Can RAYLO Succeed in Making iPhones More Affordable?

Escalating prices of new iPhone models has created an opportunity for UK start-up Raylo.

Raylo offer new and refurbished iPhones to consumers on a lease based model. At the end of the 12 or 24 month lease period, customers return their iPhones to Raylo in an acceptable condition, otherwise penalty fees apply.

The “lease don’t own” model allows Raylo to offer new iPhone 11s or iPhone 11 Pros at lower monthly payments than standard network operator “finance to own” contracts.

Raylo has raised £4.9m in funding as of December 2019 from investors including a co-founder of Carphone Warehouse.

Leasing iPhones is not a new business model. Business customers have long enjoyed a range of phone and IT equipment leasing solutions from a variety of providers.

On the consumer side, O2 and Vodafone launched iPhone 4S and iPhone 5 leasing options back in 2012. Something didn’t gel with the commercials behind these leasing plans, as O2 and Vodafone withdrew the plans soon after.

So what’s changed? Why might Raylo succeed with consumer iPhone leasing model when O2 and Vodafone have failed?

  • Expensive iPhones: Apple’s iPhone pricing for its flagship models have increased significantly over recent years. Current 2020 iPhone price points top out at £1499 for a 512GB iPhone Pro Max, compared with £699 for the top of the line 64GB iPhone 5 in 2012
  • Sharing economy trend: Raylo’s target Millennial customer base prefer to rent rather than own. Renting iPhones may fit with the mindset of customers brought up on a diet of Netflix, AirBnB and Uber.
  • Online only distribution: Raylo’s sole use of online distribution is also designed to meet the needs of a Millennial customer base. Raylo hopes its online credit check process will be simpler than network operators and Apple.

Is it cheaper for customers? How does it compare with network operator finance schemes?

Raylo vs Operator financing

Let’s compare the Raylo proposition against O2’s Refresh device financing program for a 64GB iPhone 11 Pro, RRP £1,049 from Apple.

  • O2 Refresh sale:: £50 upfront + £44.82 / mth x 24 mths = £1,125.68 (+ SIMO tariff)
  • Raylo lease: £0 upfront + £36.99 / mth x 24 mths = £887.76 (+ SIMO tariff)

A Raylo customer wanting to keep the iPhone at the end of the 24 month lease would need to pay a non-return fee currently set at £236.99, which works out at 23% of the iPhone’s RRP. Alternatively, the customer could continue paying their monthly subscriptions to Raylo for a further 12 months beyond their 24 month lease period, after which no further payments are taken and they could keep the phone.

This gives a like-for-like cost of financing a phone:

  • O2 Refresh purchase: £1,125.68 (+ SIMO tariff)
  • Raylo lease-then-buy: £1,124.75 (24 mth lease + non-return fee), or £1,131.64 (24 mth lease + 12 additional payments)

The key variable for Raylo is the residual value of the iPhone at the end of the lease. Raylo’s non-return fee assumes the iPhone held a residual value at end-of-lease of £236.99, or 23% of its RRP.

Alternatively, allowing the customer to pay off residual value at end-of-lease via 12 additional payments values the iPhone residual value at £443.88, or 42% of the iPhone’s RRP.

True market value for high end model iPhones in good condition after 24 months ranges from 23%+ for Apple’s own trade-in program to 35%+ for best-in-market trade-in.

Looking at the above comparison, Raylo seems good value versus O2’s solution for a customer who wants to own the iPhone at the end the lease. The customer pays nothing upfront, lower monthly fees, and after paying the non-return fee at end-of-lease, the customer is no worse off than financing via O2. Raylo’s non-return fee of 23% of iPhone RRP seems very reasonable for this customer.

However, Raylo does not aim to attract this type of customer. It encourages its customers to return the iPhone at end-of-lease, and roll over onto a new iPhone on a new lease.

Baking a 23% of RRP residual value into the lease monthly subscription fees creates arbitrage for Raylo. When customers return their iPhones at end-of-lease, Raylo can then on-sell the device at a 35%+ of RRP residual value.

Raylo’s commercial preferences for end-of-lease customer behaviour ranks as follows:

  1. Low value to Raylo: Customer decided to keep iPhone and pays 23% residual non-return fee, denying Raylo the opportunity to resell the iPhone at 35%+ residual value
  2. Medium value to Raylo: Customer returns iPhone at end-of-lease, allowing Raylo to resell the iPhone at 35%+ residual value
  3. High Value to Raylo: Customer fails to return iPhone, and incurs a further 12 monthly payments, paying an effective 42% residual

A blend of these outcomes will occur, allowing Raylo to tinker with the customer incentives behind each option to improve commercials.

Raylo can also capture additional revenue from the insurance referral fees it generates from its insurance partner. Insurance attachment is heavily pushed during the customer purchase journey.

So what could go wrong for Raylo?

  • Bad debt risk: Raylo’s war chest of £4.9m will quickly deplete if new £1k+ iPhones go out the door to poor quality customers who don’t pay their monthly subscriptions or don’t send the phone back after 24 months. Retrieving iPhones in the wild from delinquent lease holders won’t be easy.
  • Fraud risk is enhanced by Raylo’s decision not to charge any upfront fees before sending out an iPhone. Mandatory upfront fees charged by network operators are the legacy of tough experience of battling fraud.
  • Customer experience risk: Raylo sits on customer experience risk regarding lost or damaged iPhones, which then trigger additional charges. Raylo’s customers may not have fully processed that Raylo can recover damage or non-return fees at end of lease beyond the customers contractual monthly payments. Also, Raylo’s insurance product contains a restriction that accidental damage is not covered if the Raylo supplied case and screen protector were not fitted to the phone, another potential can of worms. Both of these items could turn into big social media sentiment headaches for Raylo.
  • Non-scaling business model: It’s no surprise that Raylo launched their business model based around iPhones, given the strong residual value these devices command. Raylo likely will seek to expand its model to cover phones from non-Apple manufactures. But following this path is likely to put their business model under strain, as the residual value of non-iPhone devices is likely to be significantly lower. This will increase monthly fees for customers, reducing the attractiveness of the offer, and decrease Raylo’s ability to make money from resale arbitrage.

Raylo is seeking to make highly desired but expensive iPhones more affordable via a lease model.

It is unlikely to have this space to itself as network operators and Apple’s own direct sales channels push their own initiatives to increase iPhone affordability.