67. Cashback, Discounts and Rewards

Today we will talk about one of the reasons why I like digital commerce and online payments… discounts, rewards, cashbacks (henceforth referred to as ‘goodies’)

Firstly, why give goodies?

Growth in transaction volume (GTV), push up the revenue, acquire new users and customer stickiness. And most important one — FOMO (in local term: ‘hey, everyone does it so should I)

“No free lunches”

There is a real or notional cost for these goodies and someone has to bear that cost. Broadly there are 3 models:

• Payment network funded: Card issuing bank, card network, wallets, TPAPs
• Merchant Ecosystem funded: Marketplace, seller or OEMs or merchant’s partners
• Hybrid Model: Where both merchant ecosystem and payment network foot the bill

Goodies:

• Cashback: User receives ‘some money’ back on qualified purchases
• Discount: User will pay ‘less’ while paying for qualified purchases
• Rewards: Token points for every qualified purchase

Let’s understand each of these better:

a. Cashback:

Assumption: 5% cashback up to Rs.100, transaction Amount: Rs.5,000

• In instant gratification cases where a purchase/transaction is done in real time (e.g. paying credit card bill on CRED) the cashback is given in real time. But in the case of e-commerce purchases where the user can avail refunds, cashback sponsor (merchant, bank, wallet) will condition that cashback is given only after the refund date is over.
• Cashback to cards is another tedious work where the issuer manually/file based processes credit cashback amount to cards.

b. Discount:

Assumption: 5% discount, Max: Rs.100, Transaction Amount: Rs.5,000

Note: Discounts get applied in real time so it is important to make sure the conditions are validated correctly

c. Rewards

Assumption: 2 points on Rs.100 spend, transaction Amount: Rs.5,000

Additional point: sponsor to assign monetary value to each point (E.g. 2 point equal to Rs.1)

Let’s assume the user accumulates 2000 points. That means now, user has Rs.1000 with

These points can be redeemed in two ways:

• Direct buy: Use the points directly to purchase items (usually done by merchants)
• Convert those points of gift cards/vouchers and use it on partner’s site (usually by card issuers) — Usually such conversions are handled by companies that are specialised in managing gift cards (e.g. Rewards360, Qwikcilver)

Note:

• Reward points are removed if the purchase is refunded. I haven’t seen merchants doing it (never focused) but the credits do it religiously.
• I have been using HDFC Credit Cards for a decade and only since last year, HDFC started showing reward points for each transaction. I do not validate but it feels good… Kudos!

*Conditions Applied:

All goodies come with conditions… Few of the conditions are based on:

• Purchase/transaction: Minimum amount, maximum cap on goodie amount, number of transactions in a particular duration, amount spent in a particular duration, not applicable if purchase is refunded
• Period: Only for a certain duration, certain days, certain time of the day etc.
• Channel: in store, only on mobile App etc.
• Product Specific: Applicable only on select products/services (of own or partner)
• Payment Mode: Only on specific payment mode (e.g. Not applicable on COD, only on HDFC credit cards, only on Rupay cards etc.)

Irrespective of the reason for giving goodies, sponsors have to factor in the financial impact of running these programs. Hence, there is a limit on how much you can spend and I am sure you have noticed how these goodies dry out over a period.

Answer this question: When was the last time you got more than Rs.10 in a Google Pay scratch card? [Not able to recollect… right?… no problem, “Better Luck next time”]

If you are big enough, then you really don’t have to spend your money rather make your partners spend for you. PhonePe started with burning its cash but later moved to model where other merchants spend money (eg. I have won so many discount coupons from rummy merchants). In fact, PhonePe must be earning revenue by promoting other companies on its App.

Engine:

Even giving away goodies is not simple… typically an engine/platform is needed to manage such programs (at scale). Usually the reward engines have capabilities to (1) manage goodies (create, edit, remove) (2) Validate the conditions. And most importantly, make sure people do not exploit it.

Usually such engines are built by merchants (e.g. Swiggy, Flipkart) or platforms (E.g. Shopify) or 3rd Party service providers (e.g. Poshvine, Rewards 360). Even a few Payment Aggregators offer a basic engine as VAS (haven’t seen anyone succeeding in that). Considering the dynamic nature in managing these ‘goodies’, most of the merchants build their own engine.

Referrals

This is pretty straightforward — once you refer a new user and if the user completes ‘qualification stage’ (e.g. complete one transaction, spend Rs.1000 etc.) you will get Rs. X or some goodies, and even the new user you referred may also get some ‘goodie’. One of the most popular ways to acquire new users and almost every company does it ranging from eCommerce companies to payment companies.

I remember people referring family, friends or anyone to G Pay to get that Rs.50. I did earn good money by referring many people during Quick Ride for carpooling.

Gamification:

People get bored of anything ‘plain vanilla’ (without any disrespect to Vanilla ice cream — still you are my 3rd favourite flavour) — thus ‘gamification’ and there are so many ways to do it.

• Milestone based: Give some ‘bump up or additional goodie’ for reaching a milestone (e.g. additional 5000 reward points for spending Rs.1,00,000 in a month)
• Scratch card: Without giving away a fixed amount every time, give a scratch card with a variable amount. Apparently it triggers something in the brain when you win a ‘small amount’ once in a while rather than winning a super small amount every time. (This is the precise reason why I deleted Google Pay app)

Gamification is designed by smart people (and some super smart people who copied from those smart people) but overall the idea is “make user spend more” so ‘achtung, bitte’

Bigger is better:

Banks, wallet or card networks are happy to sponsor crores worth of goodies for large merchants such as Amazon, BigBasket, Swiggy etc. but the same companies are not interested in sponsoring smaller companies because they won’t get visibility, volume or users in a single place… Fair enough…

What if 50 SMBs can drive the same volume as one Swiggy? In that case, would a bank be ready to offer similar goodies to all those 50 companies… maybe not. Reasons: still these 50 merchants are not Swiggy and also, managing 50 such programs…. Uff!

Business Idea for FinTechs: Build a platform that can be used by smaller merchants and pursue banks, card networks or wallets to sponsor discounts or cashback as a group.

Real discount or just price manipulation:

When an eCommerce marketplace is giving a discount or cashback, do not assume that it is hitting their bottomline. These companies can either jack up the price and then give a discount/cashback so users will think they are actually getting a ‘good deal’. If you have some spare time, then do track the prices and I’ll be curious to know whether I am correct about it or not.

Scattered Reward Points:

Everyone wants to give reward points… Thank you to all the clever people who came up with this idea simultaneously… Now every time I buy something, I get reward points.

I have rewards from Bata, Tata and every other Batata… Just kidding!! Now what should I do with those rewards… I am not going to buy new ‘chappal’ just because my 200 Bata points will expire.

I am sure you also have rewards with merchants, debit cards, credit cards… but those are totally useless because either you are not qualified to redeem them (haven’t reached threshold) or redemption processes are useless (why do I need 2 pairs of chappals of Bata?).

Business Idea 2: Combine rewards points and allow me to purchase something useful. Sounds an interesting idea but not easy. Bata is not giving me a reward so that I can order vada pav on swiggy. That will defeat the overall purpose.

Sorry, already few companies are working on this model (to some extent).

Long ago.. Before cheap data, WhatsApp and smartphones… The only way to communicate over mobile phones was by call or SMS. Telco operators thought, on an average a person will make 2–3 calls per day to friends and family. So LTV was quite straightforward.

But the only thing that Telcos didn’t factor in was — Missed call. We started communicating in missed calls. I do not have to tell my roommate that I am coming home but simply give a missed call. I am sure this behaviour would have impacted LTV calculations :)

Similarly, all these goodies don’t work all the time. I stopped using PayTM and Google Pay just because they are not giving ‘cashbacks’ any more (or play with my brain with those scratch cards). So companies — think before you ‘burn’ money on these things.