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Digital business: Keeping good customers is the next frontier

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As UK entrepreneurs take to the internet in droves, a revolution in how content is delivered has followed. Games, music, films, software and books now fill our e-shopping carts and our news.

I’ve followed the growth of subscription based business models since I tackled this very issue with eMusic, a company I founded in 1998. Before iTunes had even arrived on the scene, there were already big changes afoot in digital music and the way it was sold online. It opened my eyes to the big challenges that companies would face as the way we do business evolved. At that time, building our own billing engine from scratch was the only way of getting customer management just right.

Now, however, we should be in no doubt that cloud commerce is the new norm, and we are unlikely ever to see a return to physical content. Given the huge benefit of delivering content online – through subscription services that bring in massive, recurring revenues – you can see why more and more UK businesses are getting on board.

One of our UK clients, Mind Candy, is responsible for the seemingly unstoppable Moshi Monsters. This kids’ social network relied on subscriptions to bring it back into the black in 2009, and now boasts over 60m users worldwide. Most of these users are happy to pay the subscription fee for full access to the ‘virtual world’, keeping Mind Candy’s cash flow steady and its customers satisfied.

But holding onto a customer once they have signed up to your service is a difficult task. The question of customer retention is one of the biggest hurdles for the digital economy maturing in the UK.

Over time things can change, but a good payments provider should be able to help you manage the flux. Credit and debit cards expire and merchants don’t have the updated details. Or your customer’s financial situation or payday might suddenly alter and the charge is declined because they don’t have the money in their account or have reached their limit. We call this “passive opt-out” and the industry average is around 13 per cent. It is frustrating for those businesses who suffer; their customers haven’t chosen to leave but they lose them anyway, and are faced with the task of having to re-win or replace them.

Smart companies, like Mind Candy, have realised that simply attracting new customers in an attempt to offset their customer churn is not a profitable way of running a business.

Vindicia has the ability to deal with some of this “dropout” by just trying the card again additional times – as much as 30-60 per cent of these lost customers are ‘won’ back. The other key area we look at is attracting the right customers in the first place – identifying, via testing, the most reliable customers with the highest lifetime value (they make educated decisions about the money they spend, they spend more and they stay longer). In businesses that rely on lifetime value for profitability, the goal is quality, not quantity.

People ask me how to do this, and it is all about data. Data is the foundation for any good customer retention strategy; tracking customers, and keeping them engaged in your product with offers and flexibility. If you have enough of it, data allows you to compare your customers and promotions with broader sector trends and individuals’ purchasing history, all in a measurable format.

What digital vendors need is a solution that takes this off their hands and allows them to focus on selling their products. With the payments side managed, they can be assured that they’ll hang on to their customers. After all, keeping the customers you have is far cheaper than finding new ones.

Gene Hoffman is an entrepreneur, the founder of eMusic and the CEO of Vindicia.

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