Each September, hundreds of thousands of new “communities” take shape in classrooms across America, from kindergarten to high school, and in colleges and universities across academia. You remember the kid who used to sit next to you in math class, don’t you? How about your science lab partner? Feel like dropping them a line? Renton-based Classmates.com has taken on the role of facilitator and gatekeeper to rekindling those classroom relationships of yesteryear, as well as maintaining the annals of military service personnel. In so doing, it has created the Web’s single largest subscription service business model, a company that can claim more subscribers than the Wall Street Journal or Consumer Reports.
Each day, Classmates adds almost 100,000 new members to its massive, free member database. While not all become paying subscribers of the service, a growing number choose to do so. To get a closer look at this incredible enterprise, we sat down with President Michael Schutzler , an Internet executive who has been behind several successful Seattle start-ups including Freeshop.com. For Internet marketers, Schutzler’s advice is textbook- Subscription Marketing 101. Here’s what we learned.
Seattle24x7: Michael, there are a number of directories and search engines on the Internet for finding people. Why would someone choose to use Classmates?
Schutzler: There are many reasons. In terms of the utility, though, if you look up Bob Smith on a PeopleFinder, or Bob Smith on a Yahoo! Search or an AOL Search, good luck! You’ll get back 17,524 listings. But if you’re looking for the right Bob Smith, the Bob Smith that graduated from McKinsey High School in Pennsylvania in 1976, that Bob Smith is here, and you can find him and click on his name and communicate with him through a current, valid E-mail address. That’s what Classmates has done in reaching critical mass. We have 24 million people and we’re adding 2,000,000 every month who have given us the critical information that puts them at a specific place at a specific time.
Seattle24x7: It’s a manageable directory of information…
Schutzler: And it’s accurate. The other big challenge that databases have is that they tend to be out of date as soon as they’re published. Even a national change of address (the NCOA system) is never 100%, it’s often quite behind. I was living in Seattle and three years later, it finally caught up with me and said I wasn’t living in Chicago anymore. It’s really very hard for a third party to do that.
Seattle24x7: How do you keep it current?
Schutzler: Our system — all the content on our site — is member generated. Members report themselves that their E-mail changed, that they graduated from such-and-such a place at such-and-such a time, that they served in the Navy on this particular ship at this time period. Very soon it will be “I worked at IBM in Munich in 1984.” That kind of specific location and time element is the critical piece of information that makes it possible for you to find that person. And then of course, once you’ve found them, having actual access to them, being able to click on that name and send them a message is a fundamental distinction between Classmates and any other search engine.
Seattle24x7: According to our scorecard, you currently have 24 million members, and roughly 6.23% of those or 1.4 million are paying annual subscribers. You add 600,000 to 100,000 members per day. You’re also in a positive cash flow. Is that correct?
Schutzler: Yes, we are a subscription business and so GAAP – or Generally Accepted Accounting Principles — require us to only recognize a portion of the revenue that we actually collect. So, for example, our fee is $29.95, so when we collect the $29.95 from your credit card, our accounting department is not able to recognize all $29.95. We only recognize approximately $2.50 per month. So what we have is, in month one, approximately $2.50 in revenue, and we have roughly $27 dollars of deferred revenues which we then recognize over the balance of the 12 month period. We have positive cash flow. We don’t have net income yet. Our revenues have not caught up with our cash flow . That’s typical of any subscription business. It’s actually a positive in that at the end of this year we anticipate having $30 million in deferred revenue. So we’ll be actually entering 2002 with booked $30 million in revenue.
Seattle24x7: Since you became CEO, you’ve more than tripled the size of the business! How?
Schutzler: It basically comes down to three things. First and foremost, we’ve hired, and have been able to retain some of the best talent in the industry with respect to marketing, IT and sales & business development areas of the company. As a result of hiring really top notch financial professionals, we’ve been able to manage our cash flow in such a way that we’ve been able to achieve all of this growth as a result of bootstrapping the company — we didn’t have to go out and raise money to do to do it. If you have a subscription model and it’s working, you actually have something that you can bootstrap. Knowing which levers to pull have been very helpful.
We’ve also been able to very quickly take advantage of a declining advertising market which put us in a position to be able to lower the cost of acquisition of a new member. We found ourselves in a situation where the market was flooded with supply and not enough demand, and we were able to take advantage of that. I think we’re the eighth or ninth largest advertiser on the Internet.
Seattle24x7: How do you target new member prospects?
Schutzler: In that area, we have a bit of an advantage over a lot of other folks who have tried to build an online subscription model. Our entry point is high school. If you look at the overlap of the people who have an Internet connection who have gone to high school, it is virtually 100%. We can generically use run-of-site advertising with a very wide net, cast our message out and say something along the lines of “Did you go to high school?” And that’s enough of a pull typically for someone to at least take a look and see what we have to offer. When you come to Classmates, you discover that we have 140,000 schools listed including everything from kindergarten through every single college and university in the United States. So, just getting you in the door is step one for us.
Seattle24x7: What is the principal activity that takes place on the Web site?
Schutzler: Mostly it’s personal networking. The vast majority of activity is people connecting with each other either directly through the Hi-Note Email messages that we facilitate, or through the message boards and photo-sharing community tools that we offer. Or the reunion planning tools, and so forth. That’s the primary meat and potatoes of what Classmates has to offer.
Seattle24x7: How do you approach advertising vs. direct marketing ?
Schutzler: No matter what medium you choose, if you choose television or radio or the Internet, you can only do so much with one medium. So at the stage as a company that we were at a year ago, it made sense to focus 100% of our resources and energy on the medium at hand which was the Internet. We are now art a stage where we are in the process of refining our media mix for 2002 so we will begin to be advertising in arenas outside of the Internet because we need to continue to define our brand and educate the marketplace on what our brand is all about.
Seattle24x7: Do you feel then that Net advertising is really an image advertising idea compared with direct response?
Schutzler: It’s not quite as clear a dichotomy. In direct marketing, we’re primarily concerned with the conversion. You spend a certain amount of money in order to generate traffic to your site and then some percentage of people will actually respond to that banner or button or text link or whatever device you use to attract the traffic. And then some percentage of that will actually convert to become paying members.
But if you use a medium mix and combine that with radio advertising and print advertising, or billboards or any combination, then you are accomplishing not only the objective of defining and building the brand image and the position of the company’s service in the market, but you’re also increasing the likelihood that they will convert.
You’re increasing the likelihood that they will respond to the direct advertisement and then respond positively by converting and becoming a paid member. Ultimately, the combination of all those things in terms of brand building is about a company making a promise to a customer and then delivering on that promise, and if you do that well, then you get a loyal customer and then you ultimately build what this is all about, which is the lifetime value of a customer.
Seattle24x7: Is there anything in the community-buying concept and the economic leverage of community that you can see evolving for Classmates?
Schutzler: Sure. Member rewards are an aspect of every single member service on the planet. Whether it’s AAA or Costco, or American Express, if you look at any membership business out there, it may start out with a fundamental deliverable, (with AAA it was road and tow service, Costco it was volume purchasing, and American Express it was a charge card), but every single one of them grew that out, either in the form of points or in the form of using that purchasing power. Classmates will definitely move in a similar direction.
Larry Sivitz is the Managing Editor of Seattle24x7.
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