After launching in Australia in 2015, Afterpay has gone on to become a global giant with an impressive track record of growth.
Afterpay was perhaps one of the biggest winners of the Covid tech boom of 2020. Yes, all tech went up, but very few 10X'd like Afterpay; not even headline-grabbers Zoom or Shopify experienced the same ballooning in market cap.
Furthermore, despite being younger than its rivals in the Buy-Now-Pay-Later industry, Afterpay is one of the biggest BNPL players in the world:
How did Afterpay have a late start yet still outpace their competition to become one of the biggest growth stories of the last few years?
Same Game, Different Choices
If you're a newcomer looking to outgrow your competition, you have two paths.
The first is to look at the game everyone is playing, and instead of joining the fray, starting a new game on your own terms. This is Apple coming with a touchscreen iPhone in the age of tactile keyboards. This is Salesforce introducing a cloud CRM in the age of on-prem software.
The second path is to join the same game, but have an overlooked insight that changes how you play. This is Grab beating Uber with a hyperlocal strategy. This is Shopee with their red ocean strategy. And this is Afterpay with their own growth strategy.
To better understand Afterpay's growth, we begin with a 10,000-ft view of the "game" that every company in BNPL is playing:
We will now explore how Afterpay grew so quickly by how they approached this growth loop differently than everyone else. Their choices and actions put them on a slightly separate path than their competitors, opening the door to investing in areas where they had unique momentum and advantage.
The first significant difference was by starting with better product/audience fit. This led to more leverage for merchant acquisition and partnerships. And this meant that they could secure more and higher-value partnerships, further fuelling their growth flywheel to spin faster than everyone else's.
Better Product/Audience Fit
"Product/Audience Fit" might sound like a weird term, especially when we're used to hearing "Product/Market Fit."
That's because within a market, you can have several audiences. The increased specificity is important. Here is a simplified example.
A new BNPL company looking at the TAM could choose to target shoppers of certain categories. They might compare several audiences of shoppers like so:
Since all of these audiences would be a fit for BNPL, one may reasonably conclude that Electronics or Home & Garden are the best fit. After all, higher AOV means that shoppers feel more of the pain that BNPL is designed to solve – large purchases that disrupt cash flow.
This is the approach that US-based BNPL Affirm took at the start. Affirm's growth is primarily because of their partnership with Peloton (cheapest bike: $1,895.)
Afterpay, on the other hand, went after the Fashion & Beauty vertical. This probably wasn't a deliberate choice – the founders had a background in fashion – but it was a lucky one.
It turns out that if you take a broader view of those potential audiences in the BNPL market, we see that Fashion & Beauty has significant advantages:
Purchases in Fashion & Beauty typically have a higher frequency and usually have an emotional/social dimension attached to them, resulting in higher word of mouth. With a good product experience and the right set of retailers, all of this combines to drive higher usage, which leads to behavioral loyalty and affinity.
This is exactly what happened with Afterpay.
You'll notice something pretty quickly when you read analyses about Afterpay; the company is often described as having a "cult like" following – you don't often see a payments product have fan groups on Facebook:
Even though they're the youngest company on the list, Afterpay has the largest social media following size. Social media footprint isn't a barometer of a company's revenue, but it is a reasonable measure of their word of mouth and affinity.
This takes us back to our growth model.
With a concentrated focus on a market segment with better product/audience fit than their competitors, Afterpay got off to a blazing fast start, driven by higher word of mouth and shopper usage.
This drove more demand and results for their retailers, generating leverage for new merchant acquisition and partnerships.
Getting More Leverage for Partnerships
With the behavioral loyalty, brand affinity and large social media following that they'd built up, Afterpay has the ability to poll their audience like this:
This enthusiasm on social media made it easier to snag major retailers like Lululemon:
Such is the fervor of the Afterpay fanbase that Lululemon's customer service lines were saturated with pleas to an extent where it could not service regular calls. Whether as a means to put an end to the onslaught or because they now realize the value of the product, LULU now offers [Afterpay] at checkout. (Seeking Alpha)
Afterpay further drove demand by making themselves a starting destination for shoppers. By training shoppers to begin their shopping journey from the Afterpay website and mobile app, they're able to send a huge volume of referral traffic to merchants from their store directory.
In 2019, Afterpay has become the second largest source of referral traffic in Australia after Google. (Dovetail)
Other BNPLs also have a store directory, but Afterpay has made a conscious choice to put it front and center.
Notice how Afterpay's website drops the visitor right into the shopping experience, while other websites first focus on education and establishing credibility:
Same game, but different choices that led to higher velocity on the growth flywheel.
Driving demand for retailers gives Afterpay an edge over their competition at the negotiating table, which helps them snap up high-value partners despite being newer to the industry.
Securing More and Higher Value Partnerships
With the ability to drive demand, Afterpay could confidently go head-to-head with other, older, larger BNPLs.
To give themselves even more leverage, they're also willing to give up points on take rate:
Retailers have to pay between 3-6% on average in commission [...] Afterpay got their foot in the door by offering large brands discounted commission [...] enterprise customers are charged around 3%. (Farrer Wealth)
If driving usage and demand is how you start the growth flywheel for a BNPL, signing with big brands and partners is what takes it to the next level.
Consider the massive awareness and adoption boost you get by having your logo on every single product page on a major retailer's website:
As a BNPL, partners and marquee brands are essentially your primary marketing and advertising channels. And in the land-grab phase of an industry, it's in your interest to secure the biggest deals you can get, even at great cost.
Afterpay has several advantages that allow them to do this more than their rivals.
With the center of gravity of their business around a vertical with high usage frequency and low AOV, they could reinvest their cash at a faster rate. By going public really early in their life – Afterpay launched in 2015 and listed on the ASX in 2016 – they had faster access to capital than their private competitors, who relied on fundraising rounds to fund growth.
This meant Afterpay was willing to spend big on promotional campaigns to help close deals with brands:
Large customers were enticed by co-marketing campaigns (this can sometimes lead to exclusivity), which has high initial costs for Afterpay, but this cost has a quick payback period considering the rapid expansion of market share and share of wallet. (Farrer Wealth)
This then feeds the virtuous cycle of market awareness, which triggers a sense of FOMO amongst retailers who need to keep up in the cutthroat world of ecommerce.
The sum of all of these choices has led to Afterpay eclipsing Affirm in its home market, while appearing to beat Klarna in the footrace to claim merchants in the US:
Cultural Similarity as a Multiplier
As I was doing research for this article, I kept thinking that it doesn't make any sense that Afterpay is even competitive with Klarna in the US – in fact, Klarna should be crushing them.
Sweden-based Klarna launched in 2005, giving them a decade's head start of awareness, operating experience and relationships in payments, invoicing and BNPL. In addition, Klarna is the bigger company with resources, boasting a higher valuation and a larger headcount. They're also willing to aggressively spend on promotion: they launched a campaign with Snoop Dogg and recently ran a SuperBowl ad.
So what's going on?
A quote from a former VP at Affirm provides an explanation:
Klarna's just never been able to figure out the US market. They're the easiest, easiest company to compete with. Just no questions. They just don't get it. They just keep trying to send Swedish people over here [...] it's just a different market.” (Farrer Wealth)
The Common Culture Advantage
It can't easily be drawn on the growth flywheel, but having roots in Australian culture is another factor that contributed to Afterpay's ability to quickly become a global tech and BNPL giant in just a few years.
Australia's resemblance to other English-speaking markets means that it's often used as a pilot test market for new products and feature launches. It's also where multinationals typically house their APAC regional headquarters, so a startup could convince a regional director to do a proof-of-concept at a smaller scale, then grow to other regions.
With a low cultural "learning curve" – Afterpay's initial success in Australia gave them the outlines of a playbook that would help them close the gap with Klarna in the UK, and challenge them for leadership in the US.
Conversely, this same principle means that Klarna is unlikely to be unseated from its leadership position in continental Europe.
How To Outgrow Your Competition
Let's sum up before we wrap with a short epilogue on Afterpay's prospects.
If you're looking to grow faster than your rivals, here's what we learned from Afterpay's growth:
1. Decide if you're starting a new game or playing the same game. It depends on how you view the JTBD and how your product addresses it.
2. Map out the growth model for your industry. This gives you an idea of where the biggest points of leverage are, as you evaluate everyone's strengths and weaknesses.
3. Identify (and create) your unfair advantages. For Afterpay, it was the founders' backgrounds in fashion, their focus on the demand side, and their willingness and ability to spend to acquire big brands. Their home country's cultural similarity with overseas markets also appears to have played a role.
For Afterpay, No Choice But To Grow Even Faster
As impressive as Afterpay's growth has been so far, they're really still in the early part of their journey and face significant headwinds.
PayPal became the 800-pound gorilla in BNPL when they launched their "Pay in 4" service at the end of 2020. Klarna recently notched a $640 million raise from Softbank. The prospect of increased regulation also looms over the entire space, threatening to put a speed limit on the sector.
As for Afterpay, they've hinted at their plans for continuing to grow: expand to more countries in APAC and launch a neobank. Both of these spaces are full of experienced competitors flush with cash.
To continue their growth story, the Afterpay team will need to build on their track record of making the right strategic choices to outgrow the new competitors they'll be facing.
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