# A lower paid Monzo Tier - financially viable?

Over here, some of us were talking about whether it’d be a good idea to create a lower paid Monzo tier. £2/month was the figure being bandied about (mostly by me).

I thought I’d crank up the spreadsheet and make some guesstimates at costs, revenue and profit - and see if a lower tier would be financially viable for Monzo.

Here’s my working!

• I’m comparing this to the Monzo Plus tier. This generates £5/month revenue for Monzo, with a three month minimum term.
• There are a bunch of fixed costs for Monzo Plus - I’ve estimated them as follows:
Item Estimated Per User Cost to Monzo
Holo Card £3
Virtual Cards £2.50

I’m assuming that each user will use all five virtual cards and they cost 50p to provision. I imagine it’s cheaper than that, but I have no frame of reference - shout if you have better figures!

Now, on to the monthly costs to Monzo:

Item Max User/Month Cost to Monzo
Max interest (calendar month) 1.666666667
Cash deposit 0.5
Overseas allowance 4

The interest figure is a calendar month calculation of interest payable (in reality it’ll differ because different months are different lengths, but annualised it’ll still end up the same so I’ve stuck with this for simplicity). I’ve also assumed that Monzo is making no profit from PayPoint and that the each user maxes out their overseas allowance (calculated as an average of 2% of £200 for ATM fees per month).

Now, you’ll notice that this puts Monzo at a loss. But it’s unlikely that every user will max out these three things. So I’ve made some more assumptions: that, on average, Plus members use two-thirds of their interest allowance, that they use one cash deposit every four months, and that they go away four times a year and max out their allowance every time. So that gives us some different numbers:

Item Max User/Month Cost to Monzo
Max interest (calendar month) 1.111166667
Cash deposit 0.125
Overseas allowance 1

Adding this all up gives us some profitability figures:

Total for the period Average monthly profit
Average profit (3 months) 2.7915 0.9305
Average profit (12 months) 27.666 2.3055

So, a three month stint on Plus would give Monzo just under £1 of profit on average (assuming that everyone orders a physical card and uses all the virtual ones) . But the longer a user holds an account, the more profitable it becomes.

Going back to the conversation over here, it seems (to me at least) that a £2 figure isn’t too far off the ball-park for a lower-tier that is software features only. The issue will be how much would Monzo drive additional sign-ups versus cannibalising Plus?

Assuming these figures are in the right ball-park, I think it’s certainly do-able.

Do pick over and challenge these figures, by the way - they’re built on the sand of assumptions so making them more robust would be really helpful!

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I was contemplating this sort of thing earlier today, and without doing any of your analysis came to the conclusion that £2 to £2.50 per month would be reasonable for the software features of Plus.

Given that hardly any Plus customers will be paying £5 per month net once the interest is taken into consideration, the cost of Plus is from £3.33 to £4.99, I think £2 is a fair price for auto export, custom and split categories, and advanced round ups.

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I may pay £2 a month for a single features such as virtual cards and I’m not currently paying £5 a month for them so it would be a gain for Monzo.

The problem with this from Monzo’s point of view is wouldn’t this just cannibalise the customers who spend £5 just for a single feature such as virtual cards? Monzo Plus hasn’t really been expanded since launch (aside from a Premium tier) so they could lose money on downgrades and it not be offsetted by sign ups.

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That’s the risk, I suppose. I hope they have economists all over it assessing the figures. My instinct is that yes, some Plus customers might drop down a tier, but that would be more than offset by a significant inflow of additional paid users.

In any event, if my calculations above are anywhere near reality, the difference in profit between the two won’t be that great, I think.

(An aside: I really don’t know why companies are so secretive with all this information. Monzo’s costs are what they are - and they are, I expect, along with Starling one of the most efficient banks. Publish and scare the competition!)

If they can integrate other account spending into the budgeting and with custom categories too I would be happy paying £2.

None of the other Plus features have any value to me.

1.00% AER/Gross (variable) interest up to £2,000 better elsewhere

Holographic card don’t use cards

Virtual cards no use

Credit Tracker should be free

Offers meh

Auto-export transaction no use

1 free cash deposit a month Starling

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Also, wouldn’t these make Monzo more money if they were available to everyone?
My assumption is the merchants pay Monzo a commission each time an offer is used

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I basically pay £5 a month for Google export and custom categories. If that was in the £2 bracket I would struggle to understand why I wouldn’t downgrade.

I think there would need to be limits, 1 virtual card, 2 extra categories or something.

I do wonder how many people want these features and are “oh my days, I’m not paying £5 for things that should be free!!!111” but would do it for £2/£2.50 etc.

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I don’t foresee this happening at all, Monzo need to be making money, and the small margins on a cheaper package just don’t make sense.

Let’s go back to the calculations.

By my reckoning, over the first 12 months Monzo will be making £2.31 / month average profit from a Plus customer.

If a lower tier were priced at £2/month on software features only, and a user downgraded from Plus to that tier, Monzo would be generating 31p/month less profit.

Now, if we assume that 10,000 Plus users downgrade, but also an additional 10,000 extra join this tier, then overall profits will have increased by £16,900 a month because a lower price attracts (in theory) more users.

These are all based on assumptions, but let’s attack the figures. What have I got wrong?

Workings

Loss of 10,000 customers from Plus to £2 tier loses £0.31/user/month profit. That’s £3100

But an extra 10,000 joining because this tier is cost effective for them, means additional profit of £20,000 / month,

Take off the 3100 loss from 20k and that leaves you with £16,900 extra.

This assumes a certain level of elasticity and price sensitivity, and also that the revenue from the £2 tier would be pure profit.

Lots of these figures will be wrong - I’m keen to work out where.

A while back, Dan from Monzo confirmed they do not. A total own-goal for Monzo.

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