According to Gartner, 35 percent of the Global 2000 companies will generate revenue through subscription-based services and revenue models by the end of this year. Latin America is also following the same trend, and represents an interesting opportunity for those who are able to overcome its specific challenges.
There is no doubt that the market is huge, and it is already bearing fruits for global B2C companies. As Netflix revealed during its fourth quarter 2014 earnings report, the film and TV streaming company has passed the milestone of 5 million subscribers across the region, with more to follow. “If you take that 5 million number that we talked about, and 65 million in terms of addressable [market], we think we’ve got a lot of room for growth in the market,” its CFO David Wells told shareholders during the earnings call that ensued.
In return, these big players are boosting the adoption of subscription models in Latin America, while creating new consumption habits. Once consumers have tried these offers and understood their convenience, they are much more likely to request similar payment facilities for other verticals. This is true for B2C, but also for B2B, with giants such as SAP entering the subscription economy to adapt to changing demands.
However, Latin America presents a unique set of challenges for subscription-based models, for which foreign companies need to be prepared. During its first months of operation in the region, Netflix made sure to keep shareholders informed about the difficulties it was facing on its path to success — which made its good results a pleasant surprise to non-believers.
“We’ve had payments issues and e-commerce trust issues that we’ve wrestled with and improved over the last 3 to 3.5 years,” Wells explained. “For example, many banks turn down all e-commerce debit card transactions due to fraud risk, making it a more challenging environment than our other markets,” the company noted in a previous letter to investors.
Netflix made particularly clear that it would have to adapt to the “uniquely Brazilian form of payments known as Boleto Bancário.” Skype’s website gives one of the best explanations of this online/offline concept from a consumer perspective. “When you pay with Boleto Bancário, you can either visit a bank or retail outlet to make the cash payment, or pay via your online banking account,” it notes.
However, it also adds a warning: “Although we provide you with a payment confirmation in real time, the payment can take a little while to go through — generally three to seven days from the date of payment for the product to show up in your Skype account, but it can take longer depending on your bank.” As The Brazil Business points out, providers need to take other rules into account as well, such as the fact that overdue fees vary from bank to bank.
This can quickly become a headache for subscription services. Factor in fraud and default rates unseen in other markets, and it is understandable why many foreign companies may struggle when they first enter Latin America — not to mention the potential logistics pains if they sell physical products.
In the case of US company Benchmark Email, its main difficulty was payment processing, Brazil manager Fillipo Madella recalls. When the DIY email marketing company started operations in the country in March 2013, it found out that many businesses — even larger ones — were unable to pay in dollars and/or via credit cards. As a result, its staff had to manually issue ‘boletos’ in Brazilian currency each month to charge its subscribers. “We were losing clients,” he confessed.
According to Madella, things changed when Benchmark started to work with Brazilian startup Vindi, which provides companies with recurring billing solutions. “It solved this problem for us,” he says. Benchmark is now able to charge clients in Brazilian currency, both via local credit cards and via ‘boletos.’ Not only does it generate less work behind the scenes, but it also remove barriers to entry, as clients feel more inclined to trust Benchmark.
As a result, Benchmark might eventually adopt similar practices in other Latin American countries; it already has offices in Colombia, Guatemala and Mexico, which presents its own payment challenges, such as a preference for wire transfers. “Brazil was the first country where we implemented local recurrency, because of demand for ‘boletos’, but I think others will follow,” Madella predicted.
This reality creates many openings for a company like Vindi, which has been growing fast since its creation in 2013. According to its founder and CEO, Rodrigo Dantas, it hopes to reach 1,300 clients this year, mostly organically. “The recurrency market is booming in Brazil, and companies are looking for a service like ours,” he said.
Learning From Shoes4you
A former banking executive at Itaú Unibanco, Dantas was convinced to push forward with Vindi when he witnessed first-hand the failure of Brazilian Shoedazzle clone Shoes4you, which sent new pairs of shoes to its members on a recurring basis. Despite funding from high-profile investors such as Accel Partners, Redpoint Ventures and Flybridge Capital, the company’s managing team decided to cease operations in 2013 (its brand assets have since been sold).
Shoes4you’s core problem? A lack of proper payment tracking, which caused an unexpected hole in its business model. As a matter of fact, some members started to cancel payments directly through their banks, perhaps to bypass the company’s somewhat cumbersome cancellation process. Unfortunately, Shoes4you took weeks to notice, and kept on shipping them shoes in the meantime; word of the bonanza soon leaked out, and what started out as a small problem became a huge cash leak. When the company found out, it decided it was already too late, and ended up closing shop.
“I asked Accel whether Shoes4you would have closed had it used Vindi, and I was told it wouldn’t have, which convinced me to step on the gas pedal,” Dantas recalled. In addition to online subscription clubs, Vindi’s partners now also include offline businesses, such as English teaching schools and fitness centers.
One of Vindi’s international clients is low-cost gym chain Smartfit, which boasts a 700,000 client base through its 230 clubs in Brazil, Chile, Mexico and the Dominican Republic. With a monthly price point below US$25, it ended up driving smaller competitors out of business when they failed to adopt payment practices that were as favorable to customers.
While monthly subscriptions may seem similar to payments in installments, which have been extremely common in Brazil, they have the advantage of not generating any debt. Furthermore, they don’t involve credit card limits, which make them well suited to the country’s current economic context. “The migration has already started,” Dantas says.
This belief in the subscription economy led Vindi to organize Assinaturas Day (“Subscription Day”), a series of networking events aimed at federating its sector and discussing its issues. The latest and fourth edition took place within BRNewTech‘s monthly meetup in São Paulo, and attracted 250 attendees. Considering its success, Assinaturas Day could also turn into a full-blown conference, not unlike the Subscribed event organized by Zuora, which is one of Vindi’s US counterparts.
Building From Latin America
One of the three entrepreneurs invited by Vindi to pitch their idea at BRNewTech’s event was Leandro Faria, co-creator of metrics tracking dashboard Saasmetrics.co, which focuses on subscription businesses. Although it started out as an in-house project within Stefanini’s big data venture Datastorm, it is now picking up steam on its own.
While it is still only in private beta, it already has 51 clients. Interestingly, most of these do not come from Brazil or Spanish-speaking Latin America: 54% are from the US and 21% from EMEA, Faria said. In addition, 112 companies have joined Saasmetrics.co’s waiting list to start testing its public beta as soon as it launches.
“We aren’t actively working on distribution and customer acquisition yet, but we might initially focus on the US, also because the main platforms we are integrating for automatic data collection (such as Stripe and HubSpot) have higher penetration rates there. We may give special attention to SaaS in the beginning, but our goal is to serve as a base for any subscription business,” he explained.
Beyond Monthly Billing
Faria has also been sharing interesting advice with companies that want to launch their first subscription offers. In a blog post, he cautioned them against automatically associating subscriptions with monthly billing cycles, which can cause cash flow issues. “Yearly billing can make all the difference in the world for the health of your SaaS business,” he said.
More generally, subscription-based companies can benefit from well-thought retention incentives. For instance, Brazilian book club for kids Leiturinha offers several pricing levels: “the longer the subscription period, the smaller the monthly price,” co-founder Guilherme Martins explained. The formula seems to have worked well, with the company now shipping books to more than 6,000 subscribers, for whom reading is quickly becoming a habit.
According to Dantas, this is one of the requirements for success: having a product or service whose consumption is truly recurring. Once that basic criterion is met, companies can now rely on a growing set of tools to track their metrics and boost their revenue. One thing is for sure: in Latin America and elsewhere, the subscription economy is here to stay.