Why did PayPal buy a Chrome Extension for $4B

Everyone must have read the current news of PayPal purchasing Honey which is a chrome extension that applies the best coupon codes on e-commerce websites. It operates as an aggregation for the top coupon codes available. The deal is very similar to one where Rakuten purchased Ebates for $1 Billion in 2014. Ebates was very similar to Honey where it tracked deals and cashback schemes and was acquired by Rakuten as a means to expand in the US network. Rakuten later renamed it as Rakuten Rewards and the all-cash deal has largely paid for itself. Why is the interest in coupon code websites so strong still? You can look at it through the view of a marketplace where shoppers and e-commerce websites are the two sides of the equation.

Shoppers are always hunting for a discount and using Honey, they are quickly able to find the best coupon code which results in a discount of them. What about e-commerce websites? Why do they partner up with Honey? Discovery, lower commissions, improved retention & lower cart abandonment for the customer.

Why lower cart abandonment? Basic human psychology on why e-commerce websites issue discounts, coupons & cash-backs. It is instantly attractive. But the proliferation of hundreds of coupon codes has now created a worry among shoppers that they are not getting the best deal and delays their purchase while they search online or on other stores for better deals. When the shopper uses Honey, it ensures he gets the best deal and ultimately leads to purchase decisions quicker.

Why lower commissions? All e-commerce stores run an affiliate network that ensures when the website through which helped you discover your product earns a commission. Overall it is much cheaper for e-commerce stores to run an affiliate network rather than spending thousands of dollars on advertisements. So overall, Honey ensures lower commissions.

Coupon Codes are still very big business for e-commerce. In 2019, retail e-commerce sales worldwide amounted to $3.53 trillion dollars whose revenue is expected to top $6.54 trillion dollars soon. The famous flywheel model also applied to Honey when it launched in 2012 when the founder was just searching for coupon codes. It expanded quickly every year where it kept on getting users as it kept on adding more merchants. It now had 17 million users and 40,000+ partnering websites. It had close to $100M in revenue in 2018 and was growing 100% annually.

Working out the financials, PayPal paid 20x revenue and close to $235 per user. This makes it a very pricey acquisition. So why did PayPal pay $235 per user of Honey?

  1. Addition to their Value Chain: PayPal already owns the payment processing for e-commerce stores. It can integrate coupon discovery right to its network of e-commerce stores. This will work both ways, PayPal can ask its huge e-commerce stores to integrate Honey as well for deal discovery. It is already one of the most popular payment providers, it won’t take long for it to become a top coupon code aggregator as well.
  2. Behavioral Data: Honey collects behavioral data about online shopping and can quickly create patterns. Such data is very valuable because it can improve the targeting activities of their advertisement. The European Union Agency for Cybersecurity has estimated that the average revenue per user in digital advertisements reached $59 in 2017. According to Paul Benno, a lecturer at Columbia University, the additional revenue that PayPal can expect can easily reach $1.37B
  3. Wallet Integration: PayPal can additionally integrate (question of when not if) Venmo with Honey so that all rewards can go into their wallets directly as a cash-back. This would increase the usage and members of Venmo, a huge win for PayPal
  4. Additional Commission: PayPal can renegotiate with the e-commerce stores for a higher commission from its improved power position or provide a complete deal for payment processing and deal discovery for the store.
  5. Revenue & Profit from Honey: Obviously, the current revenue and high margins from Honey will add to PayPal’s coffers significantly in the future as Honey is growing at 100% and is cash-flow positive

Note: San Francisco-based Ebates offers a website that offers customers a way to earn cash back when shopping online at over 2,600 stores including Amazon.com, Macy’s, Best Buy, Home Depot, and others. In 2013, 2.5 million members spent over $2.2 billion on shopping through Ebates. With the acquisition, Japan’s largest e-commerce firm now has a new entry point into the U.S.’s growing e-commerce market, as well as a means to offer similar products, including online e-coupons, back home where they could complement Rakuten’s own online shopping loyalty program, Rakuten Super Points.

Leave a Reply

Your email address will not be published. Required fields are marked *