Zip.ca Hyper-Volume Renters

[Rick]

Hi folks…..

First, I’d like you to know how much we appreciate the discussion and feedback on this site, and that we take it seriously as part of our service development at Zip.ca (along with the hundreds of suggestions we receive by email every month through suggestions@zip.ca).

Today, I’m writing to solicit feedback on a specific Zip.ca question we are thinking about.

In an earlier post here several weeks ago, a writer started off on the right path:

“…the math is simple: the cost of each movie being mailed and returned is $1.00 plus tax (for two stamps), plus tax, envelope cost, processing, etc…that of course without even considering the cost of the movie itself. So if I got more than 15 movies in a month they're not making money, right?”

But he then leaped to an erroneous conclusion: “…so obviously there must be some "delaying" software going on to make it more profitable for them.”

No, we don’t do that at Zip.ca. In fact, we’ve done exactly the opposite.

No less than three times in the past year, Zip.ca has introduced major changes which allow members to increase their DVD rentals.

First, in May 2004, we change our standard membership from a 3-DVD membership – then the industry norm - to a 4-DVD membership. First in the industry to do so, across the board, for everyone, without changing the monthly membership fee.

Second, we have steadily introduced improvements in our outbound shipping. Today, thanks to the unique air+post hybrid shipping strategy we’ve developed with our partners, we now mail locally every day in no less than seven major Canadian cities. As a consequence of this unique – and expensive – approach, over 80% of Canadians can today enjoy the same mail service from Zip.ca that they would have if we were based right in their hometowns. No one else does this: Zip.ca is the only online DVD service in Canada to offer anything like this level of service.

Third, in December 2004, we introduced ZipRefill, a special privilege extended to qualified Zip.ca members who report returns online, and which effectively cuts their return shipping time to one business day.

(Regarding ZipRefill, the main things we seek to qualify members for ZipRefill is that they’ve been with Zip.ca for at least a couple of months and have a clean record regarding stolen DVD reports, which criteria are met by the vast majority of our members. And, of course, that they not abuse the ZipRefill privilege by reporting a return online, and then “forgetting” to mail the DVD to us for a few days…)

Would we spend our money on these serious service improvements simply to then defeat them by simultaneously introducing “delaying” software? The answer, of course, is that we wouldn’t, and haven’t. Our focus is on improving service.

The numbers bear this out:

Last April, our average member (then on 3-DVD memberships, prior to the introduction of air+post shipping and the introduction of ZipRefill) received 6.0 rentals a month from Zip.ca.

In May 2004, we introduced the 4-DVD membership, and the average shipments to 4-DVD members rose to 8.1 per month.

Over successive months, as we developed and implemented our evolving air+post outbound shipping strategy, the average 4-DVD member's rental volume ranged between 8.0 and 8.7 rentals per month.

Since introducing ZipRefill in December, the average 4-DVD member has received between 8.6 and 9.0 rentals per month.

So, from April 2004 to February 2005, a 50% increase in the rental service volume for our average 4-DVD member, from 6 DVDs per month to 9 per month.

At $24.95 per month, 9 rentals works out to only $2.77 apiece, a pretty exceptional deal for DVD rentals no matter how you cut it. (Even better when you consider we also pay for delivery both ways, offer about 10 times as many titles as the largest video stores, and never charge late fees.)

Further, 35% of our 4-DVD members are now renting more than 10 DVDs per month for that same $24.95 per month. Even more amazing, 15% go over 15 per month, and 3% exceed even 20 per month.

As you can see, that writer referenced at the outset does have a point. As Zip.ca makes it easier and easier for members to rent 10, 15, 20 DVDs a month and more, we do start losing significant money on those memberships, which is not a healthy way to run any business.

We’re not interested in running the business in an unhealthy manner, nor in that “solution” of throttling back service in some kind of hidden fashion, but we’ve identified three other options. I’m looking for feedback on them, through this discussion forum and elsewhere.

Here are the three options:

1. We can go bare-bones - knock off the fancy service stuff, the 4-DVD membership standard, stopping paying the extra cost of the air+post shipping hybrid, stop the ZipRefill, and just focus on keeping costs and prices as low as possible price, which probably means less hyper-efficient service and therefore fewer DVDs per month.

2. We can spread the costs of better service evenly across all members – better service and more DVD rentals for everyone, and charge everyone a couple of bucks more every month.

3. We can introduce surcharges but only for the heaviest users, still offer everyone unlimited rentals, charge a little extra to cover shipping and handling on rentals over a certain number each month. If, for instance, we charged something like $1.99 or $2.29 for shipping and handling on DVDs, over say, 15 or 20 in a month, our highest-volume members would still be paying only about $2 per DVD rental, a tremendous deal. And most members would never pay anything extra.

You can probably tell where our bias lies (it’s evident in how we’ve been running the business since we started a year ago): we believe that you are looking for great service and great selection, and prepared to pay a fair price for it. That’s why we’ve been investing in it.

But, that’s our thinking. And we’d like to hear yours. Post it here, and/or send it to us at suggestions@zip.ca.

Thanks as always for your feedback.

[Shmoo]

I would not recommend having high frequency users incur an extra charge per DVD as that will just annoy the most loyal users of your service. Unlimited DVDs has a major appeal. You need these high frequency users because they produce free advertising for Zip, and the best kind too: word of mouth.

If the high frequency users are happy, then Zip will get more members and profit from them, even though they may be losing a few bucks on each high frequency user (of whom there are few, as your stats show).

Don't skimp on service. Zip had problems for a while, but is doing well now. Now is not the time to go bare bones. Instead, raise the membership fee by a couple of dollars a month. If someone is willing to pay $24.95, they will probably be willing to pay $26.95. It is not a huge difference for most people.

[Paulzy]

Rick,

I understand that you are in business to make money. Who isn't? Maybe if you only rented to the sick and needy then it would be o.k. but you are not. That being said, I don't think any of your options are the best for that 15% of the users that you are talking about, if that is all there is to it.

I am willing to pay a few more bucks a month as a "heavy user", I'd even prefer that over the regular user paying for me to get more disks. Here is the rub. If I am consistently paying more, or I am paying more after I receive a pre-determined amount of disks in a month, then I expect something in return.

I want to get disks that I want to see. If you read the post I put in earlier about the "Gotta Have It" feature you know what I am getting at. I would pay 5 bucks more a month at least if I could sort the movies that I want to see in the order that I want to see them a' la Netflix. The way it works now is frustrating me. Too many titles with little to no availability.

I also think that if I pay a premium as a "heavy user", and/or I have been a member longer then others, that should factor into how available things are too me. Ziprewards are a good idea but thats not a huge incentive to keep the membership going. Once I have seen the 150 disks or so that are in the back of the catalog that I want to see, everything I rent will be a new release. As it stands now, I can't get a new release to save my life.

I am not totally concerned with the most disks I can possibly get, it just turns out that I would rather watch a movie or a TV show rather then putting up with all the commercialism on television. As a company offering Unlimited Rentals, I hope that my "taking advantage" of this would not be a punishment.

I like this service, I have invested my 275 bucks into your company so far and I would like to keep it up. Just be aware like what was said above, keep the faithful happy and you will see your clientele grow.

Thanks,
Steve

[constantmac]

Hey Rick, it's good that you're going to the source, those of us who care about this topic, and far be it for me to dispute your numbers. However...

There are a couple of things that I would like to bring to the table for consideration.

First, yes, it stands to reason that you lose on high volume users. But seriously, how many of those are there, and what proportion of your clientele are they?

Also people start out very enthusiastically, but I'm sure there's a large proportion of people whose traffic eventually ebbs off, or perhaps there's an ebb and flow. Periods of time when they're watching two a week, or others the full six. (Like me) Initially I was watching six a week, 24 a month, approximately. But have found that lately am lucky if I get through two or three a week.

And what about the people who pay full price and only use the service occasionally. You win big on them.

What I'm trying to say, I guess, is yes, you might be seeing a smaller profit as you increase your mailing times, and offer special features that speed things up. But you must also be making more money with some of those features, such as buying DVDs and the Gotta Have It feature.

As a user I would question whether you really need to raise prices at all, however you do it, and suspect this poll is simply a way of finding out how people would feel about paying more. Only you know what your bottom line is, and how much of a profit as a company you need. Or want.

My bottom line, of course, is how much I'M willing to pay.

[Alison]

This survey is inherently flawed, because most people here are high-end users who, as first priority, want the best service possible, and as second priority want lower prices. From private interest theory we can deduce that they will tend to choose the second option and also place some votes for the first. So far this is what we observe, although the survey is very early in right now.

[clh78]

Alison is right....most of the users here are heavy users BUT not all of us are.

To be honest, nothing irritates me more than hearing about people who are using the system to illegally burn copies and then sending them back the next day. To me, that's a gross abuse of the system and obviously not why it was created nor who it was created for. (And yes, I do realize that I'm probably about to get flamed big time for saying that....so be it.)

I'm probably what you would consider the "ideal" customer. I rent about 8-10 movies a month, keep them and actually watch them rather than burn them or copy them to hard drive and then send them back. It's not about "how many movies can I get in a month" as much as convenience for me.

That being said, I DO think heavy users should have to pay extra costs for their usage. How it is fair for a person who rents 18-20 DVDs a month on the 4 out plan to pay the same as someone who is renting 8-10 a month is beyond me. However, obviously this is going to require changing the mindset of "unlimited rentals". That's the problem with a program like Zip....there's always going to be people out there who abuse the system and feel justified in doing so because there aren't any caps in place.

I have to agree with Paulzy on the issue of new releases. A lot of people use your service to get "caught up" on older movies but once they've done that, it's time to start watching new releases again. And as you MUST know by now, your new release availability is a sore spot for most users. I've mentioned it recently and I'm sure I'm not the first to say so but what about purchasing large volumes of these new releases when you see the demand for them and then having a pre-viewed sale section rather than this Gotta Have It! jazz? You're still making money and people are at least getting something tangible for their money. I can't understand why a company like VHQ doesn't seem to have problems providing new releases to their customer in a timely fashion but the #1 company in the business can't seem to get their act together in that regard?

Zip is a great service and though I've only been a member for a short time, I've so far enjoyed my time but in "speaking" with other members on this forum, there are obviously some things which need to be tweaked. I don't know how I feel about charging S&H charges to heavy users but I think maybe you need to create a new price point for that percentage of users who are renting upwards of 18 DVDs a month.

Just my two cents....

[Rick]

Thanks to those who've posted on this so far....most helpful.

I won't make a tedious practice of responding to each and every item (I prmoise!) nor lobby for a specific outcome, but will perhaps jump in once in a while to answer specific questions or points.

Heavy user plan: we do already offer a 6-DVD plan....but perhaps we should look at something different, something especially tailored to the 15+ or 20+ group, good suggestion.

Surprise charges: agree that these are objectionable....were we to go to the model of S+H surcharges for over-threshold shipments, we would allow members to pre-select an above-threshold preference (always ship/never ship/ask me first), and also inform them if they are ever at that level in any particular month.

How many members are we talking about: the answer is a lot, and in my original post: "35% of our 4-DVD members are now renting more than 10 DVDs per month for that same $24.95 per month. Even more amazing, 15% go over 15 per month, and 3% exceed even 20 per month". We have had one 6-DVD member who had over 60 rentals in a single month.

Unlimited rentals: that's still the basic concept, just not necessarily unlimited free two-way shipping to boot... the issue here is that by improving our service as described, we've enabled our average 4-DVD member to increase their rental volume by 50% (from 6 to 9 per month) - which of course means our shipping costs have grown by that same 50%. Can't do that forever without changing something: what to change is the question we're seeking feedback on - do enable it, don't enable it, charge more for it this way, or that way.

Combining shipments: too bad this doesn't work - putting 2 DVDs in a package puts it right into the next weight category, and costs twice as much for postage, no saving. And, would actually break more often if forced through the Canada Post sorting machinery which bends the (glass) discs slightly. If not sorted mechanically could mean slower service. But costs the same postage anyway, so a no-gainer.

GottaHaveIt/New Release: this discussion is a bit of a sidebar to this topic, so I'll post something separately under that topic. Suffice to say here that G2HI is not only a "priority" feature, it actually adds an "extra slot" for that rental, effectively temporarily turning a 4-DVD plan into a 5. PS: 750 members really did receive The Aviator from us on Tuesday, the street release date; the next 750 will receive it as soon as those are returned. We buy New releases in exactly the same prortion releative to ZipList requests as any other title, meaning we buy a lot of The Aviators and Million Dollar Babys.

ASAP/priority system: although our experience is that the current ASAP system works better than the original priorization system we used and others use (which were in fact not quite so precise as people expect, because you simply can't ship effciently in precise order, without making people wait a day or two or more for replacements, which we don't think you want), we do agree agree that for some members who want to manage their shipping priorities more actively and/or more finely, enhancements can be added. Working on those (also on multiple ZipLists within one account), stay tuned.

Thanks again for the useful discussion so far.

[Alison]

I strongly disagree that people who are using Zip.ca are "abusing the system", but I also strongly agree that they are putting a burden of costs on everyone else, under the "unlimited movies" system.

I don't think Zip.ca should give up the unlimited concept in principle, as that is the whole advantage of online DVD renting. But if adding shipping costs for people who get more than X a month can alleviate the problem, then it should be done.

I also think that, although I am on a 4 DVD plan, people on 6 DVD plans should have a higher limit, given that they already pay to get more movies. It would be only fair.

I am definitely ready to pay a couple dollars more a month to keep this level of service, and I think most people would agree. But of course, I'd rather not, if there was a better possibility.

[clh78]

I'm sorry but people who rent the movies only to burn them or copy them....if that's not abuse of the system, I don't know what is. I'm not saying that people who are heavy users are abusing the system if they are actually watching them while they are in their possession....just the ones who are copying them.

Yes, yes, I realize I sound like a copyright agent (I'm not).....very funny, Grolth....

[YKdvd]

I assume #1 is a non-starter [I just can't see a press release starting "ZIP.ca today announces the abandonment of all the service improvements introduced over the last year" ]. Is #2 (across the board price increase) much more likely? Not only would you have that 97% or 85% (or whatever) of customers unhappily paying extra for a volume they never reach, but you would also be priced higher than VHQ and the rest of market for new users considering joining a service. Is this really something you'd consider, or is some form of restraint on the high end (#3) the only likely alternative if you do something?

Would disabling ZipRefill for the rest of the month after a certain number of returns make any significant difference for the heavy users? It might be a gentler way of slowing things down before getting to the monetary penalties.

[superstudd]

I wouldn't say I'm a heavy user, but I do get more than 10 in a month and close to 15. I think the service is fine the way it is now. The key word is UNLIMTED and Zip.ca even promotes "The faster you return your rentals, the faster new rentals are sent out" (not an exact quote, but close enough).

People shouldn't complain that they only get a handful of DVDs a month, if they take a few days to actually watch the DVDs. If you're taking 5 days to watch a movie (for example, Gigli - heaven forbid), you should expect less DVDs in a month. Also, if your list contains low availability DVDs, you should use a little sense and add items that are more available.

I've been able to get the older DVDs that I've wanted to watch for years......new releases I can wait for, and if I can't wait for it then every city has about 10 video stores that will. If you're going to increase the fee a few dollars, then I suggest converting the 4 DVD at a time service to 5.