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Retail-As-A-Service: Solving The Payments Challenges In Pursuit Of Global Growth

0aaaJacobo Singer dLocal

It’s not hyperbole to say that the subscription model has revolutionized the software industry. As such, it probably shouldn’t come as a surprise that consumer brands and retailers are, themselves, now testing out direct-to-consumer (DTC) and subscription strategies. Nike, in August, unveiled its Nike Adventure Club that for $20 a month will deliver new shoes to kids every 90 days. Urban Outfitters, also this summer, launched its Nuuly subscription program, while Amazon’s Prime Wardrobe, in July, unveiled its own curated subscription box, Personal Shopper.

The rush of established brands to launch subscription programs speaks to a number of factors. Evolving consumer behaviors, for one, have fueled the hyper growth of subscription startups offering everything from razor supplies and meal kits to jewelry, pet supplies, toys or any other SKU category imaginable. Beyond offering a “frictionless” experience that appeals to customers, companies are also drawn to the enhanced “stickiness” of the DTC model, while subscription pricing fosters greater revenue stability and access to proprietary customer and market data.

The scalability of the model, however, may be most appealing to global brands that have been eyeing expansion into the emerging markets, but hadn’t yet found an efficient and cost-effective entry point. It’s certainly not lost on most observers that when razor subscription company Harry’s was sold for $1.4 billion in May, the buyer cited the opportunity to accelerate the brand’s international growth as among the primary deal drivers. The caveat is that while the DTC and subscription model certainly facilitate international expansion, brands still need to figure out the payments puzzle of the local markets they aim to conquer.

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The Case For EM

In many ways, the retail landscape in emerging markets (EM) lend themselves to the DTC and subscription model. In the past, most brands that failed to gain a foothold struggled to overcome a sprawling and fragmented retail landscape. These companies may have recognized the latent demand in developing markets, but to accommodate the number of retail relationships required outsized investments in planning and administrative capabilities and on-the-ground resources to oversee in-store merchandising and POS execution. Among retailers, the investment required for brick-and-mortar locations was even more discouraging. E-Commerce, of course, eliminates these hurdles while ongoing growth in online and mobile adoption rates provides a steady tailwind that should aid DTC and subscription strategies for the foreseeable future.

As well, many consumers are already familiar with the subscription model. Wine.com.br, to cite one example, launched its subscription service, ClubeW, in 2010. It’s now the largest wine club in Latin America and has since launched new verticals (craft beer subscriptions) and recently began opening physical locations.

From SaaS To RaaS

The power of the software-as-a-service business model is evident in the rapid adoption of SaaS by both consumers and legacy technology companies. IDC predicts that by 2022 more than 50% of all software revenue globally will be purchased through subscription. Some notable differences certainly exist across sectors, but as retailers and consumer brands try to get up to speed in creating their own RaaS offerings, they will want to consider the lessons learned by their tech peers, particularly when it comes to complex payment considerations in pursuing global growth.

Local Cards, Local Customs

International credit cards, of course, represent the easiest option for vendors. The catch is that in most emerging markets international cards typically represent just a fraction of the larger e-Commerce payments mix. In Brazil, for instance, barely a quarter of online shoppers currently use international cards, whereas domestic credit cards make up roughly 40% of the payments mix. Alternatively, in Colombia — just across Brazil’s western border — domestic credit cards are used in just 5% e-Commerce transactions. Bank transfers, cash payment methods and debit cards, instead, comprise approximately half of payments mix. These examples reflect the marked differences in payments preferences from market to market, underscoring the need for a truly localized solution.

Most brands, though, will find that it’s worth the effort. Each of these markets, for instance, share consumer behaviors that align well with subscription pricing models. In Brazil, 58% of e-Commerce purchases were made through installment plans; in Colombia, the number jumps to 70% of e-Commerce shoppers. Moreover, there are overlooked benefits to other payment methods. Debit cards, for instance, mitigate the risk of customer churn that occurs when credit cards either expire or are canceled.

Cash Still Key

The biggest challenge, however, is the need to accommodate prevailing preferences for cash. This isn’t due solely to the larger unbanked or “under-banked” populations in developing markets. It also reflects shoppers’ reservations about providing payment information online. While this would seem to stand in the way of subscription sales, early movers in software and digital media have devised effective workarounds.

Take Netflix, whose reach now extends to more than 200 countries. In each local market, the company has found a way to tailor its payment options to the local conventions. In Mexico, where one fifth of the e-Commerce revenue is transacted in cash, the company has created partnership with retailers, such as Oxxo, where subscribers can “top up” their accounts through cash payments. To complete the transaction, subscribers receive a ticket or a text message that allows them to redeem the purchase on the platform. Netflix also sells prepaid cards as another cash option.

Payments’ Impact Go-to-Market

Brands also will likely find that their payments philosophy will influence other variables. For instance, in solving for cash payments, brands may realize other knock-on effects that influence everything from marketing and promotional strategies to returns and refunds. In the U.S., for instance, many of the fastest growing startups relied on promotions to build awareness and market share. Free trials, however, are far less effective if there is no way to activate a subscription once the trial lapses.

The first mover advantage, as a result, is more pronounced in emerging markets absent compelling incentives for consumers to absorb switching costs. This explains why certain brands have been just as creative in solving for other challenges, such as distribution, to build market share as early as possible in a market’s maturation. Amazon, in Mexico, also accepts cash payments at Oxxo locations. In certain geographies, where home delivery is more challenging, Amazon extended the relationship to create a “pick-up” program where customers also can receive packages.

Make no mistake, international growth is a difficult endeavor for even the largest global brands. While e-Commerce can eliminate certain headaches, mitigate the capital investment required and reduce risk, it is not a short cut. In fact, the growth of the subscription model is premised on providing a seamless and personalized end-to-end experience. Those who overlook the often-nuanced payment preferences of a given market have already failed to create an end-to-end alternative.


 

Jacobo Singer is COO at dLocal, a 360 payments platform that allows global e-Commerce companies to handle mass online payments in emerging markets. He previously served as CTO at dLocal.

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