How Klarna Is Taking Over The E-Commerce Industry
How Klarna built a deadly growth engine that feeds on it's own merchants. And why does Red Bull have a racing team?
The first letter of the year is here!
In today’s letter:
Klarna is quickly taking over the e-commerce industry. Retailers have little choice but to incorporate Klarna's payment methods on their websites allowing Klarna to slowly siphon away customers. But how are they doing it and why do retailers let them?
Red Bull recently won the Formula 1 Driver’s Championship. But why do they even have their own Formula 1 team? Aren’t they an energy drink company?
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How Klarna Steals Customers
Klarna is a very divisive company. Some hate them, some love them. But it’s without a doubt a very impressive company, having reached a $50 billion valuation in just over 15 years - making it Europe’s highest valued “startup”.
A big reason for Klarna’s success is that its revenues come from merchants, not customers. Merchants pay Klarna up to 8% on each transaction in fees which is considerably higher than traditional payment processors like Visa or MasterCard. So why would merchants willingly use Klarna? Conversions.
According to Klarna, their BNPL product boosts conversion rates by 20% and average order values by 20-80%. That’s a pretty good deal for e-commerce companies that average low single-digit conversion rates.
But this can be very costly for merchants in the long term. When merchants incorporate Klarna into their website, Klarna starts siphoning customers by incentivizing them to shop in the Klarna app. Once they convert a user, merchants need to buy ads in the app to attract their original customer back!
This is a devilishly genius growth engine. To learn more about what I’m talking about, check out the video below (Hit like and subscribe, it helps out a lot)!
Why Does Red Bull Have A Formula 1 Team?
In a dramatic end to a dramatic season, Max Verstappen won his first Formula 1 championship and the first championship for Red Bull Racing since 2013.
But why does Red Bull - an energy drink - have its own team in Formula 1?
Red Bull Racing can trace its roots back to 1960’s Austria. Lotus driver Jochen Rindt was a superstar both in the country and on the track. The love for Rindt was at its peak in the season of 1970 when he was leading the championship after a series of amazing wins. But tragedy struck when Rindt died in an accident during the Italian Grand Prix.
Rindt left behind a generation of motorsport fanatics. One of them was Dietrich Mateschitz.
Years later, Mateschitz, who worked in marketing, was on a business trip to Thailand when he stumbled upon a local energy drink that would change his life. Mateschitz realized that a similar drink could be popular in Europe and in 1987 he launched the energy drink company, Red Bull.
From the start, Mateschitz's vision was to connect the Red Bull brand to extreme sports and especially motorsport. In 1989, Red Bull started sponsoring the Austrian Ferrari driver Gerhard Berger. Since then their presence in Formula 1 has only grown.
In 1995, Mateschitz became a minority owner and sponsor of the Formula 1 team Sauber and Red Bull were integrated even deeper into the sport. However, Mateschitz soon began to feel frustrated by the low influence he had as a sponsor and passive investor.
This culminated in 2001 when Sauber declined Mateschitz's desire to hire driver Enrique Benoldi in favor of a young Kimi Räikkönen. Mateschitz realized that to get his way he had to own a team.
The opportunity came in 2004 when the Formula 1 team Jaguar was put up for sale by Ford for a paltry $1 (with the requirement to invest $400 million over the coming 3 years). Mateshitz acquired Jaguar, rebranded it to Red Bull Racing, and started pumping hundreds of millions of dollars into the team.
Mateschitz employed his good friend Helmut Marko, ex-Formula 1 driver and manager for Gerhard Berger with a solid track record in developing young talent, as well as the young manager Christian Horner who had made a name for himself in Formula 3000.
In 2005, Mateschitz also bought the team Minardi and renamed it Toro Rosso with the aim of using it as a "Training Academy" for Red Bull Racing.
Fun Fact: Jaguar was founded in 1999 when Ford bought the team "Stewart Grand Prix" where Jos Verstappen, Max Verstappen's father, was a driver.
Mateschitz was responsible for investment, Marko for talent, and Horner for management and together they became a star trio. Together, they led Red Bull to their first podium in 2006. However, Red Bull's first four years on the track were far from exceptional and at most, they managed a fifth place in the Constructors Championship.
Despite this, Red Bull Racing was an extremely popular team due to its party aura.
Red Bull’s luck started to turn when Toro Rosso driver Sebastian Vettel won the team’s first Grand Prix in 2008. The following year he was promoted to Red Bull Racing.
That year Vettel managed to win Red Bull's first-ever championship title while also becoming the youngest championship driver in Formula 1 history. Following his first championship win, Vettel and Red Bull Racing went on to win four straight championships!
Fun Fact: Toro Rosso won a Grand Prix before Red Bull Racing.
In 2014, new regulations came into effect allowing Mercedes to overtake Red Bull as Formula 1’s top-dog. Red Bull didn’t adapt well to the changes and the following years proved incredibly tough for the team. In 2015, Red Bull Racing had 0 wins during the entire season - for the first time since 2008.
Red Bull realized that they had to rebuild their team. This led to the signing of 17-year-old Max Verstappen in 2016 who became the youngest driver to ever win a Grand Prix when he won his debut race in Spain. Five years later, Red Bull Racing is back on top.
But why?
Despite all the success - is it really reasonable for Red Bull to have its own Formula 1 team?
It makes sense for Ferrari or Mercedes - being in Formula 1 helps them sell more cars. But Red Bull does not sell cars. They sell energy drinks.
And Formula 1 costs an incredible amount of money. During its first 14 years in the sport, Red Bull spent $2.3 billion, but only made about $10 million in profit per year (according to Forbes). However, Mateschitz never intended to use Red Bull Racing as a source of revenue - but as a marketing channel.
Between 2009 and 2014, Red Bull paid $160 million for an estimated brand exposure worth $320 million by parading their brand in front of Formula 1’s audience of 350-500 million viewers per year. A bargain investment that has helped Red Bull continuously grow the sales of their energy drink.
What’s Next?
It seems like Mateshitz is no longer satisfied with his sports teams only serving a marketing function - he wants them to be real companies. And he wants Red Bull Racing to be a full-blown technology company.
When Honda, Red Bull Racing’s engine supplier, announced that they would leave Formula 1 at the end of the 2021 season, it meant Red Bull was without an engine. With their less than stellar relationship with other engine suppliers like Renault, Ferrari, and Mercedes they had to come up with a solution fast.
This led Red Bull to acquire the IP for Honda's engines and create Red Bull Powertrains with the mission to manufacture their own engines. They’ve also collaborated on projects like Aston Martin’s Valkyrie. Christian Horner has hinted that it is very likely that more cars are in the pipeline for Red Bull. In the future, maybe people will choose to drive a Red Bull over a Ferrari?
With 74 Grand Prix wins, Red Bull Racing has become one of the most successful teams in Formula 1 history. And after last season’s victory, their success will not end any time soon.
End
That’s all from me folks. If you enjoyed this letter please share it with your friends. It’s free.
Until next time,
Fabian