Pie by the Slice
It was Friday. That's when we celebrated closing deals. Sometimes with a shot. This time it was with pizza. I don't remember which deal it was, but things were getting awkward as it became clear that the person who put in the order didn't order enough. We were going to run out of pizza.
To save the day, our admin hero cut all the slices in half.
This…didn't solve anything.
But… what if that was a solution? What if you could change how much pizza there was with different size slices?
Sharing is Caring
Investors Nick Sleep and Qais Zakaria ran a partnership, Nomad, for a little over a decade. They made great returns for their investors and famously closed up shop on a high note. One of the tools they used to make all these great investments — the framework that made those great returns — was "scaled economies/shared value."
It’s a clumsy word salad, but an incisive investing idea. Their insight was that when companies enjoyed economies of scale — that's falling costs for each additional sale as a business grows — and those companies shared that value with their customers, this combo created positive feedback for the business and ultimately turned into tasty shareholder returns.
Nomad used this criteria as a foundation for years-long investments in Costco and Amazon. The results were happy customers, happy companies and happy investors.
Napkin Math
Nick and Qais used this tool on a handful of consumer companies, but others enjoy economies of scale too. Payments handling is one of these.
Whether a pizza shop sells one or two slices, it doesn't cost their payments service much more to connect that second transaction with all the different accounts and networks. It’s already made that investment.
Adyen is one of many companies that provides this service. It's taken knocks this year as investors worried that Adyen's customers and potential customers have become more cost-sensitive. It's not the cheapest payments service out there and what value could you possibly add by processing payments anyway? Why not go with the cheapest?
Customers might feel tempted to reduce costs by switching to another service. Payments services might cost a merchant around $2 for every $100 of purchases. If that merchant were paying Adyen $0.15 to $0.30 for each of those purchases, they might feel pretty thrilled paying someone else $0.07 to $0.15 for a similar service.
But that’s still just about 10% of the total cost of payments. Other expenses leak to banks, card networks like Visa and various other services. Merchants still have to worry about that other 90% of the pie.
As part its secret sauce — the benefits it gets from scale — Adyen sends payments to whatever the lowest total cost for its customers. Its reach can eliminate the need for duplicate service providers in different regions. Its breadth provides merchants and customers more ways to pay — merchants can use their Apple or Android phone as a payment terminal. Adyen thrives on complexity.
While that customer might save $0.15 on a $100 purchase by switching to another service. Sending payments through Adyen can save the merchant more money by reducing the take by other vendors in the total payments pie by just 10% or so. Customers would pay Adyen more, but pay less to other parts of the payments chain. Merchants love savings, just like shoppers.
Adyen is able to do this because it has the most expansive, purpose-built, all-in-one platform. It has scale. It sees the whole cost pie, sheds some of the slices and make sure its customers get the smallest ones in other parts. It changes the size of the pie and shares that value with its customers.
What's in the Box?
All this has enabled Adyen to deliver heady growth — most of that with existing customers, gin up piles of cash and invest back in the business for a long ramp of future growth. Just like Costco discovered the power of selling pizza by the slice for $1.99, the same recipe applies to the complex world of payments: build scale, lower costs, share that benefit with customers. Its a simple mix that worked wonders for Costco, Amazon and others. Its working for Adyen too.
Disclaimer: None of this is investment advice. It's meant to illustrate ways LCM thinks about investing. Things that LCM decides are good investments for LCM and its clients are based on many criteria, not all of which are covered here. Some or all of LCM's ideas may not be suitable for other investors. LCM does not recommend investing either long or short any position mentioned. LCM may own positions in some of the companies mentioned. Some of its ideas will lose money — investing entails risk. See full disclaimer here.