What is the merchant retention problem faced by platforms?
In order to grow, platforms in the payments or retail space need to attract, onboard, and retain merchants. Using the right embedded finance provider can help with all three.
One problem a lot of payments and e-commerce platforms face is an overreliance on short-term customer acquisition. In general, 44% of businesses focus on customer acquisition while only 18% put their energy into retention. If you look at your monthly stats and see that you’re attracting 100 new merchants every month, you’re likely to think things are going well. But if 80 of those merchants aren’t coming back to you next time — or worse, are going to your competitors — the picture looks very different. That is why Merchant Lifetime Value (MLTV) is such an important metric for platform enterprises.
This metric, which is a variation of Customer Lifetime Value (or CLTV), is a number that represents the value that a business expects to receive from a customer from the time they make their first transaction until the time they churn.
CLTV = Average Value of Transaction per customer x (Number of Transactions per period ÷ Churn Rate per period)
It can be calculated for a specific merchant segment, as well as a business-wide average reflecting the strengths and weaknesses of your whole model. In the case of merchants and sellers, it takes a number of factors into account:
- Average transaction size
- Frequency of transactions
- Expected duration of a merchant's use of the platform
- Expected growth of the merchant
- Probability of churn relative to factors such as size, or sub-sector
In a saturated market, churn is a serious problem. If merchants aren’t getting the best support, they are likely to switch to a competitor's platform.
Giving merchants access to finance with an effective embedded finance provider is one sure way to increase retention and transaction volumes, as well as insulate against cash flow challenges. All three of these will contribute to increasing your MLTV.
How can an embedded finance provider add value?
Platforms that serve merchants and sellers must innovate their product offerings to provide value-added services and maintain retention over their competitors. Embedded finance providers offer a solution to meet the broader strategic goals of platforms by contributing to sales, retention, and new revenue streams - all in one stroke.
Retention
Across industries, the probability of convincing a new customer to buy a product or service from you is between 5% and 20%. The chance of an existing customer returning is between 60% and 70%. There can only be one conclusion: it makes sense to invest in retention, and embedded finance is a great way for platforms to do so. When they’re looking for funding, SME’s priorities are speed, convenience, and flexibility. A good embedded finance provider will help platforms offer them all three. Here are some key stats:
- 8% of SMEs say quick access to finance is the biggest issue facing their business.
- 57% of all SME credit applications are abandoned because they’re too difficult to complete.
- 50% of first-time SME financing applications are rejected, a number of them because the business doesn’t meet the risk profile of traditional lenders.
An embedded finance provider can solve all these problems and keep merchants coming back when they need help - be it with inventory funding, cash flow financing, or cost of expansion. When merchants experience a simple embedded finance journey with minimal documentation required, they are likely to lend long-term loyalty to their platform due to the ease of doing business.
Secondly, if embedded finance providers are able to take a variety of non-traditional credit markers into account - such as social media presence or online reviews - it means that many young online businesses will have the opportunity to invest in their growth and stay loyal to their current platform.
Thirdly, with an embedded finance provider that provides instant decisions - approval for funding takes minutes, not days. All of these benefits are sure to draw new merchants to a platform, and they’ll keep them coming back.
Transaction Volume
Retention is important. But for a clear picture of merchant lifetime value, platforms also need to consider transaction volume. If you retain a client for three years but they only use your service twice, their lifetime value is low.
At least one quarter of small businesses have growth plans in any given year, but 83% of SMEs say they face difficulty in accessing finance. That’s why it's integral for platforms to partner with an embedded finance provider to give a seamless application journey and offer strategic value for both the platform and their merchants.
Embedded finance providers who offer revenue-based embedded finance can allow their merchants to repay as a percentage of sales, meaning that the sellers can repay based on their expected sales trajectories.
Overall, this has the advantage of allowing merchants to boost capacity and increase overall sales volumes - benefitting the sellers in terms of revenue and the platform in terms of more merchant selling fees.
New Revenue Stream
Simply put, when a platform adopts embedded finance, they’re creating a whole new revenue stream for their business. Platforms have the opportunity to earn a commission every time a merchant is successfully funded. This is a massive strategic advantage over competitors who do not have diversified revenue streams. Also, with increased retention and transaction volume of current merchants, platforms benefit at a grassroots level as their Gross Merchandise Value (GMV) and merchant fees are boosted in the long run.
It's a win-win scenario for both the platforms choosing to embed financing solutions, and their business customers who choose to make use of it.
Final thoughts: Boost merchant retention with embedded finance solutions
Adopting embedded finance is an excellent way for platforms to increase the value of their relationships with merchants and nurture long-term seller loyalty. Previously, YouLend has partnered with successful platforms that have been able to boost GMV by 26% and reduce churn by 75% through fast, flexible, and convenient financing solutions.
For more on how to adopt embedded finance solutions, book a demo or read our partner case studies here.
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