behavioural economicsDigital Marketingretail

What is the ‘Afterpay effect’, and how can I get some?

By May 24, 2018 No Comments

With over 1 million users, 14,000 retailers and more than $500 million in annual revenue, Afterpay has transformed Australian retail in the past few years.

Afterpay provides customers with an attractive lay-by service, allowing customers to apply the joys of ‘Buy Now Pay Later,’ to regular purchases like clothing, homewares or kids’ toys. This seemingly simple sales technique has had a huge impact on customer behaviour. Customers are showing increasing inclination to purchase, an increase in spend, and contributing to an increase in conversion rates of up to 30% and Average Order Values by as much as 60%.

Whilst it’s clear that the success of Afterpay wasn’t just down to a spontaneous customer trend or a huge marketing budget, the figures do prompt a few questions. Firstly, why has it been such a hit, and more importantly, what can we learn from it?

We’ve delved into established human and consumer behavioural habits to discover how these may connect with Afterpay and how we can use these insights to enhance our own marketing efforts.

The connection between cognitive biases and Afterpay

When we as consumers are faced with a decision-making process, most of us would say we are in complete control. However, there are a variety of factors that can affect your decision-making without you even realising. Known as cognitive biases, these factors can cause you to deviate from your normal or rational way of thinking, particularly when making a quick decision like purchasing something. These biases essentially cause us to over or undervalue certain pieces of information to make our decisions.

There are a surprisingly large number of these biases that can come into play every time you make a decision. When explaining the “Afterpay effect” to the US market recently, Afterpay’s co-founder Nick Molnar eluded to these biases in his description:

“My wife can afford a $200 dress, but she can’t justify it”

In our research we took a look at two cognitive biases and how they may affect Afterpay shoppers, and how we as marketers can leverage these.

The Pain of Paying

The first bias of note we can relate to Afterpay is known as the Pain of Paying. This principle shows that a customers’ satisfaction of a purchase is proportionate to their moment and method of payment. According to studies on the subject, customers enjoy a gap between payment and purchase.

This reduction in payment pain often leads to customers spending more, during their payment process. Gaining increased enjoyment from their purchase, customers are happier to upgrade their product choice by one, add complimentary items to their basket or just buy multiples of their product choice. For marketers, we see this as the exciting rise in average basket values from customers.

This behaviour is exacerbated by one particular audience favourite – millennials. With relatively low usage of credit cards, millennials stand to gain far more from Afterpay’s product, reducing purchase pain.

What can we do?

  • Align “great experiences” with Afterpay, whether this is store representatives’ knowledge of the product to help explain to customers or freebies in-store with Afterpay purchases
  • Bring Afterpay forward in the customer cycle, ensuring they know from the outset that it is available

Loss Aversion

The second bias to note compounds the pain of paying by going beyond the purchase delay, to the frequency and size of the payments.

Loss Aversion stems from our dislike of losing, and our tendency to prefer avoiding losses than acquiring gains. Studies have repeatedly shown this in different forms, for instance:

Psychologists Amos Tversky and Daniel Kahneman conducted a behavioural study which resulted in a clear example of human bias towards losses. In the experiment, they asked people if they would accept a bet based on the flip of a coin. If the coin came up heads they would win $200, if it came up tails they would lose $100. The results showed that on average people needed to gain about twice as much as they were willing to lose in order to proceed forward with the bet, meaning the potential gain must have been at least twice as much as the potential loss.

For Afterpay customers, the 4 payment instalments take one large loss into 4 manageable bitesize amounts. This manageable approach makes the decision to purchase more justifiable, as 4 $50 payments appear to be a much smaller loss than $200 in one transaction.

This breakdown removes a reason to abandon that desired purchase in many cases, increasing customers’ propensity to purchase.

What can we do?

  • Align AfterPay messaging with products that are most painful in their purchase. These will differ by industry but products that are a necessity but not as exciting, or expensive seasonal products such as Winter Coats, Prom Dresses and shoes.
  • Break down that price. Online retailers use this regularly on-site breaking the payment into 4 instalments, but think creatively how you might expand this into your paid channels, social promotions, in-store and email activity.

What does this mean for marketers?

Throughout this piece, we’ve suggested ideas and suggestions that might work in the retail space. Whilst these may not all fit, be sure to A/B test ideas and use customer research to drive your testing.

Of course, behavioural biases don’t affect us just in our use of Afterpay, and there are plenty of opportunities elsewhere in marketing.

If you’d like to understand more about your customers and their engagement with Afterpay or similar products, please get in touch for a coffee.