Cash & Liquidity ManagementCash ManagementPracticeE-commerce Success Through Strategic Billing in Latin America

E-commerce Success Through Strategic Billing in Latin America

According to a 2008 Visa study, e-commerce purchases in Latin America are forecast to grow at an annual rate that exceeds 50%, to reach nearly US$30bn in 20101. With its vast economic potential, Latin America is fertile ground in which to earn revenue and reap profits through selling goods or services online. Most merchants have barely scratched the surface, however.

A critical component for online businesses is billing, which most assume to be a basic operational task – more or less a boring necessary chore – that does not relate to their business strategies. That assumption can’t be more wrong: billing has a significant bearing on customer acquisition and retention. Studies have shown that understanding the nuances of billing models and adopting the right one for an online business promises to boost profitability by at least 10%.

Cost Difference Between Intangible and Tangible Products

First, a word about the economic forces behind e-commerce. The US$30bn figure mentioned earlier applies to the total sales of both tangible and intangible goods. Relatively speaking, however, losses from fraud in sales of tangible goods impact the bottom line much more.

If someone steals, for example, a TV from an e-commerce retailer, not only does that retailer suffer the loss of the TV’s cost and related profit, but also the TV itself. On the other hand, the cost of selling intangible goods refers to how much it takes to deliver them over the Internet, or the cost of bandwidth. Assuming that the fraud rate is low, with bandwidth costs falling dramatically over the years (thanks to technology advances), the cost of selling intangible goods is minimal.

A far bigger revenue threat to merchants of intangible goods is the risk of inadvertently rejecting legitimate customers. The reason is obvious: the true value of customers lies in the time period of their patronage rather than their one-time payment.

Consider a simple example. If a company charges US$50/month for a subscription service and the average customer stays for two years, the average customer lifetime value for that service is US$1,200. Consequently, the company should focus on retaining customers for the natural lifetime, and ideally for longer.

This article discusses the billing-related factors for online businesses of primarily intangible goods in Latin America. Some of the points also apply to sales of tangible ones, however.

Billing Considerations for Latin America

In setting up the billing model for an online business of intangible goods in Latin America, keep in mind the following:

Payment method

How would the target demographic community pay? Offering an appropriate range of payment methods – credit cards in Argentina, Boleto Bancario in Brazil, and mobile options in Mexico are a few choices – is a critical step toward acquiring and retaining customers. Furthermore, since each method varies in the speed with which purchase transactions are processed and concluded, a company must be proactive and thorough in researching and understanding the ramifications and choosing the right method for its business.

Take, for example, a US merchant with an online business in Brazil who accepts both credit cards and Boleto Bancario as payment methods. For credit card transactions, that merchant’s account would typically be settled in two to 10 days, depending on the banking institutions involved. The same transaction processed through Boleto Bancario will take a week to complete after the customer initiates the payment push with the bank.

Business model

How can the billing model support and enhance the business model? Online business models range from subscriptions to freemium to microtransactions. For example, MoiPal, a virtual world that recently expanded into Brazil, delivers a freemium model in which basic registration and play is free. MoiPal’s VIP Club, which entitles players to extra credits and virtual goods, charges a fee, however. Some merchants have creatively mixed different business models and developed robust hybrids, such as base subscriptions on top of which people can buy virtual items through microtransactions.

For economic, demographic, and competitive reasons, business models are often in flux and must change by necessity. No matter the reason, a company must ensure that its billing infrastructure can efficiently and smoothly adjust to business and pricing shifts. Examples are adding usage-based alternatives to a time-based billing model, creating billing plans that include a free trial period and offering promotions for new services.

Fraud management

How can the billing model help detect and alleviate fraud? Again, the financial impact from fraud is far less for intangible goods. In managing fraud, a firm must strive to keep the rate as low as feasible, yet also ‘let in’ as many valid customers as possible. Be sure to have a safety net in place that minimises credit card payment chargebacks. One example is an automated system to identify, characterise, flag, and counter chargebacks so that a company can regain the revenue that is rightfully theirs.

Winning chargeback battles not only recovers revenue, but also lends insight into business practices. By understanding the root causes of chargebacks, a company can often draw conclusions of which affiliate channels are inadvertent or deliberate fraud advocates, which business practices need changes and which products are eroding or promoting overall profits.

In fact, a company should regard the cost of chargeback recoveries as a must in its budget for winning customers. However, if the chargeback rate seems too low, ask if, given the significant potential in its customers’ lifetime value, the business is being aggressive enough in its sales efforts. The more effective a company is in managing chargebacks, the better its billing model can optimise the overall marketing strategy.

Conclusion

In targeting the Latin American market, besides the obvious demographic factors (such as age, spending potential and community interests) that affect long-term profitability, do pay special attention to the billing infrastructure. Billing plays a major part in how well a company can take advantage of demographic trends. Ultimately, in-depth knowledge of the implications of fraud, payment method and business model on the billing infrastructure is crucial for the success of customer acquisition and retention strategies.

1 B2C Electronic Commerce in Latin America and the Caribbean: Beating All Odds, Visa 2008.

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