Crunchyroll is crushing it. The Japanese Anime streaming media service currently has over 700,000 paying subscribers, making it one of the top 10 SVOD providers in the world. What lessons can Crunchyroll teach us about international expansion, subscription metric fundamentals, and the value of focused markets?

Gabe Weisert met up with Marketing Lead (and former Senior Analyst at Hulu) Reid DeRamus at Crunchyroll HQ in downtown San Francisco for a pointed, informative discussion.

Where do you see the state of OTT right now?

Well, you have Netflix, Amazon, and Hulu, the three big guys who were the first movers, and they’re all playing in the same arena, where you’re going for more broad-market, general-appealing content. You’re going for breadth.

As far as user experience though, it’s relatively shallow: you pop in there, you watch what you want to watch, and then you pop out. You’re not really directly communicating with anybody, and it’s not really a lifestyle brand. You don’t feel as much affinity towards it.

It’s more like this is just a great deal, there’s a ton of great content there. It’s a no-brainer compared to the traditional cable bundle, especially if you’ve never been a cable subscriber before. Do I call Comcast and get this $150 subscription, or do I get Internet and $10 Netflix?

But we still think there’s a big gap in the current market, where you can provide a more enriched experience. We’ve certainly seen that through the anime community. You have conventions, you have an active forum, and there’s just that much more engagement across the board. You’re seeing that across other “niche” SVOD providers as well: horror, comedy, Korean drama, etc.

Where do you think the industry is headed long-term?

Well, when you unbundle cable, and I think that’s what’s going on right now, you ultimately will have lots of individual channels, but that’s not sustainable from a consumer perspective. You’re just not going to subscribe to 100 different channels and have 100 different billing relationships. So there has to be some form of aggregation. I think that’ll be the next phase.

There’s that popular quote, which is that the only way to make money is to either bundle and unbundle, and I think right now we’re in the unbundling phase. You have everybody who’s creating content trying to launch their own subscription channel, and figure out a way to monetize in this new environment.

But ultimately, from a consumer perspective that’s just not a sustainable road map. You’ll have everything fall apart, and then people will bundle back up, and some channels may not be included in that rebundling, but it’s an exciting time to be in this space.

Sometimes it feels like Amazon and Netflix got into original content to mask that mile-wide,inch-deep aspect to the business. They’re trying to avoid being commodified.

Yes. They’re definitely investing methodically. I think they’re seeing viewership behavior and then they’re looking at the investment relative to where we have seen successful engagement in the past. Like Bojack Horseman, or F is for Family, they’re getting into the adult animation type arena and they’ve probably seen that work historically. So now they’re starting to invest in that as an original series.

In our case, as a result of the construct of our partnerships with our content partners, the majority of the money that we make we send back over to Japan to fuel the growth of the Japanese anime business.

How would you describe the Crunchyroll audience?

We skew male a little bit. We’re definitely a little younger than most of the other services. There’s a lot of overlap in gaming, Twitch, e-sports, Comicon, a lot of overlap with that kind of crowd. We have a lot of hardcore anime fans on our site, who drove the growth of Crunchyroll initially, but we have a lot of titles that also appeal to the broader audience. It’s not just die-hard anime fans anymore. It’s like a beautiful blend of all of them.

So the challenge is talking to those people in a way they want to be talked to, and reaching them where they live?

Yes, it’s so important. The more niche you are, the more you have to differentiate through some kind of aspect, and we do that through community. We have a very big brand team who focuses on engaging our audience. They go to conventions all year long. There’s an absurd amount of anime conventions. We all went down to Anime Expo, that’s the big one in LA. Over 100,000 people went last year, which is just crazy to think about.

We’ve also started to produce our own content as well, including a weekly podcast and show reviews. This past Christmas, we produced a Holiday special, which was a bizarre comedic skit that highlighted our love for anime. We put it up on Crunchyroll and Twitch, but also put it on TV through networks like Comedy Central, Spike, and TLC. Our fans really loved it and it actually got picked up by Variety. We’ve taken a very active role in trying to build the best possible relationship with our community.

That’s also traditionally an audience that gets bombarded with advertisements. What are the pluses and minuses of pure ad plays versus asking someone for $8 a month up front?

I think it really depends on the type of content. It’s just really hard to monetize purely on ads, enough to pay for the content investment. In addition, it’s not the best consumer experience. I think the other element is if you’re successful in building a great product and a great content offering, people are willing to pay. It’s not unreasonable to ask for $8 if what you’re providing is perceived as at least that valuable.

Crunchyroll is case in point where you have over 700,000 paying subs at roughly $7 a month. I think it’s largely dependent upon what kind of content you’re putting out there, and how well you’re able to execute that from a product perspective.

Levelling up into subscription business models, you’ve written some interesting blog posts on some of the inherent masking effects of commonly used churn metrics. Can you expand on that?

Sure, we’ve worked with a lot of people in this space, and there’s a fundamental misunderstanding around how to measure retention. When we talk about retention we’re asking a simple question: If I have an individual subscriber, on average, how long are they staying on the service? A lot of people conflate retention and churn rate. Churn rate is an aggregate measure of on average, within a given period of time, how many people are canceling the service.

Typically, when you get metrics on an aggregate level they can be helpful monitoring the heartbeat of the business, but they’re not really as meaningful as individual-level metrics. The core metric that you should be optimizing towards is customer lifetime value, and the backbone of that is customer lifetime and that’s retention. How long, on average, are you getting people to stay on the service as a paying sub?

Or think that they’re somehow joined at the hip.

Right. They’re not, they’re completely independent.

Let’s talk about overseas expansion. Crunchyroll is in over 180 countries and climbing. What have you learned?

Crunchyroll has a lot of subscribers outside the US. I think a lot of people quite rightly associate us with Japan, but we actually don’t have any subscribers there. Our content deals exclude that area.

Once you start getting into international markets you get some really interesting challenges, and payments is the fundamental first thing you have to address. If you can’t monetize your users, you can’t justify making any type of investment in that market. It’s like having a faulty business plan, so you’re undercutting yourself from the start.

With Crunchyroll, at first the only thing that we really addressed in terms of international markets was subtitling. That was really our way of translating the product to those local markets, and it’s worked out pretty well for us.

But at a certain point we hit a brick wall. We were running these credit cards across borders, and that was just really hard. We offered some local payments, but not to the degree that we needed.

For example, South America’s a predominantly cash-based market. They just don’t have the credit card penetration that we do up here. On top of that, they don’t have as many people using credit cards online. If you think back to the early days of the Internet, not everybody was comfortable putting their information online and buying stuff.

That doesn’t necessarily speak to any kind of market sophistication. It can just be a cultural thing.

Precisely. I was talking to somebody who worked at HBO about the same issue, and I really think that US businesses in general are somewhat naïve in thinking that you can just go and do a new international market and everything will be rosy.

So payments are very important. We break it down into two parts — you have local acquiring, which you need to set up either through a partnership or establishing some kind of presence. You’re able to build relationships with the banks in those markets, and that’ll really maximize your ability to process credit cards.

The other side is alternative forms of payment. Boleto in South America’s a big one. The e-wallets. Gift cards are really huge. Netflix has alluded to the success of gift cards in Latin America, so that’s something that we’re really interested in doing.

So you have two ways of maximizing your efficiency there, through local acquiring, which takes a little more effort, and then alternative forms of payment.

It sounds obvious, but nailing payments is a real foundational turnkey for any subscription business.

Yes. It impacts three important areas of your business. If you’re offering alternative forms of payment or localized forms of payment, you’re maximizing your acquisition. You’re expanding the pool of potential subscribers that can pay you.

The second element is retention. A big portion of our cancels are from involuntary churn, and I know this happens across the board for not only digital subscriptions, but stuff like gaming. It’s not an uncommon problem.

You can do really smart things around trying to update credit cards through account updaters and intelligent retry schedules. Messaging is really key, so if you have a payment fail, you want to message them cross-platform: in the app, desktop, and email is really critical. We see a large portion of our saves come through active messaging and having people proactively update their card information. All those measures greatly reduce involuntary churn, which is critical to sub growth and extending that customer lifetime.

The last element is cost. Our biggest variable cost is processing payments. You always want to minimize your transaction volume, so you want to be able to have a high success rate, and the way you do that is more intelligent recycling and figuring out what’s the best way to try to invoice cards and successfully charge them.

So all three of them are pretty interrelated. For example, if we’re thinking about partnering with a payment specialist in South America, we would make the argument that they’re going to provide us a greater pool of subscribers to access.

Unlike retention rate and churn, you can’t really talk about one of those three elements in isolation.

That’s right.

Thanks for the chat, Reid!

Thank you.

For more insights into Crunchyroll’s strategies, catch Reid DeRamus and Zuora’s Craig Barberich in our webinar – The Renaissance of Media: How Crunchyroll’s Fans are Driving the Future of Streaming Media!