Maximizing LTV in Digital Lending Business
In the world of lending, while the allure of acquiring new customers often takes the spotlight, the real heroes behind a company might surprise you – they are the nurtured and returned customers. These individuals, once part of your ecosystem, can potentially be the most loyal and part of the business. However, their importance is frequently underplayed.
Our partner – SpaceCrew Finance group, has a philosophy that is understood and deeply embedded. Join us as we delve into their world, exploring their methods in customer retention, their nuanced marketing processes focused on magnifying customer lifetime value, and unpacking a treasure trove of cases and practical experiences that have steered them to success.
What is the LTV in a Digital Lending Business
Traditionally, LTV (life-time value) serves as an indicator of the profit a company earns over its entire period of interaction with a specific customer. However, in the digital lending business, this indicator is influenced by several additional parameters:
Interest Rate for Regular Customers: Lending businesses typically offer promo codes and bonuses to entice regular customers, reducing the standard interest rate. It's crucial to understand that the interest rate isn't merely a competitive advantage between companies; in the lending world, it's essentially the core of the product. If rates are too high, customers might be hard to repay. So it's always about finding the right balance between price and promotion.
Loan Term: The length of time a client borrows money significantly affects a company's earnings. The larger the loan and the longer its term, the greater the potential profit.
Cost of Acquiring Loyal Customers: The lending sector is fiercely competitive in many countries. For instance, within the SpaceCrew Finance group, they find high competition in almost every country we operate. As a case in point, Ukraine currently hosts over 400 active lending companies. In Sri Lanka, there are over 100 credit organizations offline and up to 10 online. In Vietnam, around 60 organizations are well-known, while in Poland, there are more than 50.
Default Rate: This measures a borrower's inability to repay the lender. A high default rate can lead to substantial losses for the company. Minimizing this rate is, therefore, a primary objective in lending. Firms leverage scoring models to help identify borrowers likely to repay their loans. For an in-depth discussion on this, you can refer to an article “Risk Management in the Lending Business” on our blog.
The marketing goal is to engage customers who are savvy about borrowing, financially astute, or those eager to evolve and build a robust credit history over time.
An example of a daily report in which the main indicators are tracked throughout the day – the number of applications, disbursements, average check, average interest rate, and others:
LTV Calculation in a Lending Business
To compute the LTV, one must determine the income (which is the commission minus the interest on the loan for its entire duration) and the costs (encompassing administrative, marketing, operational, and default costs) for each client. These calculations should be made specific to every loan agreement.
Given its intricacy, calculating this metric independently is nearly impossible. As a result, they rely on intermediate indicators. These are employed monthly and aid in directing towards end goal. Metrics such as conversion rate, average daily interest rate, average daily interest discount, and average daily loan disbursal amount are particularly insightful.
Here are some key metrics to monitor:
Number of applications
Number of disbursements
Average request amount
Average interest rate
Average daily interest discount
Customer conversion metrics, including transition from the first to the second contract, from the second to the third, from the third to the fourth, and so on.
Cost associated with customer retention.
Retention Strategies to Increase LTV of Clients in the Lending Business
Three primary retention strategies are prevalent in the digital lending sector:
Working Based on the Number of Previously Closed Loans: Typically, this strategy involves individualized engagement with each client. For every client, a unique discount is computed based on the number of loans they've closed in the past. Essentially, the longer a client stays with us, the better conditions. While this model might be more intriguing from a financial standpoint, it's less effective in terms of conversion. Given the fierce competition in the lending industry, and the direct impact our partners' product has on a client's financial health, clients tend to choose companies offering immediate, competitive loan rates.
Engagement Based on the Time Since the Last Loan's Closure: Here, clients are grouped into buckets” based on how many days have elapsed since their last loan was closed. For companies from Ukraine and Poland, the first group consists of “clients for whom 1 to 30 days have passed since closing a loan”. However, in Asian regions, the initial bucket is more concise, capturing “clients for whom 1 to 10 days have passed post loan closure”. This model might be more effective at converting and attracting more clients.
Hybrid Model: This approach combines both the aforementioned strategies. SpaceCrew Finance frequently adopts this model across various of their projects. In Ukraine, for instance, they bolster the automated communications of the first strategy with manual notifications from the second. In Asian countries, the companies often combine the second strategy with automated notifications—like personalized bonus offers on a client's birthday or upon closing their fifth loan with service.
The overarching aim is to remain not just in the minds of clients, but to be present across their preferred communication channels. Therefore, understanding your target audience is paramount. In our retention approach, we utilize a multichannel strategy to maintain consistent communication with customers, spanning email, SMS, push notifications, and instant messaging. When navigating omnichannel touchpoints, it's vital to pinpoint the primary communication channel for each client. Initiate the communication sequence through this preferred channel.
Data Analytics to Enhance LTV
Analytics forms the bedrock of every retention strategy SpaceCrew Finance develops. They monitor conversion rates from each mailing segmented by customer groups, analyze responses to offers, scrutinize customer behavior across interaction channels, and craft touchpoint sequences within an omnichannel content plan.
Our partners consistently monitor several reports:
Conversion of Specific Newsletters/Messages: The emphasis here is on gauging the number of notifications dispatched and their ensuing conversion into customer requests and leads. Such reports offer insights into the immediate effectiveness of marketing efforts.
Customer Attrition Based on Time Since Last Loan Closure: This report helps identify challenges. It's worth noting that re-engaging customers becomes more challenging the longer they've been away, especially if over six months have lapsed since their last loan.
Client Conversion Across Consecutive Contracts: This report reveals the potential number of loans one client might take and pinpoints when a more enticing offer might be necessary to retain them within the loan portfolio.
The evolution of retention strategies is always the outcome of persistent testing and deep dives into the behavior of the target audience. The specific analytics tools employed – be it manual Excel work or advanced data analytics tools – are secondary to the ability to meticulously assess outcomes, draw accurate inferences, rectify errors, and continuously pilot new operational mechanics.
All other tools primarily serve to expedite processes. Undoubtedly, manual tasks like database warming, spam checks, text composition, and hand-crafted reports can be quite time-consuming. And in a competitive sector, time is often of the essence.
The Impact of AI and Big Data on Strategies to Increase LTV in the Digital Lending
When it comes to Big Data, it underpins the foundation of strategy. Effective retention can only be built by grounding your tactics in an understanding of customer behavior. This understanding aids in enhancing the sales funnel metrics and facilitates precise customer segmentation for targeted engagement. Importantly, customer segmentation shouldn't be merely based on sociodemographic factors. Instead, it should revolve around the “Jobs To Be Done” principle, focusing on the specific challenges and needs that distinct segments of your audience address using your product.
As for AI, while it's a useful aid in handling routine tasks, it hasn't yet matured into a standalone tool for analysis or ideation in the business context. Currently, SpaceCrew Finance employs AI primarily as a generator for niche text content.
For example, leveraging GPT Chat, we efficiently tackle tasks such as:
Crafting engaging A/B test headlines
Drafting email content:
Informative manual letters.
Composing copy for A/B tests
Refining and rephrasing SMS/push notifications
Condensing text for concise SMS messaging
Regrettably, the solutions it yields tend to be generic and haven't proven effective in the market for content planning, foundational strategy development, or client consultation.
Impact of Customers' LTV on the Overall Profitability of the Digital Lending Business
In most markets, the majority of companies offer new customers an enticing bonus: the first loan at a 0% interest rate. This rate genuinely stands at zero, without any hidden charges or additional fees. However, the cost of acquiring a new customer can range from 25 to 70 euros. It's crucial to note that there's always a subset, approximately 20-30%, who default on their loans, meaning they don't repay the borrowed amount. When you add operational costs for credit verification, client validation, and administrative expenses (including depreciation), the company often incurs a net loss on the first loan to a new customer.
The lending business operates in a fiercely competitive landscape. This situation is compounded by the general lack of customer loyalty in the financial sector; clients prioritize their own financial benefits over service quality.
In this environment, marketing emerges as the primary tool for directly impacting profit and, more broadly, the company's return on investment. The company's viability largely hinges on whether marketing can entice a new customer to take out a second loan, and if so, the amount and duration of that loan. It's important to acknowledge that marketing teams cannot always retain all customers, as some are screened out initially based on credit scoring, which helps maintain the quality of the loan portfolio.
Customer Retention Practices from SpaceCrew Finance Group
In every country our partners operate in, they adopt the same strategy for client retention. SpaceCrew Finance bases their approach on the number of days that have elapsed since the last loan agreement was closed. Interestingly, despite the stark contrasts in European and Asian mentalities, this strategy is consistently effective. However, regional nuances do affect implementation.
The local legislation plays a significant role. For instance, in Poland and much of Europe, the General Data Protection Regulation (GDPR) restricts interactions with clients without their explicit consent. As a result, Poland must first obtain a client's permission before sending any promotional notifications.
Technical constraints of the specific country can also influence the strategy. One of the scoring rules stipulates “no more than 1 loan in 1 hand,” ensuring the company doesn't overburden clients financially. Marketing efforts can only commence once a client's previous contract is fully settled. In Sri Lanka, for example, the lack of comprehensive technical integration with many banks means about 30% of payments are processed manually over 1-3 days. This delay is significant for strategy in Sri Lanka, as clients can't return to us within this window.
In Vietnam, the brand OnCredit faces a unique challenge. The local mobile network prohibits any advertising messages from any commercial companies. If the client's mobile number is associated with a network, it would be difficult to deliver promotional messages to them.
The promotional offers companies provide also vary based on cultural and mindset differences. In Ukraine, for instance, the “Invite a friend” program isn't effective since borrowing money is seen as socially taboo, whereas in Europe, it's more accepted. As for incentives to boost conversion – whether they're promotions, bonuses, cashback, or gifts – regional preferences play a part. In Ukraine, monetary incentives like phone recharges, loan repayments, or cashback are effective.
Meanwhile, in Sri Lanka, direct monetary rewards aren't as trusted, but tangible gifts like food baskets are appreciated. Sri Lankans have a particular fondness for various lotteries and game mechanics. Consider, for instance, an advertising campaign that achieved significant success on OnCredit LK:
In Poland, people appreciate gifts in the form of digital technology – for instance, the Apple Watch is currently drawing everyone's attention.
In Vietnam, one of the few effective tools for attraction is cashback, which can be used to repay a loan in our service. Vietnam's example with gamification:
In Conclusion: Mastering customer LTV in Digital Lending
The lending landscape, as demonstrated by SpaceCrew Finance Group, is multifaceted. LTV and customer loyalty goes beyond mere profit, diving deep into client loyalty and long-term value. Through adaptive strategies, technology, and regional nuances, the industry is continuously refining its approach. As we look to the future, the marriage of data and understanding customer behavior will be pivotal in ensuring sustainable profitability.
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