Brands Pay More When Customers Pay Later

More than three quarters of online shopping transactions end with shoppers running away. Plenty of marketing efforts, from email to mobile retargeting, are focused on capturing the missed revenue from cart abandonment. This past year, a new tactic was increasingly added to marketers’ revenue capture strategy: the explosive adoption of buy now, pay later (BNPL) solutions.

The number of consumers using BNPL increased 81.2% year-over-year in 2021 (according to eMarketer).  BNPL only represents about 2% of ecommerce sales in the U.S. but continues to grow in both user and retailer adoption, even expanding into brick-and-mortar checkout.

A typical transaction is a four-part, zero-interest installment loan. For example, a shopper with more fashion motivation than discretionary income that week may covet a $200 coat. Using a BNPL service (like Klarna, Afterpay, Affirm or Paypal), she could pay 25% of the purchase price up front and pay the balance in three installments -- an additional $50 would be debited from her account every two weeks.  In this scenario (and provided she does not miss any payments), there is no cost to the consumer because the retailer is footing the bill.



What is the cost of that customer acquisition? For online retailers, credit card fees hover around 2% (according to Credit Donkey), but that cost to merchants more than doubles with BNPL firms, with variable fees ranging from 3.29% to 5.99% (per Merchant Maverick).  These services can charge more because they can show that consumers will spend more.

BNPL is now credited in earnings calls for bringing in more customers and higher average order values.  Brands from American Eagle to Southwest Airlines are pointing to BNPL for their increased sales, according to Bloomberg.

Moffett Nathanson estimates that implementing BNPL led to a 15% to 20% increase in sales for most retailers last year. Many retailers, such as Walmart, list BNPL options as early in the purchase journey as the product page to help push along the purchase decision-making process.  Klarna claims that retailers can expect a 45% increase in average order value by offering its product.

Consumers have always bought big purchases they see as needs over wants on credit: appliances, auto-related purchases, furniture and special event travel. However, BNPL has a new crop of products that move well with delayed payments. Impulse and discretionary spend, especially apparel, are seeing more success with this method 

With lending access more easily available, the credit consumer has also changed.  The new customers brought in by BNPL have one big thing in common — they probably skew younger than your customer base. Gen Z is the biggest adopter of BNPL services. 36.8% of Gen Z digital shoppers made a payment last year, with credit-averse millennials not far behind at 30.3% usage, according to eMarketer.   Contributing factors for this skew could be credit card distrust, light credit history or bad credit history. Consumer watchdogs are taking notice and putting more pressure on regulation for the BNPL industry.

For brands looking to recapture revenue and get younger consumers in their mix, BNPL service fees can be considered an acquisition cost that recaptures and grows revenue at checkout. But it needs to deliver more customers or a higher order value to justify the deep cut into your margin.

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