November 22, 2019
PayPal just announced the acquisition of Honey, a browser extension that helps shoppers to save money, for a whopping $4 billion. The first reaction of the tech community on social media was: “WHY?” Paying $4 billion for a browser extension that plugs in coupon codes at checkout and currently has revenue of $100 million sounds quite exorbitant. This means PayPal is paying 40X the revenue multiple for Honey! Is PayPal feeling the heat from the Internet giants expanding into payments+commerce? Is this strategic move PayPal’s hedge in the increasingly competitive landscape? Or is there more to the 4-billion-dollar bill that PayPal just paid?
Let’s look at some facts about this deal as well as the synergies of PayPal & Honey to understand this.
Honey Science provides a free browser extension that automatically finds and applies coupons at checkout. It also helps users save money on e-commerce platforms by showing price history and sends notifications when it drops below a selected price.
One must note that PayPal monetizes merchants by processing their payments. PayPal also has PayPal Marketing Solutions that allow brands the option of discounting orders for PayPal customers. Which means PayPal is incentivized to bring more consumers to those merchants as well as to convert them into paying customer.
Amit Goel, Founder of MEDICI, draws attention towards the bigger picture and highlights that “We have always said that payments are the last part of the commerce journey. PayPal was in payments and was mainly relevant at the checkout. With this move, PayPal is moving upstream in commerce. With Honey, PayPal would be relevant even before the checkout value chain. If consumers are getting more offers, PayPal would be bringing more transactions to the merchants, and merchants are going to be happier. It’s an interesting play.” It is noteworthy that Honey brings millennials and GenZ a highly sought after demographic by merchants. Some analysts would point it out as a defensive move. From a payment processor’s PoV, they need to offer value-added services to consumers so they can retain their primary line of business, and one high synergy route is to converge payments and commerce. Capital One’s deal with Wikibuy (checks other retailers for better prices) and Rakuten’s acquisition of Ebates, a cashback, and shopping rewards business are a few similar examples.
From a brand perspective, new ways to reach consumers – without spending a significant sum on advertising through BigTech platforms such as Facebook, Google, and Amazon or shelling out transaction fees – is obviously a better alternative.
Looking at the numbers: Honey has over 17 million users, and it makes $100 million in revenue (estimated at $200 million this year), which translates to $5.88 (or an estimated $11.77 this year) per user per year. PayPal has 300 million users. If PayPal’s current user base generates the same revenue through Honey, this presents a $1.76 billion to $3.5 billion market opportunity in the form of a new line of business. It is hard to comment about the percentage of conversion as of now, but even a 10% conversion would translate into an additional ~$350 million in revenues for PayPal. Additionally, Honey will get access to PayPal’s 24 million merchant accounts.
PayPal’s strategic priorities clearly provide the rationale behind this move. The strategies include adding product discovery capabilities, higher consumer engagement, expanding beyond checkouts, and reaching the customer at the beginning of the shopping journey.
In PayPal’s consumer journey priorities, Honey will play a role in product discovery, offers, and loyalty programs. Honey would help the company’s merchant priority to become a one-stop solution for commerce by being an important part of customer engagement tools. With these priorities, PayPal is set to play in multiple ‘beyond FinTech’ markets covering payments as well as online and offline commerce, and the acquisition of Honey seems logical from PayPal’s perspective.