Afterpay's Hidden Costs: A Deep Dive for AU eCommerce Operators

19 May

Afterpay feels like a non-negotiable for Australian eCommerce brands. The promise is simple: offer it, and you’ll see higher conversion rates and bigger average order values.

I’ve heard this from dozens of founders.

The problem is that the top-line revenue number doesn’t tell the whole story. When we audit accounts at Elite Brands, we often find that the brands most reliant on Buy Now, Pay Later (BNPL) services are also the ones with the most fragile profit margins.

The 6% merchant fee is just the ticket to entry. The real costs are buried deeper in your P&L, showing up in places like customer service overhead, return processing, and diminished customer lifetime value.

This isn’t an argument to switch off Afterpay tomorrow. It’s a call to look under the bonnet and understand the true cost of the sales it generates. For many Australian brands, what looks like a growth engine is actually a slow leak in the hull.

Afterpay’s hidden costs for AU ecommerce operators

Most operators I speak to fixate on the direct merchant fee, which typically sits between 4% and 6%. They bake this into their cost of goods sold and assume the job is done. But this is just the most visible part of the cost structure.

The initial appeal is undeniable. In a competitive market, reducing friction at checkout is critical. Afterpay does this brilliantly. It can lift conversion rates, especially for higher-priced items. I saw this myself when I was scaling Gearbunch. The temptation to focus on that conversion rate uplift is huge.

The hidden costs, however, accumulate quietly. These aren’t line items on an Afterpay invoice. They are operational drags that erode your net profit over time. Think about the administrative time your team spends reconciling payments, handling disputes unique to BNPL, or answering customer questions about instalment plans. This is time that could be spent on marketing or product development.

The BNPL landscape in Australia is now mature. Customers have options, from Afterpay to Zip and others. This means the competitive advantage of simply offering a BNPL solution has diminished. It’s become table stakes.

Because it’s table stakes, you need to analyse its performance like any other channel or tool in your stack. Is it bringing you profitable customers, or is it just bringing you revenue at a cost that makes scaling unsustainable? A deep dive is the only way to know for sure.

Net profit erosion: Beyond Afterpay merchant fees

Let’s break down the real numbers. The 6% fee is your starting point, not your total cost.

Imagine you sell a product for $150. Afterpay takes $9 right off the top. Your cost of goods is $50. Shipping and fulfilment is $12. You’ve spent $30 on Meta ads to acquire that customer. Your gross profit on that order is $49.

But that’s before the secondary costs kick in.

We see a consistent pattern where Afterpay transactions generate more customer service tickets. Customers have questions about their payment schedules, what happens if they return one item from a multi-item order, or why a payment failed. Let’s say this adds an average of 5 minutes of your customer service team’s time per Afterpay order. If you pay your team $30 an hour, that’s another $2.50 in cost.

Your profit is now $46.50.

Then there are chargebacks and disputes. While Afterpay handles some of this, any time spent by your team providing evidence or managing the process is a real cost. It pulls them away from proactive, value-adding work.

Cash flow is another major issue. You get the funds from Afterpay in a lump sum, minus their fee. But if that customer returns the product, you’re refunding the full amount from your cash flow while navigating Afterpay’s refund process. For businesses with tight working capital, this can create serious cash crunches, especially after a big sales period.

The biggest hidden cost is the pressure it puts on your pricing and promotion strategy. Many founders feel they need to run sales just to maintain volume, offsetting the high fees. This leads to a dangerous cycle where deep discounts hurt AU eCommerce profitability even further. You end up paying Afterpay’s fee on an already discounted price, compounding the margin erosion. That $46.50 profit can quickly become $30 or less. To combat this, optimising your email strategy for full-price sales and stronger CLTV is vital; our free Klaviyo Audit can help identify opportunities to boost email revenue and reduce reliance on discounts.

Afterpay’s correlation with higher ecommerce return rates

One of the most significant costs we see is the increase in product returns. Afterpay encourages a “try before you buy” mentality, which is great for the customer but expensive for the business.

The platform dramatically reduces the friction of purchase. A customer can order three different sizes of a dress to try at home, knowing they only have to pay the first instalment. They are far more likely to do this than to pay the full amount upfront on a credit card.

This behaviour directly inflates return rates. When we analyse Shopify data for new clients, we often find the return rate for Afterpay orders is 15-30% higher than for orders placed with credit cards or PayPal. This isn’t a small variance; it’s a major operational and financial drag.

Each return has a multi-layered cost:

Shipping: You’ve likely paid to ship the item out, and you may also be covering the cost of return shipping to remain competitive. That’s two shipping fees with zero revenue to show for it.
Labour: Your team has to receive the return, inspect the item, process the refund in Shopify and Afterpay, and restock the product. This is pure operational overhead.
Product Condition: The item might not be in a sellable condition. It could be damaged, worn, or simply have damaged packaging, forcing you to discount it or write it off completely.
Inventory Lock-up: While the product is with the customer and in transit back to you, it’s not available for a genuine buyer to purchase.

Let’s go back to our $150 dress. The customer returns it. You might be out $12 for initial shipping and another $10 for a return label. Your team spends 10 minutes processing it, costing another $5. The plastic garment bag is torn, so you need to replace it for $1.

You’ve just spent $28 on a transaction that resulted in zero revenue. Worse, you may not even get the full $9 Afterpay fee back, depending on their terms and the timing of the refund. The official Afterpay merchant documentation explains the process, but the operational cost is all on you.

This isn’t just a cost. It’s a direct drain on your net profit. A small lift in your return rate can wipe out the profit from multiple successful sales.

Customer quality and lifetime value with Afterpay strategy

A lift in conversion rate means nothing if the customers you acquire are unprofitable. This is the core issue with relying too heavily on any single payment method that attracts a specific type of shopper.

The question you have to ask is: are you acquiring a customer who loves your brand, or a customer who loves Afterpay?

We often find that customers who check out exclusively with Afterpay can exhibit lower brand loyalty. Their purchasing decision is driven by the payment terms, not a deep connection to your products or mission. They are more likely to be one-time buyers who came for a deal and will move on to the next store that offers them the same payment flexibility.

This has a direct impact on Customer Lifetime Value (CLTV). A truly valuable customer is one who comes back and buys again at full price. If a large segment of your customer base only buys during sales and only uses Afterpay, their long-term value is significantly lower.

You need to get into your data to see this. A simple analysis in Shopify can be powerful. Export all your orders for the last 12 months. Create two cohorts:

Customers whose first order was with Afterpay.
Customers whose first order was with any other payment method.

Now, compare them. Look at their repeat purchase rate, their average time between orders, and their total spend over that 12-month period. In many of the accounts we analyse, the Afterpay cohort has a 10-20% lower CLTV than the credit card or PayPal cohorts.

This data is crucial. If it costs you $30 to acquire a customer (your CAC), and that customer’s lifetime value is only $70, your CAC-to-LTV ratio is poor. If another customer acquired for the same cost has an LTV of $150, your entire business model looks healthier.

The goal is to build a base of loyal, repeat customers. This is done through great products, strong branding, and smart retention marketing. Effective Klaviyo management is a huge part of this. You need targeted post-purchase flows that build a relationship and encourage that second and third purchase, turning a transactional shopper into a loyal fan. Relying on a payment method to do the work for you is a short-term strategy with long-term costs.

Optimising your Afterpay strategy for ecommerce profitability

After analysing dozens of accounts, I’m not convinced that turning Afterpay off is the right move for most brands. It’s too embedded in Australian consumer behaviour. The key is not to eliminate it, but to control it and shape its usage to align with your profitability goals.

Your job is to manage Afterpay as a strategic tool, not a blanket checkout option.

Here are the practical steps we implement with our clients to mitigate the downsides:

Set a Minimum Order Value. This is the single most effective tactic. By setting a minimum threshold, say $100, you ensure Afterpay is only used on orders that are large enough to absorb the associated fees and potential return costs. It discourages its use for small, low-margin purchases.
Restrict It by Category. Do you have a product category with a notoriously high return rate, like footwear or specific types of apparel? Consider disabling Afterpay for that category alone. This surgical approach protects your margins where they are most vulnerable.
A/B Test Its Visibility. You don’t have to display the Afterpay logo and instalment breakdown on every single product page. Try testing its removal from product pages and only showing it on the cart and checkout pages. This can capture the high-intent buyers without encouraging casual, low-commitment browsing.
Strengthen Your Return Policy. Be explicit about your return policy for BNPL purchases. Clarify who covers return shipping and any potential restocking fees. A clear policy can deter speculative buying.
Diversify Your Payment Options. Make sure other payment methods like PayPal, Shop Pay, and Google Pay are just as prominent. Don’t let Afterpay dominate your checkout. Highlighting alternatives like Zip can also cater to different segments of the BNPL market, giving you more data on customer behaviour. Good forecasting for AU eCommerce behaviour means understanding how your different payment options contribute to your bottom line.
Analyse Profitability per Channel. The most important step is to connect your payment data to your marketing data. Are the customers you’re acquiring from a specific Meta Ads campaign predominantly using Afterpay and returning items at a high rate? That campaign might look profitable on a ROAS basis but be killing your net profit. You need to analyse profit per order, not just revenue.

Afterpay is a powerful customer acquisition tool. But like any tool, it needs to be measured, managed, and optimised. Letting it run unchecked is a recipe for a business that looks great on the top line but is struggling to make any real profit.

Want a Klaviyo expert to look at your account?

We’re Klaviyo Master Gold partners. Our free Klaviyo Audit flags the 24 things that most often kill email revenue on Shopify stores.

Get the audit →

If you’re not tracking these metrics and actively shaping your strategy, you’re letting a payment provider dictate your profitability. Taking control of this is one of the most important levers you can pull for the long-term health of your brand.

Dan Nikas