus you still have to fully comply with PCI, but it does lower the risks of actual disclosure and shrinks the scope of your compliance efforts.

A surprising number of merchants are unaware of or don’t implement Account Updater, which is available from Visa and Mastercard in North America and some of Europe (Visa’s overview.) Account Updater functions in two ways. The primary way will automatically send card changes for customers that you’ve billed in the last six months to you so that you can seamlessly update their card before a billing event. The alternative way is for you to either proactively or after a billing failure ask if there has been an update on any given card. We’ve found that the absolute best result is to run Account Updater in both modes and spend time optimizing the latter mode for specific billing plan frequencies.

Unfortunately, the requirements of Account Updater and its impact on customer retention are at odds with the requirements of tokenization in support of PCI. Most of the tokenization projects at the various vendors do not take the product requirements of Account Updater into consideration. How does one query the Account Updater service for the new card that may have replaced the one that failed when all you have is a handle to the old card? Unless your vendor has specifically added this to their tokenization implementation you are hostage to their product roadmap to save some significant percentage of subscriber churn. When you recall that few vendors are focused on the challenges of digital content and services with subscriptions, and instead get the bulk of their revenue from one time purchase physical goods merchants it makes sense that these tokenization projects have usually not addressed Account Updater functionality.

At Vindicia, we’ve built CashBox to both take you completely out of the PCI compliance burden with HOA and to directly and richly implement Account Updater with our merchant acquirer partners. We’ve also made the commitment to you that your customer data is yours should you want to move on. Once you experience the revenue increase we deliver through increased customer retention, we doubt you will. But that commitment is there to help end the tension between customer data ownership and tokenization as well – which is something I’ll touch on in a later post.

Gene HoffmanTags: , , , , , , , , , , , , , ,
Posted by Gene Hoffman in Best Practices, CEO Blog | 1 Comment »

Customer Retention – the little stuff matters

Wednesday, September 8th, 2010

The three tenets of our CashBox solution are 1) to increase customer acquisition, 2) maximize customer retention, and 3) enable operational excellence for online merchants that sell digital goods & services to consumers and small business (SMB).

Acquisition is straightforward – allow consumers to choose the right product / plan at the right price in the correct language and currency, and to pay in their payment method of choice.

Operational excellence around billing and customer information is also obvious – securely store all sensitive data while managing and nurturing the overall customer relationship (PCI DSS & SOX are methods of enforcing parts of this).

Where the waters get a bit murky for some folks is customer retention…

The concept is simple. If a transaction fails, try it again, and again, and again. However, retention involves multiple moving parts, so every little detail matters and the compound effect of many small tweaks can be quite large. Some factors that make an impact on retention include:

  • Failure type
  • System availability
  • Transaction type (one-time, subscription, etc)
  • Time since last billing
  • Time between retries
  • Number of retries
  • Payment processor used
  • Transaction routing (# of stops along the way)

Many of these factors are specific to the business model used (Time between billings, transaction type) and some are the result of merchant preference (time between retries, number of retries). Yet others are system related (payment processor, transaction routing, system availability). While the first two areas can experience continual improvement with testing and optimization, the system related issues are *somewhat*out of control of the merchant. The *somewhat* refers to the fact that merchants have a choice of business partners.

Let’s take a closer look at the three system-related factors listed and how we address them.

  • System availability
    • The uptime of connections to the payment processor from the gateway, and the connection from the payment processor to the Interchange.
    • Vindicia: Part of our solution to this problem is a built-in gateway in order to eliminate uptime issues between the billing system and the payment processor. We also have hardware directly in the datacenters of certain partners with direct connections to further reduce any connectivity issues. As a final step, if the payment processor’s connection is down, we automatically queue the transactions for retry.
  • Transaction Routing
    • The number of systems involved in submitting a transaction makes a big difference. The typical flow would involve:
      • Creating a transaction in the billing system
      • Passing the transaction to a gateway
      • Submitting the transaction to a payment processor
      • Receiving information from the card network interchange
      • Capturing the transaction (or other actions, depending on processor response)
    • Vindicia: As mentioned above, we have combined the billing system and gateway (first three steps above) for more control over the transaction flow and greater payment success rates. This also gives more control over the retry logic by directly interpreting error codes from the payment processors into different retry flows. Billing companies & in-house systems that have not directly integrated to payment processors cannot compete with our results.

I’ll save descriptions of the other factors for another post. Optimizing customer retention is goal with constantly moving goalposts. When embarking down the path, merchants have a choice of either becoming experts at payment networks and card retry logic or choosing a partner that is already an established leader in the space.

Jeremy NusserTags: , , , , , , , ,
Posted by Jeremy Nusser in Best Practices, Data Geek, Marketing Fury, Payments 101.201.301 | 1 Comment »

Oh Canada, or why TX success rates matter

Thursday, March 25th, 2010

Of late, Vindicia has been welcoming quite a few Canadian based gaming, software, and social media companies. We also work in partnership with Tier 1 payment providers like Litle and Chase Paymentech. This brings up an interesting issue as these merchants think through their business structure and monetization plans.

Visa and Mastercard rules require that for US dollar transactions be presented by a merchant as a US domestic transaction, the merchant must have a “presence” in the US. The card associations rules may seem confounding but they’re much to do about making sure that the associations comply with US regulatory requirements and so that the associations and the card issuing banks can have some confidence about the risk created by the merchant for any given transaction. This leads to a requirement that Canadian and other foreign domiciled companies have to set up a “presence” in the US. The alternative is to use a Canadian merchant account to present international transactions priced in US Dollars.

The extra effort  may seem painful, but that leads to an important consideration every company should be considering and that is the statistical likelihood that any given credit/debit card transaction will go through at any given time. One of the reasons that Vindicia has chosen to work with the very best payment providers is that, on average, those payment providers are more likely to complete a successful transaction. We often see prospective clients compare one of the top provider’s pricing to that of less capable providers and the variable most often missing in their ROI analysis that offsets their sometimes perceived higher cost is the change in revenue that an even .05% better success rate completing one time and subscription transactions creates in terms of dollars saved. When the cost of payment processing is less than 3%, it doesn’t take a lot of 97%+ transactions to offset small cost deltas between the pricing of the best in class and all the rest.

Returning to Canadian companies, analyzing the average likelihood of success of any given transaction shows that the slight extra effort is well worth it. Requests to bill a US customer from what appears to be a foreign (even just Canadian) bank will lower the statistical likelihood of each transaction that a Canadian merchant attempts as card issuers assign more risk to non domestic transactions. It takes very few incomplete transactions (from customers who wanted to buy from you!) to offset the small cost of creating a US subsidiary in a favorable US taxing area.

Gene HoffmanTags: , , , , , , , ,
Posted by Gene Hoffman in Best Practices, CEO Blog | 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 »