One of the most talked about “pain points” associated with mobile billing are the fees levied by carriers. While it’s true that carrier fees can be laughably high, it’s important not to miss the forest for the trees. If you’re selling products with a marginal cost to produce approaching zero (e.g., software, games, virtual goods, digital content, etc.), what matters most is the conversion rate of shoppers to buyers. Yes, mobile payments are “expensive” on a direct cost basis, while credit/debit cards are relatively “cheap”. However, focus on the rate at which consumers complete a payment across different payment methods and you’ll start to see the impact on incremental revenue is driven more by payment conversion rates than by the direct cost of payment processing. And it’s not even close.
Let’s say you’re selling virtual goods as a way to monetize your wildly popular online game. Whenever a user intends to buy a virtual good, there is a chance that he won’t buy when faced with the task of actually completing a payment. For the sake of this example, we’ll define the payment conversion rate as the rate at which your customer actually completes a payment after intending to do so. More specifically, the payment conversion rate is the rate at which a user gets to the “payment completed” page after clicking the “pay now” button, generically speaking.
Now, let’s take a specific example to illustrate how payment conversion rates impact revenue. Let’s suppose you offer two different ways for your customers to pay you, with a credit card or with cell phone. For every 100 users who intend to buy by clicking the “pay by credit card” button, only 5 successfully complete a payment.* Again, there are lots of reasons why this payment conversion rate can be 5%: 1) user doesn’t want to share sensitive financial data; 2) user doesn’t have card handy; 3) user gets “cold feet” halfway through typing his billing address, etc. For every 100 users who intend to pay you $5, only 5 actually will. This yields $5 x 5 = $25 - $1.50 (direct costs for payment processing) = $23.50 in net revenue.
Now let’s take a look at mobile payment. For every 100 people who intend to buy by clicking “charge my mobile phone” about 50 will actually end up successfully completing a payment.* There are several reasons to explain such a high payment conversion rate: 1) user knows his mobile number by heart; 2) it’s a phone, not a bank account, so user isn’t worried about security; 3) there is no other personal information required - just the mobile number. So, for every 100 users who intend to pay you $5, 50 actually will. This yields $5 x 50 = $250 - $100 (direct cost for payment processing) = $150 in net revenue.
As you can see it’s not even close ($23.50 vs $150). Your net revenue is far more sensitive to your payment conversion rate than it is to your direct payment processing costs.
PS - Wondering where the “breakeven” point is for credit card conversion rate? It’s 30%. So if you’re getting a 50% payment conversion rate on mobile payment and 30% on credit card, your net revenue will be virtually the same ($137). Only difference is that with mobile payment, you’ll get 67% more paying customers than with credit card. After all, if you’re going to make the same amount of money, wouldn’t you rather have more paying customers?
*Actual aggregate payment conversion rate data shared by our customers.
Mobile Payments, Virtual Goods
conversion, credit card, Mobile payment, revenue
This summer we were honored when IMVU, the leading avatar-based social network and industry pioneer, chose us to be their mobile payments partner. With over 40 million users all over the world, IMVU built their own in-house mobile payments solution. After operating their own platform for a couple years, they decided to try us on for size.