Problem Definition
Your client is a start-up that has created a payment service designed for independent workers who typically work 1-10 days for tens of employers in a given year. The independent workers using the service are varied and include independent doctors, nurses, security guards and brand ambassadors, amongst others. The service solves a common pain point for these types of workers: delayed payment for their work.
For example, if an independent security guard were to work for a shopping centre for the first time, and on a one-off basis, she may not be paid until 2-3 months later due to the time taken by the employer to register her with the relevant payment processor.
PAY-ME solves this problem by paying the worker for the shift on the day and then collecting the payment back from the worker as a direct debit a few months later when the worker is paid by the employer. The worker must submit a photo of their timesheet to PAY-ME via email using a camera phone and must set up a direct debit payment to return the payment to PAY-ME 1-3 months later.
The whole process takes place between just PAY-ME and the worker, so there is no communication between the employer and PAY-ME. The PAY-ME team has offered this service for free in a "beta" format for 8 months and has built a client base of 5,000 workers.
After this initial testing phase, the team now wants to start generating revenue and scale up the number of users.
The team have asked for your help to determine how much they should charge and how to grow the user base.
Question 1Structuring
How would you structure your approach to the problem?
Hint · Structuring
Build 3–4 branches that are specific to this client and question, not a generic framework. Check they don't overlap and together cover the problem.
Additional InformationAsk for more dataHide data
- If asked, please share that PAY-ME's primary objective is rapid but sustainable profit growth.
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How much can PAY-ME charge? a. What should the price per transaction be?
- i. Value-based pricing: What is the value of an early payment for the user?
- ii. Cost-based pricing: How much does the service cost PAY-ME to offer? E.g., bank charges, risk of bad debt, cost of capital
- iii. Competitor-based pricing: What do similar services charge? E.g., pay-day loans b. What revenue model should PAY-ME use?
- I. Variable
- II. Fixed
- III. Subscription
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How can PAY-ME reach more customers? a. Who should PAY-ME target?
- I. Expand within current customer groups: Assess which customer types have highest lifetime value and seek these out
- II. Reach new customer groups, e.g., ad-hoc workers in the film or TV industry, events staff, etc. b. How should PAY-ME reach them?
- I. Using current customer base e.g., referral incentive
- II. Beyond current customer base e.g., targeted social media ads, partner with industry players such as security personnel training providers to advertise to their customers
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Capabilities & risks a. Capabilities: capital (funds needed to finance marketing, worker loans, etc), tech, labour b. Risks: regulation on usury rates, worker default, interest rates squeeze
Question 2Numeracy
The team is considering charging a fixed fee per transaction, and aims to achieve £1.50 profit per transaction.
Hint · Numeracy
Write the formula before you plug in numbers, keep units and zeros explicit, and sanity-check the order of magnitude at the end.
The fixed costs of running the service (labour, technology, etc.) are £100,000 annually for a target volume of 500,000 transactions. Variable costs include transaction fees of £0.50 per transaction as well as the cost of capital for PAY-ME which sits currently at 3% per annum paid monthly.
If the average shift payment is £300 paid back in 2 months, what price must PAY-ME charge per transaction to achieve a target profit of at least £1.50 per transaction?
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- If needed, please share that the frequency and cost of bad debt is currently unknown and not included in the given costs.
- If needed, please share that the cost of capital for each transaction is calculated by applying the monthly percentage cost of capital to the payment for each month until it is repaid.
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PAY-ME must charge more than £3.70 to achieve the desired profit per transaction. £3.70 is just over 1% of the average shift value, which feels reasonable given typical credit card charges are similar or higher. I would want to test a £3.70 fee against even higher fees (e.g., £5, £10) to see if uptake reduced.
Minimum price per transaction = Fixed costs per transaction + Cost of Capital per transaction + Variable Cost per transaction + Target profit per transaction
a) Fixed costs per transaction = (Total Fixed Costs/Production Volume) = (100,000 / 500,000) = £0.20
b) Cost of capital per transaction 3% p.a. is 0.25% per month (3% / 12 = 0.25%), so 0.5% for 2 months. Cost of capital over 2 months for a £300 shift = £300 x 0.5% = £1.50
Minimum price = (Total Fixed Costs/Production Volume) + Variable Cost per Unit + Cost of Capital + Target profit per transaction = 0.20 + 0.50 + 1.50 + 1.50 = £3.70
Given that this analysis does not account for the cost of bad debts, I would want to investigate this risk and understand the cost associated.
Question 3Creativity
The team is concerned about the risk of failed repayments by workers if they cancel the direct debit or if the payment to PAY-ME bounces.
Hint · Creativity
Brainstorm in buckets (e.g. internal vs external, short vs long term) so ideas stay structured and you can see gaps.
How could this risk be mitigated? Please think creatively to identify mitigating actions to the risk.
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Mitigation strategies:
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"Carrot": a) Continued communication with the customer e.g., text message with "your payment will be taken in 2 days" to avoid bounced payments b) Limit number of transactions per customer until their payback rate is seen to be good -- customers are rewarded for use of PAY-ME with an increasing transaction limit on their account c) Customers receive "reward points" with increased use of the service, which increases loyalty
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"Stick": a) Customer signs contractual agreement b) Set up communication with the bank so PAY-ME is immediately aware of cancelled direct debit c) Contact customer with failed payment directly via phone to discuss d) Remove customer from the service e) Use formal debt collection process
Question 4Judgement & Insights
PAY-ME has grown their customer base to 5,000 over the last 8 months using non-scalable methods, such as posting on online forums and social media. The PAY-ME team has brainstormed four options for increasing the number of users in a more sustainable way and has created the following table (share Exhibit 1).
Hint · Judgement & Insights
Read the exhibit title, axes and units first. Lead with the ‘so what’, then back it with one or two numbers.
Based on this information, which option(s) maximize the profit per customer? Which method do you recommend PAY-ME use to sustainably grow their user base?
Additional InformationAsk for more dataHide data
In order to answer whether the channels will grow PAY-ME sustainably, the candidate should ask for the Customer Lifetime Value. If the candidate does not ask, provide it.
- Average lifetime value of a customer is £30.
Exhibit 1Potential customer acquisition methods
| Acquisition method | Cost to implement per 100 people (£) | Success rate |
|---|---|---|
| Referral incentive | 100 | 30% |
| Social media advertising | 200 | 10% |
| Affiliate promotion | 50 | 20% |
| Telephone sales | 100 | 10% |
Definitions:
Referral incentive -- current customers can refer friends to PAY-ME and receive rewards such as a zero fee for their next use of PAY-ME
Social media advertising -- for example, targeted Facebook or Instagram adverts
Affiliate promotion -- a company related to the industry who would advertise the PAY-ME service to their members, such as a shopping centre sending an email to all their security guards
Telephone sales -- use a call centre team to research and approach potential new customers over the phone
Source: Pay-Me case file
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- With the lowest cost per sign up at £2.50, affiliate promotion is the most profitable acquisition method. The Customer Lifetime Value is £30, a 12x return on the cost per sign up. Still, since referral incentives are also very attractive (£3.33 cost per sign up), PAY-ME should also implement referral incentives. Both would be sustainable channels for growing the business.
- These channels will reach different types of customers - the referral incentive will reach only the friends of current users and be limited by the current number of users, whilst the affiliate promoters will broaden PAY-ME's reach beyond its current type of customer. However, it may take time to find the right affiliates to promote PAY-ME.
- Social media advertising and telephone sales are the least effective approaches, because the success rate is 10% and cost is comparatively high.
| Acquisition method | Cost to implement per 100 people (£) | Cost per sign up |
|---|---|---|
| Referral incentive | 100 | 100 / (100 * 30%) = £3.33 |
| Affiliate promotion | 50 | 50 / (100 * 20%) = £2.50 |
| Social media advertising | 200 | 200 / (100 * 10%) = £20.00 |
| Telephone sales | 100 | 100 / (100 * 10%) = £10.00 |
Question 5Synthesis
Based on the information you have assessed so far, what would you recommend PAY-ME do to increase their customer base in a profitable way?
Hint · Synthesis
Answer first: the recommendation, two or three reasons with numbers, then risks and next steps.
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- We were asked how PAY-ME should go about introducing a transaction fee while profitably scaling its customer base. I recommend PAY-ME use a referral incentive and affiliate promotion to expand their customer base and charge at least £3.70 per transaction for their service. This is for two reasons: a) £3.70 meets PAY-ME's target profit of £1.50 per transaction and is just over 1% of the average shift value, which seems reasonable compared to credit card fees, and very reasonable compared to traditional pay-day loans b) Affiliate promotion and referral incentives have a higher payoff than other available marketing methods (with a £2.50 and £3.33 cost per sign up respectively) and each will reach different types of customers. Both are sustainable strategies with a customer LTV of £30.
- My next steps would be to set up a test to see what impact a £3.70, £5 or even £10 fee has on customer uptake, to determine which fee would generate the most profit.
- I would also want to estimate the likely risk of bad debt and determine how this could be built into the fee to ensure long-term profitability for PAY-ME.
Contributed by CaseDrill practice community