How and why are companies giving cashback?
What is Cashback?
Getting discounts on e-commerce sites is a very common scenario and most of the customers keep looking out for mouth-watering discounts to make their purchase. Cashback is the new trend in town and it involves giving extra “cash” back to the customer in their digital wallet over and above the discount. This cashback can be utilized to make future purchases, payment of utility bills and mobile recharge etc. Cashback is a win-win situation for both customer and company, as the customer gets some extra cash to shop more and company gets customer’s money in their digital wallet which ensures repeat purchase and loyalty. In this article we will discuss How and why are companies giving cashback?
Now many companies are adopting the strategy of offering cashbacks and Paytm is the leader in this domain, which has already claimed around 100 million wallet user with 60 million transactions in a month. Very recently it rolled out “up to 100% cashback Diwali campaign”. Snapdeal also stepped into the mobile wallet domain by acquiring Freecharge for $ 400 million.
How are they giving it?
Various e-commerce companies were giving discounts as deep as 40-50% and they were giving it from the investor’s money. It is a well-known fact now, that they are still not profitable and have high cash burn rate.
To understand Cash back we need to understand the business model of companies giving cashbacks like Paytm, that is little different from other e-commerce companies. Paytm has its own mobile wallet which means people deposit their money with the company in the virtual wallet. This virtual wallet money is stored in an escrow account of the company with a bank. The company gets interest on this amount of customer’s money they have in the escrow account. So, this becomes a part of income such companies generate. Now when a user gets cash back he/she will spend it either to recharge or pay utility bill or shop. In each case, these companies charge a commission of 2-10% from the telecom companies/ merchants. Thus, mobile wallet is not only a way of generating revenue but it has a more strategic implication. Let’s see how.
Why are the companies offering cashbacks?
It was easily understood that companies were offering deep discounts to acquire customers. But the ‘Cashback’ funda has put customers in much confusion some are not able to believe that they can get the discount and on top of it cash back also on anything they purchase.
Below are the main points which make cashback as the most attractive strategy for e-commerce sites.
1. Customer loyalty:
In this investment crunch time of Indian startups,the focus of the companies has shifted from increasing GMV to unit economics and profitability. Customer acquisition cost is very high and these companies have already spent a large amount of money in marketing themselves. But none of them have gained significant customer loyalty which is difficult to gain amongst customers who are price sensitive. If their competitor offers better discounts than the customer will shift for better deals as there is no switching cost.
With cashback, companies are ensuring that their customers will stick to them and come back for a repeat purchase. For example by selling a premium smartphone for Rs. 40,000 an e-commerce site offered cash back of Rs. 7,500 and with this it ensures than the customer will come back to their site and make additional purchases to use the money lying in the wallet.
2. Blessing for Shopaholics:
With cashback e-commerce sites are giving extra money in shopper’s wallet to make a repeat purchase from their site. After trying every nook and corner, with cashback companies have believed that they have striken the right cord of Indian shoppers to gain retention and loyalty. By giving discount marketplaces can go up to a certain extent both in terms of sales and retention but with cashback they can travel that extra mile to add real value to customers.
3. Digital wallets:
Potential in digital wallets is the talk of the town now and every company is trying to get the slice of customer’s money in their wallets. Paytm is the leader in digital wallets with a broad range of products and services in their market place. RBI has also granted the license to 11 payment banks for increasing financial inclusion and making payment process more efficient. Experts believe digital wallet is the future of making transactions and big players like Apple and Google are also competing in the West to be the leader in this space.
For the customers, no doubt cashback are blessings and it is working magic for marketplaces in improving their revenues and customer loyalty. But the important question is how long this party will continue in this investment crunch scenario.
Companies have to control their cash burn rates and think more about innovating and making their processes more efficient. There is a lot of news coming in media regarding shut downs and layoffs in startups due to the cash crunch. In this scenario, it is hard to believe that this golden scenario will continue for very long as startups have started fighting for survival and sustainable business model away.
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