vindicia lp

Customer Data Ownership

New companies are being formed every day – here in Silicon Valley, we see a lot of activity and buzz around all of the companies that are creating the next big thing.

This is always exciting to follow, but for us here at Vindicia, it is doubly interesting. We take note of the business models and the target markets for these startups as we’ve built our business on meeting the needs of companies selling digital goods online to consumers. One trend we’ve been seeing lately is a sharp growth in the number of consumer-focused startups. This is great, but as many players are new to accepting direct payments from consumers, considerable thought should be given to the business strategies and how to be successful both near- and long-term.

While many discussions exist on the pros and cons of the different business models (microtransactions versus freemium versus subscriptions), one element has been mostly overlooked – ownership of customer data. Companies that publish their content exclusively on social networks and mobile platforms have limited access to communicate with and upgrade their own customer base. This applies to anyone, even independent sites, that rely on a 3rd party system to handle purchases. Let’s walk through a few common scenarios to highlight this problem.

  • Example #1 – iPhone app: Company X builds a fun, engaging app and launches it in the iTunes App Store. They then build buzz and excitement via marketing campaigns and manage to achieve a high ranking inside the app store that allows their game to easily be found. Great initial success funds continued development and more marketing. In a few months however, Company X wants to release an new version. The app store doesn’t allow direct communications or discounted upgrade pricing with existing customers. Each customer will have to purchase the new version again at full price. In addition, if a new version of the same app is offered, the existing version will be temporarily unavailable while under Apple review. Also, since Apple doesn’t allow purchases of “virtual currency” to be used in applications, developers are restricted to designing games around the episodic content model to keep their users engaged in the application. If possible, developers should try to create a direct relationship with their customers via a controlled channel like a destination website.
  • Example #2 – Freemium Service: Company Y creates a free hosted storage site for consumers with additional storage and tools if a premium monthly membership is purchased. To offload the difficulties of building a billing system and PCI DSS compliance, Company Y chooses a hosted payment page run through a popular gateway. After a lot of hard work and customer success, they are outgrowing their service and want to move to a system that can handle their scale and optimize their customer retention while providing better rates. Unfortunately, the gateway they’ve been using informs them that there is no way to get the data out of the system (and Company Y couldn’t create a backup of the data due to security concerns). This leaves Company Y in a tough spot – existing customers will have to re-enter their payment information in order to be billed on the new system. This leads to a sizeable (but one-time) increase in passive opt-outs as customers re-evaluate the value proposition of the storage service.

No matter what your company size or type, ownership of customer information will always remain critical. Owning customer information lets companies control their own destiny instead of relying on 3rd parties to act in their best interest. Many companies find out the hard way that 3rd parties can restrict growth and involve a painful migration down the road. Either way, as your new startup (or product line) looks to directly monetize consumers, make sure that you are asking “who owns this data and how hard is it to change providers?”

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