How Cred Burned Money To Earn A Single Rupee: Was It Really Worth It?

Remember, Anil Kapoor, Madhuri Dixit and Bappi Lahiri dancing and singing to weird but surprisingly catchy tunes, every time there was a match break? Every year, IPL picks up some big brands as its partners and sponsors, who display their annoyingly repetitive ads (we hope you’ll all agree), each time there’s a telecast break. 

And this year, this gauntlet was picked up by the recently popularized credit-card payments app CRED, which was named as the official partner of IPL 2020.

But, how did a startup become the official partner for a national mega event (IPL) and also manage to rope in such megastars for its advertisements? Could CRED really afford to spend so heavily on its marketing?

Recently valued at Rs 5872Cr, CRED posted a loss of Rs 360 crore on operational revenue of a mere Rs 52 lakh in FY2020, sparking a debate on valuing startups that grow fast but have a hazy business model outlook.

A look at CRED’s Debatable Business Model

The CRED app allows customers to pay off their credit card bills while earning tokens called CRED coins, which they can use for a range of rewards from different brands. Users can also gain ‘special access’ to live experiences and products.

 The interesting thing here is that CRED does not charge any fee from its users and is completely free for everyone.

So, how does it make money?

CRED partners with different businesses and displays their offers on its mobile app, by charging a listing fee for products and offers, that the businesses wish to display to the app users. The users who redeem these offers become customers to these businesses.

Additionally, as you continue using the app, CRED gathers your financial data. Eventually, as more credit card users join the app, more targeted financial data gets collected with the company. And naturally, banks and credit card companies pay CRED to get access to this data or advertise their products directly to these customers.

CRED spends ₹ 727 to earn one rupee!

Coming back to the story, like all hyper-funded startups, CRED has also been registering mammoth losses year on year. However, despite this, its annual expenses seem to be on a race for the top.

Although, according to details provided by Entrackr, CRED did manage to earn Rs 17.5 crore from interest on bank deposits, bringing its overall revenue to Rs 18 crore as compared to FY19, wherein the company clocked expenses of Rs 63 crore and had zero revenue.

During FY20, CRED raised about Rs 828 crore, which it excessively spent across various verticals, especially in marketing. By spending Rs 180 CR in FY20 on marketing, the company saw a sharp increase in its marketing costs (from 19 CR in FY19)! Remember the IPL partnership and megastars as brand ambassadors?

On a unit level, CRED spent Rs 726.7 to earn a single rupee of operating revenue during FY20.

Also, CRED’s after-tax loss stood at INR 360.31 Cr, an increase of a massive 492% from the FY19 loss of INR 60.86Cr.

The Road Ahead

There is no doubt that these figures are alarming; however, this gigantic spending did help the company draw in a wave of new customers. Due to its expensive marketing campaigns, CRED managed to onboard a high spending user base of close to 5.9 million credit card users with excellent credit scores.

According to RBI, there is an issuance of around 60 million credit cards in India, which means that around 10% of all Indian credit cards users are using the CRED app.

While the current financial figures of the company hardly leave scope for a positive outlook on its future, one mustn’t forget that every startup that turned into multi-billion dollar business empires, began with booking heavy year-on-year losses. Even Facebook didn’t start earning profits till 2016!

All in all, CRED is also planning to enter new ventures in the near future. So, things aren’t exactly on the bleaker side. And with its increasing customers, who knows, maybe CRED can become the Facebook of the Indian startup base!

So, what do you think? Is CRED’s current business model actually viable, and can it turn into something bigger?