Financially Speaking / Archive RSS Feed
Archive for January, 2010
Buried in Billing Activities
This is a guest post from Lance Walley, the Co-Founder of Chargify and EngineYard. Chargify is an SaaS software that manages billing activities. Engineyard provides infrastructure for running Ruby on Rails applications in the cloud (TransFS runs on Engineyard). I suspect that his story of how Engineyard got buring in billing activities will resonate with many entrepreneurs and developers.
Over the course of a few years, Engineyard grew from 0 customers to 1,000 and by month 12 we were buried in Managing our Billing Activities (BAM – Billing Activity Management). We had a combination of software and people involved every day just to keep up. It became very expensive in terms of operational costs, customer dissatisfaction and the inability to report on that activity.
Engine Yard started reining in these costs in 2009, but I wish a better solution had existed earlier.
How We Got Buried
Here’s what happened. I think it’s pretty typical:
- It’s easy to get started with tools like Quickbooks and Auth.net to set up simple recurring billing of ‘x’ dollars per month on a customer’s credit card. When you just want to get a customer set up, this is quick and simple, but the simplicity is short-term because…
- Customers add & remove products, you need to change the recurring amount they are billed
- You’ll change pricing over time. We did so 4 times over a couple of years. We gave existing customers 1 year of grandfathered pricing, which added another layer of complexity to pricing.
- Some customers get special pricing because they’re in a special group, such as a charity, school, or reseller. Another layer of pricing.
- Credit cards get declined or expire, so someone needs to resolve these issues. I later learned that this process is called “dunning”.
- As you figure out what your customers really want, you’ll change your products.
- This is where “metered billing” comes into play. Unlike pre-paid flat-rate plans mentioned so far in this story, this is where customers pay ‘x’ amount per ‘y’ widgets used in the previous billing cycle.
- As your business grows and you get a finance person, you’ll discover that some charges must be “recognized” over different periods of time. We found out that set-up fees are supposed to be recognized over the expected life of the customer. I had never heard of “revenue recognition”. Wouldn’t it be nice if your BAM system could help with things like this?
As you can see, Engine Yard quickly outgrew the systems we started with, and we had almost no ability to report on all of this activity because the data was either spread across different systems or just didn’t exist.
We were paying a lot for a bad BAM system. For my next business I wanted to solve the BAM problem, which I think we have done at Chargify.
Customer Question- Reserves?
A TransFS user recently asked:
Do processors on TransFS require reserves?
Our answer:
Our processors usually don’t have reserves, and when they do it is only in legitimate, non-abusive circumstances. We can’t guarantee that our processors won’t have reserves because it’s possible that if the customer does something risky, the processor uses the reserve to protect themselves. As always, TransFS monitors your merchant account for abusive behavior on the part of the processor and will step to assist if necessary.
A reseve is when a processor notices “risky” behavior from a merchant and keeps money in a special account to account for any special circumstances. Learn more about reserves here.
Retailers’ aversion to fraud seems to be heightening, with over 57% of online merchants seeing fraud as the greatest threat to their business. This number skyrocketed from 2007, when only 6% of merchants saw fraud as a threat.
The good news is that just 1.6% of online orders tend to be fraudulent, an improvement over previous years’ statistics. This may be because retailers are becoming more wary and are taking steps to protect themselves.
A great way for merchants to protect themselves is to make sure they are PCI (Payment Card Industry) Compliant. These are standards set by the government to make sure merchants protect themselves from security threats. For a guide to learn more about PCI Compliance, click here.
Some people see fraud as a threat to the internet’s existence in itself. Several internet crimefighters have found ties between mafias and security breaches, especially in places like Russia and Italy. The internet seems to be the new frontier for organized crime to steal and distribute booty. NPR has a great interview with several cybercrime fighters who work behind the scenes to make sure the internet stays safe.
Image thanks to http://www.flickr.com/photos/59463761@N00/616649762/
There’s something about a top ten list, especially of folks to follow on Twitter, that draws your attention. Even if you don’t regularly Tweet, Twitter provides a wealth of information on basically anything so it’s worthwhile to start following notable people who regularly post business resources. Here are a few to start for women business owners; get the complete list here.
1) Anita Campbell @smallbiztrends- Anita regularly posts and comments from her wildly successful blog, Small Biz Trends.
2) Forbes Woman @forbeswoman- Even if you don’t feel like paying money for the magazine, following some popular business magazines gives you the opportunity to see what they’re covering.
3) Suze Orman @suzeormanshow- No matter what you might think of her show, Suze Orman gives a lot of great personal finance information through Twitter. See what other people on commenting on as well, Suze is fairly prolific on Twitter.
A TransFS user recently asked this question:
” I run a quarterly business and only take in credit card payments a few times a year over the phone. As a result, I’m looking for a processor who does not charge monthly fees. What do you recommend?”
Our answer:
“We could potentially set up a zero monthly charge contract with a processor but that would really increase the discount rate you’d receive, making it not beneficial for you. The reason that processors are usually unable to waive monthly charges for seasonal businesses is that you pay for their infrastructure with the monthly fee, and they have to keep that up even when your business is in the off season.
Another option is using Paypal and emailing them the invoices. However, depending on your volume this may also not be the most cost effective choice. The lowest monthly fee in the TransFS marketplace is just $8/month so in this case, it might be more cost effective to just pay a low monthly fee to avoid higher rates.”
Maine business owners are joining the opposition to inflated credit card processing fees. A local news station, WMTW reported that business owners are noticing a consumer payment trend that shows consumers drifting away from cash use and depending more and more on credit cards. This means that they are punched with higher processing fees. Smaller businesses not only feel it worst, but have the hardest time fighting back because of their size.
One gas station owner, John Babb, is fighting back by circulating petitions among his gas stations. “They’re [processors] actually making more money on a gallon of gas than we are,” Babb said. “They write the rules, you either take it or leave it and our customers demand we take it.”
The signatures collected from Maine’s petition efforts will be sent to Congress to join the already millions of other signatures asking for reform and more regulation.
Yesterday, Techcrunch reported that mobile payments startup Boku (now calling themselves Paymo) raised $25 million in series C funding led by venture firm DAG Ventures. Since its launch in June, Boku has raised $38 million in funding.
The way it works is that to make a micropayment, Boku users enter their cell phone number on the website, reply to a text message, and all virtual charges are tacked onto their monthly cell phone bill. This is great since users don’t need to have a credit card or bank account to make a micropayment.
Boku recently acquired its competitors Paymo and Mobillcash, and with this acquisition gained a strong base of users internationally. No joke: Boku boasts service in 58 countries and 190 carriers with more countries stepping into the queue.
One of the major problems mobile payments platforms face is high fees stemming from mobile carriers. This can represent anywhere between 10-50% of purchase price….also nothing to joke about. However, Boku is in the process of negotiating these fees down, first in Europe then hopefully followed by the US.
Boku’s major competitor is Zong, most well known for providing virtual currency via Facebook.
Referral Marketing
Many business owners mistakenly think that their sales cycle will be jumpstarted with cold calls bringing them to leads. Although this strategy is somewhat effective (based on volume of cold calls), a better strategy is to focus your marketing efforts on getting referrals from existing customers. This great post from About.com outlines a seven step approach to getting referrals. Here are a few:
1) Set measurable goals- Decide to grow your referral business by a certain percentage per month, and do everything to hit that target. This way, you’ll know how much more or less you need to do in order to gain a certain number of referrals. For example, in the insurance industry, agents are known to get at least three referrals from each person they talk to.
2) Pick your top twenty- Not all customers are comfortable giving referrals, so it may be more helpful to target those with whom you have the best relationship. Twenty percent of customers may be a good starting point, and feel free to branch out should you feel that your relationships with more customers is getting stronger.
3) Give, Give and Give- Provide customers with the best service possible, and watch the referrals come. Go beyond what you think is necessary, and make sure customers feel special. According to the principle of reciprocity, which states that people want to help after being helped, customers will willingly refer you to others.
Image thanks to http://www.flickr.com/photos/36499169@N04/3563008885/
In a rare move, the major credit card companies Visa, Mastercard, American Express, and Discover have decided to waive interchange fees on donations made for the tragedy in Haiti. Happening only once before for tsunami relief in 2004, the revoking of interchange fees shows how card companies succumbed to public scrutiny over highlighted fees in light of the tragedy.
The Huffington Post reported that some non-profit disaster relief organizations collect up to 85% of their donations by credit card which translates to over $250 million dollars that credit card companies pocket from non-profit organizations. Many of these profits are pocketed directly after a huge disaster–like the earthquake in Haiti.
According to the New York Times, the companies will do as follows:
1) Visa- No interchange fees through February to donations made to major charities providing relief in Haiti. The list is still being compiled. Visa will also donate revenue generated by charitable donations through next month.
2) MasterCard- No interchange fees on donations made using US-issued MasterCards to the American Red Cross, AmeriCares, Unicef, Save the Children, and CARE USA.
3) American Express- Rebating transaction fees for donations made on the card directly to nonprofits listed on the Agency for International Development’s Web site.
4) Discover- Waiving some fees, but have not offered the public details.
Non-profits are a great candidate for saving money using TransFS. By using the reverse auction system and getting competitive bids from top processors, nonprofits can save an average of 40% on processing. Non-profits really need to make every penny count, so wasting money on excessive payment processing fees is an easy fix for non-profits looking to save some money.
Trends for 2010
Many people are speculating which technology will bring the biggest changes in 2010, especially with all the hubbub after CES. Sometimes, however, technology is not the only thing that spurs innovation and changes in how we do things. Consider these next few trends:
1) Going Mobile- Yes, yes, I know that the iPhone has been out for many years and numerous business owners have made their iPhones a staple for conducting business. However, there are two things to note here. The first is that more and more functionalities will be taken over by the phone, such that in years to come, laptops will be a thing of the past (much how we view desktops now). The other is the release of Palm’s OS system and more importantly, Google’s Android. The iPhone’s ubiquity is well to be challenged…and with that might come a paradigm shift in the way business is conducted…yet again.
2) Homepreneurs- This is the new term used to describe many laid off folk who decided to start businesses from home. These new businesses are shaking things up for traditional workplace ideals. In fact, homepreneurs are so common, that the Small Business Administration (SBA) predicts that 50% of businesses are home based. This number will only grow in 2010 as the unemployment rate stays steady (did you see last week’s NFP?).
3) Green- It’s here to stay. Consider it the new black…as in businesses are going to be banking on consumer awareness of the green movement and trying to position themselves and their products as green. Surprisingly, emerging markets are more keen on green. Some 84% of consumers in China, India, Malaysia, and Singapore say they would accept a higher price for green products, compared with only 50% in the U.S., Japan, France, and Germany, according to the Harvard Business Review. Conclusion: sustainable design is the name of the game for 2010.
Image thanks to http://www.flickr.com/photos/45639066@N02/4230961450/
