How is this app profitable?

May 11, 2015 10:01 PM

I've been seeing a lot lately about an app which lets people buy and sell gift vouchers at a discount. However, I'm curious as to how the company itself can make money....

So this app (called Zeek - didn't want to name it above the fold) acts as a marketplace for gift vouchers. You have an unwanted £50 voucher, and decide to sell it at a 10% discount. The app charges £3 commission per sale, so when you sell your voucher, they will pay you £42, plus any postage costs if you have to post a physical copy. Which makes sense - that's how eBay and Amazon work for sellers, right?

However, it's the buying side that doesn't make sense. If someone signs up with a referral code, they get £10 credit. So if I were to buy that £45 voucher, I'd be paying £35 in real money, but the seller would still get £42. If other people use my referral code, I get £10 credit each time - meaning in theory that everyone is buying their £45 vouchers for £35, and I can use my credit to get the voucher for free. I can't see how this is a sustainable business model - those of you who know more about the app world, how does this work without the company losing money?

posted by mippy to Computers & Internet (6 answers total)

They might well be losing money, at least for now and possibly forever. Don't think of the £10 credits as part of the sale, think of it as a marketing expense for the company to acquire new users. They are betting, at least for now, that they can spend £20 (£10 for you and £10 for them, though one side may go redeemed, making the true cost less, and really they are spending £17 and forgoing their commission) to acquire a user and make up that cost in future sales. From that perspective, it's no different than if they spent an average of £20/new user on tv commercials, online ads, direct mail, sponsorships, or any of the other ways people try to advertise.

If everyone took the credit, only bought one voucher, and never used the app again, they'll lose money. If enough people take the credit and become loyal repeat customers, their investment in customer acquisition will pay off.

But this doesn't have to be a permanent offer. They can run the promotion now, try to build up a pool of loyal users, and then eliminate or reduce the referral credits, hoping the business can further spread by word of mouth and other forms of promotion.
posted by zachlipton at 10:16 PM on May 11, 2015 [2 favorites]

When PayPal launched, they gave $10 to each new customer, and another $10 to the person who referred them. That was not a profitable transaction for them, for sure. But eventually people who already had accounts started transacting, and they started making some money.

Promotions for new users are very often done at a loss, under the hope that you'll still find their service worthwhile even when they're not paying you to use it.
posted by aubilenon at 10:22 PM on May 11, 2015

zachlipton has it - it's all about the Lifetime Value of the customer (LTV) and the Cost to Acquire a Customer (CAC). They're probably working with some large averages. Here's a hypothetical example:

Cost to Acquire a Customer (CAC) = £20 (£10 to you and £10 to your referral)
Lifetime Value of a Customer (LTV) = (Average total transaction amount * commission %)

So as long as (Average total transaction amount * commission %) > £20 they will be earning more in commissions over the lifetime of the customer, on average than they spent acquiring the customer.

If they just launched, they're probably making plenty of assumptions about the lifetime value of each customer.
posted by reeddavid at 10:26 PM on May 11, 2015

Response by poster: Well, the app only has 900 and something downloads on the Google store, so this makes some sense...
posted by mippy at 10:34 PM on May 11, 2015

That's 962 reviews on Google Play. Google says their installs are 10,000 - 50,000.
posted by zachlipton at 10:39 PM on May 11, 2015

So they don't make anything on the buying side, typical behavior. Seller pays the fees, eBay model.

In SOME auctions there's a "buyer's premium" but in this case seller pays. After all, if there's a buyer, there's a seller. They're just middleman.
posted by kschang at 9:53 AM on May 12, 2015