We are still in the covered wagon, Wild West frontier days of making money off the Internet. New ideas, applications, and platforms are springing up almost weekly. If you are looking to cash-in on the Internet, first find a niche – then sell to it. Sports is not a niche. Women in Southern California that play tennis – left-handed – that’s a niche. The trick is finding a target market that is small, but not so obscure that only you and a few neighbors on your block know about it. The key consideration is: small enough to specialize, but large enough to monetize. Now that you’ve got your niche, here’s how to make money off it.
Our newsletter subscribers know that we’ve been hinting at some exciting Fusebill announcements. Well we’re ready to let you in on the first of them– and it’s the biggest!
“We are thrilled with the support of OMERS Ventures and Covington Capital” said Steve Adams, our CEO, and of course the whole Fusebill team feels the same way.
More and more businesses are turning toward subscription-based business models hosted in the cloud. In fact, Gartner Research expects that, by 2015, more than 40% of companies selling media and digital products will rely entirely on subscription management systems to manage their customer lifecycle.
This new investment gives Fusebill the resources to continue our rapid expansion, so businesses adopting subscription based business models have affordable access to business-critical capabilities.
Our focus on small-medium sized companies is one of the reasons both OMERS Ventures and Covington Capital found Fusebill attractive:
“Fusebill fills a big gap for small and medium-sized businesses that in the past haven’t been able to access or afford this kind of technology. This makes Fusebill a very compelling investment for OMERS Ventures.” Derek Smyth, Managing Director of OMERS Ventures.
“We are excited to partner with Fusebill’s complementary management team and OMERS Ventures in building this business.” Matt Hall, SVP Investments of Covington Capital.
All of us at Fusebill would like to send a big thank you OMERS Ventures and Covington Capital.
And don’t forget, this is only the first of our upcoming major announcements – keep reading to find out what’s next!
This is the first in a series of posts on price plan components
When it comes to understanding price plan components I think it’s really just an issue of terminology. It’s one of those things that most people know what it is; they just didn’t know the name of it.
Basically a price plan component is: What (cost) and how (frequency and when) you charge your customers for your products/services.
Go to the pricing page of any subscription-based business and what you’ll see listed are price plan components, broken into two main categories:
A. Items where the price is a one-time charge
B. Items where the price is a recurring charge
The first (A.) is a straightforward transaction, this is called a one-time component, when you set up any of your products or services as one-time components, your customer is only charged once and it is usually at the time of purchase .
B. One the other hand deals with a recurring charge of which there are three main types:
1. Core plan
2. Recurring Add-ons
Determining how you are going to bill your customers is the most important step when setting up Subscription Billing. When creating your price plan components you need to define the cost of each of your products or services and how frequently that cost will be charged. Here are some simple questions to ask yourself:
- Is it a recurring charge?
- If no, you will decide on a price and set up a one-time component.
- If yes, there are some follow-up questions:
- How often do you want your customers to be charged for the component: Monthly, Quarterly, Annually?
- Is this evergreen subscription, meaning there’s no end date for the recurring charges, or is it term subscription where the subscription expires after a period of time?
- Does your component need to charge for consumption during a time interval?
Once you have answers to these questions you can further define your recurring components by type (core plan, recurring add-ons, metered) and start building your catalog.
We’ll look at each of these types in depth in future posts.
One of the key differences between the transactional (one-time sale) world and the subscription world is the impact billing practices and systems have on your customers, and consequently your revenues.
In the transactional world, billing is pretty simple. A product or service is purchased and the customer is given the bill with the goods or it is sent at a later date, the bill is paid and the relationship ends.
The subscription world works differently because customers pay on a recurring basis usually monthly, quarterly, or annually, under evergreen or fixed terms. Billing becomes a cycle and consequently plays a much larger role than it does with transactions. The impact of this increased role of billing can often affect your business negatively, especially if your billing system is not correctly mitigating the effects.
Typical Impact of Billing Cycles on Churn
Churn is the percentage of customers lost during a specific time period. To calculate, take the number of customers you have entering the period, the number lost during the period and divide the loss over the starting point.
At the beginning of the subscription billing cycle churn is faster. As shown in Figure 1, when charting churn you will typically see a significant loss of customers in the first month especially when the subscription begins with a free trial. The first big spike on the chart below occurs when the credit card is charged the first time. Smaller spikes in cancellations can be seen every 30 days as credit cards are charged on monthly plans and once a year on annuals. Track these spikes and the impact billing has on customer churn becomes very apparent.
There are two groups of reasons for this correlation between billing and churn:
- Many credit cards fail on signup. This can be because the gateway didn’t process, the website timed out, etc. If you haven’t captured contact information beforehand, you won’t be able to ask customers to come back and finish the purchase and they’ll be lost at the beginning of the lifecycle. Our data shows 25-30% of cards will fail but will succeed if retried.
- Customers are lost as cards expire. Credit cards expire every three years, this means 3% expire every month. For startups this may not seem like an issue but if you have a customer base in the thousands or hundreds of thousands, 3% can be a considerable amount.
- Customers could be at their credit capacity on the billing date.
- Many billing systems automatically turn off accounts as soon as a card fails, which can lead to a dramatic increase in churn.
- The most prevalent behavioral reason is passive churn. These are customers who want to cancel your service, but don’t. A failed or expired card allows them to cancel without having to do anything. Statistically, this type of customer does not come back.
- Sometimes, people are surprised at the end of a free trial. This often leads to a chargeback – where customers don’t just cancel, but call their credit card company and report an invalid charge. This can cause serious problems for you as the vendor.
- Other customers (usually those who don’t review their credit card bills) aren’t surprised they’re being charged for a service; they’re surprised when they realize they are still being charged, and will cancel at that point.
Typical Impact of Billing Cycles on Lifetime Value
1. Customer Lifetime Value
The inverse of churn is customer lifetime, if churn is low customers stay a long time, if churn is high, customers stay a short time. This means that as with churn, billing cycles impact customer lifetime value, a fundamental metric measured by the length of time a customer would have to remain a customer at the cost of the subscription before profitability.
It’s imperative to have a model to measure lifetime value. You can create one even if you don’t have data on how long customers will stay by making assumptions based on costs, revenue stream, and how long you expect customers to last. Next, add sensitivities to see your breakeven point, how profitable you are on a per customer basis, and whether your business model holds.
Segmentation is also vital, for example, the structure is different depending if you are selling online to someone who has come to your site directly versus someone who clicked on a paid ad, versus if you’re paying a salesperson commission. Segmenting based on acquisition channel is important to measure if the channel is profitable and to get different customer behavior viewpoints, these include selling channels, marketing channels, and price points. Price plan segmentation determines the lifetime value of a customer that can vary based on price plan.
Make sure to look at your margin each month as well as your revenues. If there is a cost to delivering your service you should work this, and churn into your chart aswell.
While the billing process can have a negative effect on your business due to impact on churn and customer lifetime value, there are things you can do to mitigate these issues and in fact, many of them can be resolved and even automated just by putting the right billing system in place.
Your billing system should include abilities such as:
- Intelligent retries – It should continue to process cards even those that fail on the first try. This alone this can cut your churn rate in half for a broad based service.
- Customer communication – A good billing system will send notifications to both customers and staff about upcoming renewals, expiring credit cards, failures, and even receipts.
- Credit card management – Give your customers the capability to manage their own payment methods, view invoices and other information about their account.
- Account status implementation – Linking account status to billing status allows you to block account access or limit features to customers who aren’t up to date with payments. This will often compel people to fix their card.
Billing and billing systems should help your business reach its goals, not hinder them.
No matter what your business is, if your email is your primary point of contact with your customers, email deliverability (the number of emails successfully delivered) is important.
This is something we take seriously at Fusebill, and not just because we send emails to our customers, but more importantly, because our customers use the Fusebill platform to send emails to their customers.
While our main goals are making sure cash collections are quick and efficient, costs are reduced, and customer lifecycles are extended, email deliverability is a significant part of our business.
It’s very important to us that your customers receive your invoices, welcome emails, dunning emails, renewal notices, receipts, etc. The difference between getting an email delivered to the inbox or not, is revenue. Not just for us, but for you as well. Since on average, 20% of legitimate email never gets delivered, it is a bigger issue than most people think.
You don’t see any of this when you login to Fusebill, but here is some of the behind-the-scenes work we do to improve the deliverability of the system emails. We’ve partnered with SendGrid, a cloud-based email delivery company.
SendGrid has a highly scalable email infrastructure that consists of a fully managed datacenter and is the industry leader in security and reliability.
- Mail servers are secured so threats of hackers or spamming are eliminated.
- ISP feedback loops are in place for managing complaints, and processes are in place to react quickly if there are complaints.
- Postmaster and ‘’abuse” mailboxes are in place, and are monitored.
- Valid MX record ensures ISPs aren’t blocking email.
- Email authentication (SPF, DKIM and DMARC).
At Fusebill we recognize that email deliverability is an important part of our service. By using the SendGrid platform, we’re helping to ensure your email is delivered.
Over the past few months we have written articles on seven of the most popular pricing strategies for subscription based businesses, to end the year we’ve created a summary to make it easier for you to compare:
1. Freemium plus Upsell
In this strategy a company offers people a ‘free forever service, but also offers a paid version which includes more features, or removes advertising, etc. LinkedIn is a good example of the Freemium+Upsell strategy. Anyone can sign up for a LinkedIn account, it’s free and all you need is an email address to get started. But, if you want to see a full list of people who have have viewed your profile, or use the InMail feature, or get better, faster access to job posts, you’ll need a Premium account, and it comes with a price tag. Read the full post
2. Multiple Editions
In this pricing strategy you create different packages for different people, and let them choose the one that is right for them. The price of the different packages offered can be based on many factors such as number of customers, usage, etc., usually dictated by the type of service the business offering the multiple editions is selling. Cell phone companies. More
3. Pay As You Go
Also called usage based, or network based pricing where customers only pay for what they use on a transaction basis. In this strategy customers either pay in advance, or pay in arrears. Pay as you go has been shown to lower over consumption compared to when a flat rate is charged. Since saving money can be a powerful motivator and in some cases, having a pay as you go option may be the reason someone chooses your business over your competitor. More
Online, this is the pricing strategy of choice for communications and data storage, but depending how pricing is set up, it has the potential to be very confusing for the consumer. An example would be a wireless company that charges $25 a month for up to 2GB. This is a flat rate unless you exceed 2G and then you’re charged extra based on how much data you use over the allotment. More
This is a very popular pricing model in the SaaS and subscription based world. Basically, a company offers different price packages where volume is the key differentiator. What constitutes volume varies of course. In this strategy, you’ll often see three tiers because it creates a frame of reference for the pricing. The goal is usually to sell the middle tier and the edges are included to make the pricing seem reasonable. If you using or are thinking of implementing a tiered/volume based pricing strategy, it’s very important that you do a market analysis where your goal is to adequately address each segment. More
Sometimes called price bundling, product bundling, a compilation, or a package deal, this is when a customer buys two or more products or services together for one price instead of buying items separately for individual prices. To successfully use this pricing strategy, you have to create bundles where the perceived value exceeds the asking price. If you get the right value in front of the right customer at the appropriate price you’re more than likely going to make a sale. More
With segmentation you offer the same product or services but at different (or unique) prices to different types of customers. This pricing strategy has proven to increase overall profit and revenues especially in industries with high fixed cost structures. Segmentation can be based on volume, attribute or feature, service offering, time of purchase, time used, to name a few. While segmentation can be powerful there are difficulties with this pricing strategy that can reduce the impact. More
Recently we published A Year End Billing Checklist to Make the Whole Year Bright that contained tips to help you get a head start on your year end. Once you have everything cleaned up you’ll want to keep them that way. Here are six resolutions you can make for 2013 that will go a long way:
1) Keep client information up-to-date. Allow your customers to manage their own payment information online, you can do this with a self-serve portal. Easy to set up and secure, it’s a great way for customers to update their own information. You can even set up reminders that automatically let you and your customers know when credit cards or subscriptions are about to expire.
2) Automate recurring billing and collections. Let your billing system manage failed payments, expiring cards and late payments – so you don’t have to. Automating will also help reduce revenue leakage that can occur in manual systems when recurring charges get missed.
3) Recognize revenue monthly – calculate the earned portion of your subscriptions each month, and monitor the deferred revenue.
4) Implement account status tied to payments: distinguish customers in good standing from delinquent payers and defaulted accounts, and ensure that this status is used by all service delivery systems. Once implemented make sure you set up alerts so both you and your customers are notified when an account status changes, this will significantly increase efficiencies across accounts.
5) Manage customers through their subscription lifecycle. Automate welcome emails, renewal notifications, and payment reminders. This will prevent billing errors, and save time and money.
“Steely-eyed, VP Marketing Steve Adams and green-eyed, tech developer Kareem Sultan together with a 13-person, Kanata-based team made up of veterans like Founders Greg Burwell and Tyler Eyamie are building a global billing system that handles recurring payments.” Is the intro for this article by Bruce M. Firestone, best known as a professor, entrepreneur and founder of NHL hockey team, the Ottawa Senators.
Read the rest of the article here: Keys to Recurring Success
We’ve developed a nice model to help our customers assess the ROI (return on investment) on deploying a recurring billing and payments solution. ROI models are used to assess, justify and prioritize investment decisions.
Everyone’s situation is a bit different and we’ll tailor your analysis appropriately - contact your account manager today.
What are the main building blocks of the analysis? Fusebill helps on both sides of the equation – growing revenues while reducing operational costs. (Because Fusebill is delivered as a service, our customers don’t face capital investments or IT costs to run the system.)
Revenue grows by reducing churn (especially passive churn) and eliminating revenue leakage – but also by being able to compete better and more rapidly introduce new pricing schemes.
Compared to building your own billing system, or even just connecting directly to payments gateways, Fusebill eliminates most upfront development costs: for checkout pages, self-serve client portals, and payment gateway integration, as well as the security costs for maintaining a PCI compliant environment.
Ongoing costs are dramatically reduced by eliminating manual clerical work and automating billing operations (account reminders, card expiry, etc.). By allowing end clients to manage their own accounts and payment methods, inbound calls are dramatically reduced. IT requirements for subscription billing reporting are also eliminated.
There are also a lot of ‘softer’ benefits that are harder to quantify, but often are key considerations. Eliminating errors significantly improves customer satisfaction, and reduces a major trigger of customer churn. Timely and accurate reporting improves business decision making – and detailed analytics provide insights to customer behaviour. And relying on a certified partner reduces risks of security breaches.
All ROI models are based on assumptions, and we’re happy to share our view of the benefits our customers have seen – from scrappy startups to well established businesses.