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AFTERPAY: ANALYSIS REPORT MGMT30006: Managing Entrepreneurship and Innovation Group Assignment  

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Assignment #2     Lisa Yang 758225 Weicheng Ma 928607

Introduction The purpose of this case study report is to provide an analytical view of a business, through its background, service description, business model plans, marketing strategy of service/product and possible risk and challenges which would arise and the recommendation for the service. Afterpay is the service of interest in this report, which is a rising payment channel across Australia and New Zealand. Afterpay is a simple, interest-free instalment plans payment method program, created by Afterpay Holdings Limited(AHL) in Sydney, Australia in 2015. (AHL has merged with Touchcorp to create Afterpay Touch Group in 10/07/2017.) It mainly offers instalment payment service to customers in a number of online stores and some physical shops, most of them being retailer stores. Afterpay delivers value by serving as an intermediary between retailers and customers. It benefits both parties because the instalment payment method enables customers to ‘try before you buy’ and premature consumption, which provides flexibility to customers and boost sales for merchants at the same time. Afterpay is mainly targeting the customers, especially the Millennial generation (early 1980s - 2000) and Generation X (1960s - 1980s), that can easily adapt to new shopping method nowadays like online shopping. In the targeting group, university student users play an important role because they usually do not have a regular income, which can be unpredictable ranging from spare money given by their parents, or part-time wages. Since most of them cannot achieve the threshold required for credit card or loans service offered by the bank, Afterpay becomes an attractive option towards shopping by instalment plans to fund consumption. Afterpay has cooperated with a wide range of retailers to expand the scale of business and to aggressively penetrate the market. Afterpay is growing at a rapid rate, with more than 700,000 customers nationally shopping at more than 5000 retailers including iconic Australian fashion stores like Myer, Cotton On and Sportsgirl. Moreover, some electronic products and accessories are covered in Afterpay instalment service. To some extent, Afterpay is not comprehensively available to all shopping transactions. Given that Afterpay promises no interest or establishment fees to their customers, it is not technically providing a financial service. It is the retailer that pays a small fee to Afterpay, around 4 per cent of the purchase price. Though it is a small amount, Afterpay can still accumulate to profit once it attracts a substantial amount of sales. Comprising less than 15 per cent of its overall revenue, Afterpay also collects late fees from their customers if payments are not submitted on time and is exposed to the risk of loss of principal should customers default on their loans This payment method basically works when the customers check out. If paying online, Afterpay is fully integrated with the store’s online checkout process, together with other popular payment options like PayPal and credit cards. Then choose the instalment plan, which now is strictly four equal fortnightly 1

payments. However, the credit/debit card details of the user need to be recorded to ensure the amount due could be repaid on time. At last, the service could be approved instantly without inspection on personal financial situation like commercial banks’ credit services. On the other hand, if pay in physical stores, just simply downloads the Afterpay app, and show the barcode which is unique for every Afterpay user at the register. Then the payment is instantly approved as well.

Business model To introduce the business model of Afterpay, we first analyse the business through Porter’s five forces analysis model.

Suppliers Since its inception, Afterpay’s profit stream largely comes from sales in online retailing stores. This instalment system is very attractive to retail buyers because for a small commission fee like $1,000, it can be onboard with Afterpay and enjoy a boost in sales from customers. According to the financial report H1FY17 of Afterpay, fashion and home appliance were two most contributive to retail market payment volume at 16% and 21% respectively. As a result, fashion and home appliance are the retailing industries Afterpay mainly focuses on.

New entrants The barriers to entry for instalment payment system for online retailing is not high; advances in communications technology, social networking and digital marketing have removed significant barriers for entrepreneurs. Once a new entrant has the ability to access distribution channels and form networks, in this case by collaborating with retailers, they may be able to gain similar bargaining power like Afterpay, Within this competition of market share, the differentiation in commission charged to merchant would be the core competitive point, but it certainly will impact overall performance of the business. And ultimately the competition might change the revenue structure of Afterpay.

Substitutes As a burgeoning innovator in online payment system, Afterpay has a lot of undirected competitors which form close substitutes among themselves, but a few of them have the same instalment platform as Afterpay. Most notably, Paypal, which is currently the most popular electronic payment system across Australia, has high capacity, intensive level of connection with off-line business owner and reliable security reputation throughout the industry. More importantly, Paypal can store funds online just like a bank account which is not included in Afterpay service. It is a huge enemy for afterpay in the battle of acquiring market share. However, favourably, Afterpay provides instalment plans for users while Paypal

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does not. It could be a competitive advantage for Afterpay among those substitutes since it caters financial flexibility to customers.

Consumers Though Afterpay has taken off in popularity in 2016, it is still considered to be a fledgling innovator. That said, a competing instalment payment platform with similar levels of market presence, resources and organisational capability has yet to emerge in Australia. This leaves consumers with little to no available close substitutes, pushing up perceived switching costs. This is compounded by cash-strapped consumers feeling pessimistic about the long term economic outlook, placing strains and stresses on the Millennial generation in particular; combined with a high appreciation for instantaneous gratification and convenience, making consumers less able and/or willing to pay things upfront in lump sum compared to instalment payment methods offered by Afterpay.

As a newer player in the market, most of Afterpay’s existing customer base are individuals who have the resources or desire to embrace change, having a higher tolerance for risk, uncertainty and ambiguity. More risk-averse consumers may still uncertain about Afterpay’s service offerings - whether it is safe, legitimate or trustworthy. The apprehension is arguably exacerbated by the fact that this concerns one’s utmost private personal finance security. To close this ‘chasm’ and alleviate such concerns, Afterpay could intensify their marketing efforts and invest in informative advertising that generates interest, creates demand and provide the more conservative consumers a better understanding of how Afterpay can fit into their lives. In addition, to consolidate the existing customer base, Afterpay should seek to strengthen brand loyalty through aggressive advertising that stresses brand difference and unique service offering.

Financial Revenue

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In the 2016 Financial Year, Afterpay’s revenue demonstrated healthy growth rates from $0.2m to $1.2m; in first half of FY 2017, the revenue has skyrocketed to $6m, which is a 2629% change driven by growth in underlying increasing merchant sales. Given the furious pace at which Afterpay has been expanding to hundreds of Australia’s household name retailers, it is safe to assume that customer and retailer numbers as well as underlying sale figures will climb to even greater heights. The following diagrams below depicts the early stages of Afterpay’s exponential growth, which has been largely driven by female, Millennial fashion shoppers (Eyers, 2017)

In the second half of FY 2017, sales and revenue are expected to grow on the backs of the upcoming Christmas peak shopping season. However, even though revenue has been growing rapidly, the net profit after tax so far still remains a negative sum, which perhaps points to some flaws in Afterpay’s existing payment system. Because the fintech innovator doesn't charge any interest or establishment fees to the customer, this may be detracting from its financial bottom line and limiting their profit potential. As a result of this, so far the scope of the business may not be large enough to attract the necessary funds or cover its operating costs. In spite of this, Afterpay has demonstrated that it is capable of creating demand even 4

in such an early stage; its ability to turn a profit remains promising once it achieves a certain scale in operations and hit the break-even point.

Structure of business

Marketing Strategies Typical of great entrepreneurs, Afterpay’s founders Anthony Eisen and Nicholas Molnar demonstrated that they have unique environmental insights, which they have used to identify opportunities that others overlook as problems. Through an online payment system, customers can purchase a product, receive it up-front and pay it off over two months in instalments. The founders have identified a niche; attempting to bridge this gap between going into debt for something the consumer may not be able to afford in a one-off lump sum versus completely not getting it at all. By identifying opportunities in the big picture of overall market trends, the Sydney-based FinTech startup is introducing new ways of thinking regarding payments and their solution to consumers’ problems are at the core of their service offering. They understand that their customers are reluctant to use their credit cards to buy smaller items like fashion garments, and are attempting to create value by offering consumers a means to finance it with their own money. It is plain to see that the leading retail payments innovator is aggressively targeting the millennial generation and is slowly becoming part of the millennial vernacular. Millennials are currently the largest demographic in Australia and lies at the heart of the retail revolution; Afterpay’s meteoric rise has been driven by a fast-growing customer base of over 650,000 active users, of which approximately 73% being millennials. The Afterpay has been forthright about further exploring this niche, meeting this gap in

market demand and supporting their growth objectives through continued product innovation. Indeed, with its strong focus on delivering next-generation products and services, Afterpay deeply appeals to the mobile-first, tech-savvy consumer (Sholly, 2017).

The Afterpay App has conducted extensive internal and external research to more closely understand the millennial consumer, who, having grown being the ‘first natives’ in a digitalized world, are experimental and adventurous with technology and are intolerant of slow, outdated technology. In addition, millennials are loyal to brands that are deserving of their loyalty - the millennial target demographic are loyal that highly resonates with them on a personal level and have an intimate understanding of their core values and attitudes. Again, having grown in a time teeming with technology, millennial consumers are well-informed critical thinkers; the information age has allowed millennials to emerge as experts in seeking out the answers to their many questions in Internet search. This leads to a generation of super savvy consumers who spend hours researching product information, reviews and price comparisons at their fingertips before making a purchase decision and share buying tips amongst their social circle. Contrary to the assumption of millennials being self-indulgent, irresponsible spenders, research conducted by Afterpay has revealed that this group of consumers are more likely to be responsible spenders who budget, pay their instalments in a timely manner and are looking to use their own money in smarter ways (Molnar, 2017)

That said, the millennial customer also has no patience for waiting and highly values convenience and flexibility. The rapid pace of technology has lead to hyper-connected lives and a strong focus on agility

 ld adage - this is the ‘Ain’t Nobody Got and immediacy. Forget the ‘good things come to those who wait’ o Time For That’ g  eneration of consumers that gets easily frustrated at web pages taking a couple of extra seconds to load and want their things right here and right now. (Muther, 2013) Afterpay gives their customers the time and flexibility to pay with their own money for the things they like while also providing 6

an essential budget tool by offering the option to pay it off in fortnightly instalments. This culture of impatience and instantaneous gratification is powerfully transforming the future of retail and become the expectation of Millennials. Afterpay is doing brilliantly at penetrating the millennial market with intelligent algorithm backing their systems, and by investing in developments that continue to optimise their product and enhance the customer experience Aside from allowing customers to better finance and budget for their purchases, a less obvious benefit is that Afterpay is allowing their online consumers to pay for their purchase after they have received their items and have had a chance to try it. While the eCommerce industry is definitely on the rise, sometimes it can be very inconvenient when items arrive and don’t match with customer expectations and need to be returned. We’ve all had disappointing online shopping experience when a dress didn’t end up looking as pretty in real life as it did on a screen, or when a shirt being too tight-fitting because of the label’s smaller sizing. Online shopping consumers being unable to physically see and touch products prior to purchasing them has been a persistent problem, with consumers often having to guesstimate based on hunches. Afterpay understands this frustration and has sought to resolve the issue in an innovative way with a ‘try before you buy’ approach According to the startup’s co-founder Nicholas Molnar, the idea behind Afterpay was inspired by an ‘obvious gap in the market for the ability for an online customer to try the goods before they have to pay, coupled with being able to spread their payments over a short period of time’ ( Bindi, 2015) Contrary to more traditional marketing mechanisms, marketing for emerging innovators like Afterpay operates on a radically different paradigm, focusing intensely upon customer solution, customer convenience, customer communication and customer cost. As an entrepreneurial entity, Afterpay is carving out a niche that no one else has gotten into - it is operating in an emerging and fragmented market with high levels of turbulence. Hence, it is crucial to concentrate on a marketing philosophy that leverages a deep level of consumer knowledge and insight into sale and continue research to discover consumer preferences, desires and needs. Reiterating that Afterpay is ‘absolutely a data company’, Afterpay has demonstrated its commitment towards using data and analytics to conduct their market research and generate large volumes of highly relevant insights into retail and customer behaviour, transaction integrity and repayment capabilities to secure their competitive advantage (ASX, 2017). Additionally, this has been instrumental in allowing Afterpay to create extremely well-defined audience profiles of their customers and underpin future opportunities through data. The advantage of this being that Afterpay can adjust messaging to communicate directly to their audience base, increasing brand awareness and engagement and strengthening their stakeholder relationships and brand loyalty. As with any great entrepreneurial marketer, Afterpay has taken a proactive approach in making a customer the active participant in the start-up’s dynamic innovation and realizing the value of social media advocacy. Social media emphasises audience contribution and it has played an instrumental role in enhancing the company’s brand awareness and equity. Afterpay has been rallying an army of passionate 7

customers to expand its networks across more retail stores across Australia. Afterpay took opportunities to engage with its customers, encouraging them to act as advocates and lobby their favorite businesses to adopt Afterpay. Since then, using the hashtag #afterpayit, social media users have been urging major shopping centres, department stores, as well as brands like Mecca, Peter Alexander, Bardot, Bras N things and Sephora that offered limited time offers and lifestyle products, to take up Afterpay as an alternative payment scheme. Additionally, some users expressed disappointment at not being able to purchase from brands such as Myer and Mimco, by encouraging user to lodge simple customer feedback to these brands, they were soon on board with Afterpay. This expands networks and leads to a win-win relationship where the customers are happy that they were able to purchase what they wanted; the brands are happy with the extra sales and Afterpay gaining another client thanks to social media brand advocacy. This is consistent with Afterpay’s social media engagement strategy in building a stronger portfolio of brands (Koehn, 2016)

Challenges and Recommendations Afterpay stands at the forefront of the trend that lets shoppers purchase items from retailers on a ‘buy now pay later’ basis. Upon purchasing an item, Afterpay allows consumers to finance the item in regular instalments with no interest or added fees such that they do not pay a final amount above the original purchase price. This is an attractive model popular with retailers and shopaholics alike, as merchants enjoy substantial increases in sales and consumers can take advantage of Afterpay’s interest-free, budget-friendly payment offering. Funds are collected through direct debt and Afterpay claims to use advanced data analytics to evaluate customer’s credit worthiness based on regular online shopping habits and repayment history. However there is still the looming risk that the fintech startup may be left with a pile of bad debt as it must pay the retailer upfront, yet has limited recourse in the event of customers default on their payment obligations due to having insufficient funds in their accounts (Richardson, 2016) Some are understandably concerned that this may be another means to get people access to credit when they don’t have the means to find the money, thus fuelling irresponsible spending habits. According to SA Council of Social Services chief executive Ross Womersley, this is yet ‘another way of spending money that you do not have. Australian households have the highest debts that they have ever had and this process invites you to take 8

on another debt’ (Smith, 2017) With sluggish wage growth rates relative to inflation, households are dipping into their savings or taking on debt to fund consumption and fuel their thirst for housing. As of April 2017, RBA figures reveal that household debt relative to disposable incomes has soared to record highs of 190 per cent, it follows that the ability of households to service this debt is potentially a ticking time bomb. (Robin, 2017; Knight, 2017). It is perhaps not an overstatement to suggest that Australia is on the brink of a debt crisis. According to research group Digital Finance Analytics, as much as 20 per cent of ‘middle income’ Australians have no emergency funds to cover unexpected expenses. Financial Counselling Au...