CRED’s Business Model Explained

Now we are sure you’ll be surprised to know that in 2020 alone, CRED incurred losses worth $48 million against operating revenues of just $70,000. Moreover, for every dollar the company generated in 2020, they spent $727 to earn it, and we have seen how massively CRED spends on its creative marketing campaigns.

But the question is that if the company is incurring such losses, how is its valuation going up and why are people investing in the start-up? To answer this, let us first take a closer look at the company’s business model and understand why it is so unique.

CRED is India’s first such technology that enables users to pay their credit card bills on time, that too for free. It is basically a one-stop solution for all your credit card bill payment problems. CRED was founded in April 2018 by Kunal Shah, who is also Freecharge’s former founder. Kunal Shah started the company with the intention of creating an exclusive society with the most credible people in India. The application lets you handle and pay off all your credit card dues, and gives massive discounts on your credit card while keeping a track of the expenses as well. Well, but what is so unique about it? Actually, CRED reduces your pressure of handling multiple credit cards and remembering the due date on each of those. Moreover, users earn points, also known as CRED coins, which can be used towards prompt purchases through the CRED application. And trust me when I say this, the offers are unbelievably mouth-watering. On top of this, the user-friendly interface of CRED app makes the payment system much more simple, thus offering its users an altogether different experience.

The beauty and peculiarity of the CRED business model is that it extensively works on altering the “Behavioural Design” of the society. It basically operates on a model that relies upon changing the psyche and attitude of the people at large. Now this strategy works out in 4 steps.

  • Step 1. Cash Burn– This is the first step where the company identifies a major problem in the society and then designs a system to fix that problem. Next, the company raises massive funding to practically execute its plan and finally it induces customers to use their product by giving them unbelievable offers which seem too good to be true. In order to explain this to you with a real-life example, let us take the case of Reliance Jio. Firstly, Jio identified lack of cheap and high-speed internet accessibility in India as a major problem in the society. Then, they spent 1.5 lakh crore Indian rupees in order to build the infrastructure that would actually solve this problem. Finally, in 2016, when Jio was launched, they gave unbelievable offers that looked almost impossible- free sim cards, free high-speed data, and free unlimited calls. And guess what, the moment this announcement was made, millions of people rushed to their nearby stores to buy the Jio sim. Also, Jio did practically everything in its capacity to expand their user base, without even bothering about profits for the first six months. Infact, adding to the heavy investment they made, the company earned a loss of 31 crore rupees in its first year. Similarly, when CRED rolled out in 2018, they identified three major problems of every credit card user. First, hidden charges, second, late fees due to forgetfulness, and third, extra interest. The company gave massive offers and cashbacks so that users are motivated to pay their bills on time. These offers were much more amazing than you think. For example- free flight tickets, movie tickets, extremely lucrative discounts, and one thousand rupees cashback. Fast forward to 2021, CRED today has over 3 million users on its platform, which includes 20 percent of all premium credit card users. So this is how, within a short span of time, companies incentivize customers to use their product which eventually increases their user base.
  • Step 2. Habituation– Let us take you back to Jio so that you understand this simply. Imagine, once you bought a Jio sim, you never bothered about data or talk-time. The same data, which earlier costed nearly 300 rupees per GB, was now at your disposal for free. People started enjoying the comfort and easy accessibility of internet, and particularly the luxury of social media. Similarly, in case of CRED, people who had two or three credit cards found the technology so helpful and comfortable that they stopped using the traditional means of payment which required them to go through their long list of statements and putting in the extra effort to locate the hidden charges in each and every transaction. As you would expect, users found it extremely convenient on CRED, as compared to how they paid their bills earlier wherein they had no clue where their money is going. So this is how, in Step 2, companies, using their super-efficient systems, get us habituated to the new normal wherein we are no longer used to adjusting with the hurdles involved in the traditional method.
  • Step 3: Irreversibility– Perhaps the most crucial stage of all, Irreversibility can be explained with the example of Google Maps. Now you must have observed that most of the people of our generation never even bother to remember the street names and addresses. This explains how much we have relied upon, or you can say, got habituated to Google Maps. Here, the point we are trying to make is that Google Maps has made our life so easy that the very thought of remembering addresses does not occupy our mind. Similarly, in case of CRED, users no longer have to remember to pay their credit card bills and their due dates as such. Take another example of Ola Cabs. Once Ola Cabs entered the market, you no longer had to venture around on streets to find a taxi as it was always at your disposal with just one click. So you see, once these companies came in, there has been an irreversible change in our behaviour where the small acts of finding a cab or paying your credit card bill has changed to such a large extent that we will never ever go back to our past system. Now CRED is yet to complete this phase which is why all the numbers you earlier saw about CRED are in the negatives because CRED is yet to change a significant part of the consumer behavior.
  • Step 4: Profitability– Now this phase is what all investors wait for, wherein their company starts making profits. For instance- take a look at the numbers of Jio. In just 1.5 years, Jio became profitable with their first ever positive profit figure of 504 crore rupees. And from there onwards, it has been on a magnificent ride, wherein in 2020, Jio posted a net profit of 5,562 crore rupees. And the reason why CRED is on the same boat is that the customers of CRED are the richest 1% of the country. These people are literally the dream customers of any company because their incomes are high and, as a result, they make large purchases on a regular basis, which, in turn, results in massive profit margin for the company. It is in this phase that CRED can leverage its premium customer base to make extensive profits. Today, CRED has one of the most valuable customer data which makes it large chunk of money. For example- CRED knows that Sam loves to spend on fitness products or Amy loves spending on make-up. So CRED can use this data to show relevant personalized advertisements, to get people spend heavily on things they actually love by giving exclusive discount coupons, thus making a commission out of it.

In order to access CRED programs, a credit score of more than 750 must be obtained. This application requires users to share certain data such as credit card numbers, access to emails to track users’ expenses and due amounts, credit score, and how they invest their money. You collect CRED coins for every payment you make on the app, and these CRED coins can be used to purchase a number of products from the app itself. In order to make these deals available, CRED ties up with several companies and creates connections with them, thereby again making a commission out of it. The exposure that these companies achieve in the CRED application helps them attract customers from diverse backgrounds, and target their particular market, which is obviously among the premium batch of people who get access to CRED.

Ordinary people like you and us might find this business model a little weird, but, in reality it is a revolutionary idea coming from one of the smartest entrepreneurs in the Indian start-up space. Today, innovative start-ups like CRED give a fair idea about the potential of Indian start-up ecosystem. It is the genius behind these business models that it is said that the 21st century belongs to India.

We hope you found it insightful!

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