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Oct 19, 2001
Case Study

How Classmates Got 1.5 Million Paid $29 Subscribers

SUMMARY: Although Classmates was founded in 1995, by the time CEO and President Michael Schutzler joined the Company a year ago it was floundering in red ink. 

Learn how Schutzler and his band of marketers, armed with the now-famous yellow Classmates banner ad, turned everything around.

BTW: If you are designing your company's visitor registration process - this is a must-read Case Study for you!
CHALLENGE

Classmates had 6.5 million registered users, 350,000 of whom had paid $15-$25 for two-year subscriptions to reconnect with old friends and hang out on message boards with their kind of people. It also had a Board of Directors that was growing increasingly anxious about negative cash flow as the dot-economy steadily worsened.

Schutzler says, "I had two mandates from the Board. Number one: stop the bleeding. Number two: how big is big?"

CAMPAIGN

Schutzler is unusual in the dot-com world in that he's got hands-on experience in both classic direct mail (he worked for Donnelly Direct's agency arm in the early '90s) and in online marketing (he co-founded Freeshop.com and has been on the Boards of three Internet start-ups.)

With a background like that, stopping Classmates' bleeding was "pretty easy." Schutzler explains, "We had cash flow coming in so it was really a matter of cash flow management basics, and ramping up the metrics that drive revenues. It's classic direct marketing -- minimize the cost of acquisition and grow."

First he moved the Company off of QuickBooks to a more heavy-duty Oracle accounting system. (Previously Classmates wasn't even able to easily renew subscribers.) Then he began the process of meticulously testing site design tactics to maximize the conversion of free visitors to registered users, to paid subscribers.

The Company now does in-person, site usability tests with focus groups and individual users on a monthly basis. Schutzler says, "We do more than just test feasibility -- we put the site in front of people and videotape them and ask them a lot of questions." Every single element of the Classmates site and landing pages that you can possibly imagine has been rigorously tested and retested, including colors, exact wording, typeface, graphics, page size, layout, load time, number of registration steps … and even how the steps in the registration process are numbered (or not.)

The only element not tested is subscription price point, because Schutzler refuses to test pricing until he can get extremely accurate reports on results. And let's just say he's really, really picky about measurement. He says, "I'm now in the process of building ratings engines to test price point sweet spots. I have a theory, but I'm not touching it until we're ready." So, the current price of $29.95 per year (expressed as $2.50 per month on the order form, but billed in the full amount) which Classmates' previous marketers had fumbled their way to, remains for the time being.

Schutzler found that the key to online registration and subscription sales success lies in two areas. The first critical element is page load time. "60% of our visitors are people with 56K dial up. Lightweight pages are one of the most important factors. Everybody in this space is acting like broadband is everywhere and it's not!"

The other element is making the form as easy and engaging as possible. (Classic KISS - keep it simple stupid - stuff.) For example, when new visitors enter the site they don't even realize they are involved in a registration process because the steps are not numbered until they get to page five where typing, versus clicking, begins. When they suddenly wake up to that fact, there's a big free gift wrapped present graphic to entice them to continue; and besides many people figure, well I got this far in, why not complete the form? It's a case of getting them to say yes before they even realize they're being asked to make a yes/no decision.

As Schutzler began to feel more comfortable with site effectiveness, he turned his attention to traffic-driving marketing. To cut cash bleed, all media buys were evaluated purely on a CPA basis - even when Classmates had to pay the media owner CPM. They ruthlessly renegotiated or cut all buys that weren't profitable. 99% of Classmates' advertising budget is spent on banners and buttons online. (They've also done a tiny amount of print advertising when terms were extremely favorable, and sponsored a car in the INDY500 where Schutzler enjoyed acting as a member of the pit crew.)

The founders of Classmates had gotten a key marketing element right before Schutzler joined. Two years ago they invented Classmates' now-famous yellow banner (you know the one with a bright yellow background featuring old black and white high school yearbook-style headshots.) Over the past 12 months, Schutzler's in-house advertising team has designed and tested thousands of banners to replace it. Nothing's beaten the control so far.

Why does this familiar yellow banner work so well in a world where most advertisers have to change creative constantly to keep clicks up? Schutzler says, "It's my speculation that it's almost become a piece of the user interface. You go to MSN, you go to Yahoo!, you go to the weather site, and that button says, 'Classmates'. We've become integral to the user interface on everybody's site. It's always the same damn button. And it works!"

Still the creative team keeps plugging away at tests, taking two widely divergent approaches. The first is to tweak the control, changing a tiny element - the background color, one of the headshot photographs, the typeface…. The second is to go in a profoundly different direction and test something "wacky."

Happy with subscription sales progress, Schutzler next turned his focus to growing supplementary revenue streams, the most prominent of which is ad sales. However he prefers to sell text links instead of banners because "banners don't work as well here. We're a community site. We have the same challenge as iVillage. We're a sticky site. Shoving banners in front of eyeballs doesn’t work because we're not a portal. You're not coming here to click off, you're coming here to be at Classmates!"

At a time when many content sites are grabbing any insertion orders they can lay their hands on, subscription revenues allow Schultz the ability to be picky about who he allows to advertise on the site. He explains, "We are rotating partners through blocks and whoever does the best clicks wins. Our model here is what does the member want? Let's give it to them. We truly are a membership company." Winning advertisement categories include dieting, dating, genealogy, home repair and Internet connection offers.

During the registration process, Classmates also collects opt-in permissions for a variety of email lists - including shoppers' specials in 20 categories and a weekly cartoon email -- which advertisers can sponsor. (About 15% of registrants choose to be added to at least one shopper's special list.) Schutzler notes, "We're great at targeting. We can target women aged 35 in Beverly Hills. I can be that precise." That precision makes selling these ads easier because micro targeting is the name of the game in online media buying these days.

Plus, the Company gets a cut of revenues generated on its site from a co-registration sales alliance with Synapse Group. Classmates encourages new registrants to opt-in to their choice of free trial magazine and other offers by using the disgustingly clever tactic of promoting the co-reg form as their aforementioned "Special Bonus Gift" complete with a gift-wrapped box icon for registering. (Come on, who's not gonna click on the icon to see what their gift is?)



RESULTS

You read the headline right -- as of today Classmates has 1.5 million paid subscribers, almost 80% of whom have been acquired at the $29.95 price point since Schutzler joined the company one short year ago.

Classmates is one of the biggest advertisers on the Web buying "staggering amounts of inventory -- 5-10 billion impressions per month." (In fact Schutzler flinches when big sites like Hotmail have server trouble because it directly impacts banners served which in turn affects his resulting sales.)

Those billions of banners and buttons served translate into two- two and a half million unique visitors per day. These in turn convert to approximately two million more registered users per month, who convert to about 150,000 new paid subscribers per month. That's an astonishingly good 6-7.5% average sales conversion rate. (In comparison, many other subscription sites are happy to get 1-5%. And some do worse.)

Although 80% of Classmates' revenues currently come from subscription fees, their accounting system doesn't recognize this income until it's earned at a rate of $2.50 per subscriber per month. So the smaller 20% slice of ad sales revenues, which can be recognized immediately, has a greater impact on the bottom line snapshot at this time.

Schutzler had been predicting the Company would show positive net income by December 2001, but notes that due to the events of September 11th his new forecast is for March 2002 at the latest barring any other unforeseen economic disasters. We'd like to note that Classmates has yet to touch the most profitable revenue stream of all -- renewals -- because almost no subscribers are up for renewal yet.

Schutzler is crossing his fingers. He says, "I look around at airlines closing and laying off, Motorola laying off … the list goes on … and here I am still chugging along. If we can survive this, we can survive anything."

http://www.classmates.com

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