Has Afterpay lost its touch?

Afterpay, Australia’s fintech darling, ran a four-day sale last week where customers could receive up to 70% off their favourite brands and small businesses.

This is a far cry from the value proposition it once marketed to its retail partners just 2 years ago, where it claimed it generated more sales for retailers with higher conversion rates, higher AOV and repeat purchases.

In e-commerce, a buy-now, pay-later (BNPL) option is no longer just “nice to have”, but a must-have. Consumers demand the option to finance their purchases over four installments.  

Once upon a time, a BNPL option drove higher sales and conversions for merchants. But now that it is mainstream, the BNPL hype has faded. It’s likely that existing sales are being cannibalised by a BNPL platform.

The losers here are retailers.

An issue of incentives

Afterpay earns its revenue by taking a clip of every dollar transacted through its platform — a merchant fee of 30c  and a commission fee of up to 6% per transaction. 

Afterpay’s financial incentive is to therefore maximise every dollar transaction, what is referred to as gross merchandise value (GMV).

So, how does it achieve this?

Positioning itself as a ‘platform’, not a payment provider, is Afterpay’s current strategy. Holding ‘exclusive’, flash sales to customers provides another channel for retailers to sell their product. In effect, this positions Afterpay as a platform, not a payment provider — creating an exclusive channel to maximise GMV.

Then, the incentive to attract customers are sales of up to 70% off. 

But does Afterpay consider the financial impact to the underlying retail partners? Unlikely, because there’s no incentive to do so.

Remember, Afterpay take a clip of revenue — not profit.

The average direct-to-consumer small business retailer makes 50% gross margins on a good day. This is the margin before wages, rent, insurance and all the other costs of running a business. Just offering a 30%+ sale would result in negative contribution margins for the average retailer — and that excludes the 6% commission fee to Afterpay.

Hot tip: you will never be profitable selling your goods for $30 that cost $40 to sell.

The marketing gurus are probably crying in the background, saying: “What about lifetime value? You can make a loss now if the customer is profitable over their lifetime!”

The problem here is that Afterpay owns your customer. 

If Afterpay is the first point of purchase in a customer’s journey, the risk is that your brand is simply a commodity in a sea of other merchants competing for an audience with limited attention. 

The front page matters in marketplaces — and the bigger the discount, the better the real-estate. 

It can be a vicious cycle.

Afterpay faces looming competition

With the myriad of BNPL players flooding the market, retailers are left with multiple options to enable their customers to finance their purchases. 

CBA’s latest offering is by far the friendliest option, with no additional costs to businesses above CBA’s standard merchant fees. 

Afterpay recognises it needs to find new ways to protect its margin and retain its value proposition to retailers, but the latest tactic to encourage retailers to run heavy discount sales is not a sustainable one. 

Afterpay will risk sending its “partners” broke — but only after taking its 6% clip.