Adult Billing and the Credit Crunch

Alex Henderson
Americans who have been in the adult entertainment industry for 25 or 30 years can remember a time when most adult sales in the U.S. were done in-person. Back in the 1970s and '80s, consumers typically acquired erotica and sex toys at neighborhood sex shops — and clerks had no problem accepting cash. But since the rise of the adult Internet in the 1990s, most Americans have been using credit cards to purchase adult entertainment.

From adult membership websites to adult websites that sell tangible goods — anything from adult DVDs to sex toys — credit cards have become the dominant billing method for American adult companies. But in the recession of the late 2000s, banks aren't being nearly as generous with credit as they were in the past. Now adult webmasters find themselves operating in an environment in which banks are reducing consumers' credit lines, terminating "dormant" credit cards and declining credit applications left and right. And if American consumers in general have less credit, what are the implications for adult e-commerce?

Harlan Yaffe, president of the gay-oriented, Miami-based adult affiliate program, said the credit crunch is problematic not only for adult websites but for e-commerce in general. "If there's a lack of liquidity in the system on any given day, and if banks don't have the credit to issue, that's a problem whether you're a porn company or whether you're Pottery Barn," he said. "Consumers have the same expenses they had before, but they don't necessarily have the same amount of available credit, through no fault of their own. It doesn't matter whether you're buying porn online or whether you're buying something online from Wal-Mart — there is less credit to go around."

While credit cards are the primary billing method for adult websites in the U.S., that isn't necessarily the case in other countries. Wolfgang Kring, CEO of 2000Charge Inc., a payment solutions provider that has offices in Los Angeles and Munich, Germany, pointed out that debiting bank accounts has been the norm for many European adult websites — and he predicted that American adult sites will be moving more in that direction in the future.

"Adult entertainment companies are, unfortunately, not immune to the economic crisis," Kring said. "When credit becomes less available and individuals feel its effects, then sales will suffer to a certain extent — and consumers are forced to use alternative billing methods to pay for their adult online entertainment. The effect is greater in the U.S. than in other parts of the world, where consumers are not used to paying [with] credit but purchase only when they have the funds available in their bank accounts.

"Certainly, as credit diminishes, consumers will have to revert to alternative payment methods, and bank-driven solutions that debit the funds instantly from their bank accounts are really the primary replacement of credit card transactions. U.S.-based merchants that have solely relied on credit card transactions in the past will have to add billing solutions that offer an alternative to credit cards in order not only to retain their current client base but also to attract new customers."

In the U.S., credit card transactions on the adult Internet can range from $20-$30 a month for a membership website to hundreds of dollars for high-end BDSM equipment. Kring said that in the U.S., reduced credit lines are more likely to affect sales of high-end tangible adult goods than monthly adult site membership charges.

"Given that the average purchase is under $30 for a subscription," Kring said, "the impact on sales is less severe than with the purchase of higher-ticket items. Generally, when people reduce their spending, they tend to start and look at larger ticket items first."

One adult entrepreneur who has been selling a wide variety of sex toys online is the Colorado-based Lisa Lawless, founder and president of the Holistic Wisdom Corp. Estimating that "about 95 percent of our sales are credit card payments," Lawless said that sex toy sales have remained profitable for her company even with the recession and the credit crunch; in fact, she said, "We're doing slightly better [in 2009] than last year."

But Lawless stressed that the recession and the credit crunch have made her customers increasingly bargain-minded.

"The credit card companies have not only become more particular about who they lend credit to, they've also been increasing their interest rates," said Lawless, who also heads the National Association for Sexual Awareness and Empowerment. "And I think the economy has pushed us to think outside the box. People are looking for deals, and one of the things we have done is implement coupons — little discounts and free gifts for people. If they're a repeat customer, we send them a coupon sheet that they can use with their next order, and that entices them back. At this point, every other order is a coupon order. Another thing we've done is combine our products into sets, and people save when they buy more in bulk. The trend I've seen is that customers are definitely becoming savvier about ways to save money online."

Yaffe said the recession and the credit crunch are making consumers more hesitant to commit to full membership on adult membership sites.

"I think that one thing adult entertainment companies, both gay and straight, are finding is that many more of the consumers who would have previously taken a chance and signed up for a month are now opting for trials because they're cheaper and because they can be canceled more easily," he said. "What has changed is that consumers who previously would have given full membership a shot and become recurring members are now going for limited trials and canceling immediately in order to limit their financial exposure while still taking care of their libidinous needs. You have to bear in mind that the profitability of adult membership websites is in the rebills — and considering that without rebills there is no profit, that fact can really play with the balance sheet of adult companies."

Yaffe stressed that with the recession showing no signs of letting up and banks being so tightfisted with credit, it is more crucial than ever for adult membership sites to keep their customers excited.

"This is the wrong time to not dazzle your consumers," he said. "The best way to rebill is to give the best possible regular updates you possibly can. You need to dazzle them every time they log in so they think, 'Hell yeah, this was money well spent' instead of thinking, 'Where is the cancel button?' This global economic crisis has demonstrated that porn is not recession-proof and that our industry is not independent of the world's economy — and you have to remove every possible reason for people not to buy from your tour and every possible reason not to rebill from your members area."