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.
“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
