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how-consumer-financing-improves-retail profitability
Feb 6, 2023
Digital Transformation

How Consumer Financing Improves Retail Profitability

Consumers don’t always have loaded wallets to pay upfront for large purchases or to finance significant repair jobs during crises. They cut their spending and adopt stricter priorities during recessions. Moreover, as sales decline, companies typically reduce product prices, incur cost-cutting, and suspend new investments.

Although it’s wise to cut down on costs, failing to support businesses or study consumers’ constantly changing needs and demands can threaten performance over the long run. 

However, after examining the marketing successes and failures of numerous businesses as they survived recessions starting in the 1970s, Harvard Business Review discovered the trends in consumers’ behavior and businesses’ strategies that either boost or deteriorate their performance. Companies must be aware of changing consumption patterns to adjust their tactics.

Brands that prioritize their consumers’ needs and fine-tune strategies, tactics, and product lineups to cater to the changing demands are more likely to prosper during and in the aftermath of a recession

Financing lets consumers defer payments to when the economy is more favorable. Offering simple consumer financing options helps businesses increase their average order value (AOV), gain more customers, and generate more sales. 

Because financing provides your consumers with a flexible option to pay for large purchases, offering such services can help attract new clients and increase recurring business. Through financing options, retailers give consumers the flexibility to make purchases through regular loan payments, thereby giving consumers more purchasing power.  

Benefits of Providing Consumer Financing  

It’s easy to understand why consumer financing, also referred to as retail financing, has become so popular in recent years. Consumer financing allows customers to pay for purchases over time rather than upfront. Major players like Klarna and Affirm claim that retailers who provide financing options to customers see an increase in their AOV of up to 85% (Affirm) and 45% (Klarna).  

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Consumer financing may be better known by the acronym “BNPL” (Buy Now, Pay Later), or programs such as “RTO” (Rent to Own) or “LTO” (Lease to Own). 

Nearly 250 retail decision-makers and 2,000 US customers participated in a recent poll conducted by Klarna. They found that 27% of customers said flexible payment options would increase their likelihood of spending more with a company and that 36% of consumers said flexible payment options would motivate them to shop with a brand again.  

Since financing gives customers greater purchasing power and flexibility and helps businesses increase sales and improve cash flow, financing schemes benefit consumers and enterprises.  

Let’s explore the top 7 benefits of consumer financing in detail.   

  1. Increases Average Order Value (AOV)

Consumer financing can be a powerful tool for upselling customers, which can help brands increase their average order value (AOV).    

By offering finance options, companies can be more moderate in changing what people want to purchase. Instead, they can encourage them to make big-ticket purchases by guaranteeing they have the financial capacity to do so.   

Businesses can show customers how a slight increase in their monthly loan payments can unlock the upgrades they want, ultimately helping them increase transaction sizes. For instance, if you’re giving a customer a quotation for a kitchen makeover, you might mention that they can upgrade from a laminent countertop to engineered marble for $20 extra per month.  

Companies that offer consumer financing see an AOV increase of 30% compared to direct cash payments. Additionally, 93% of people who used finance options for the first time stated they would do so again.   

When purchasing big-ticket products, consumer financing can make the difference between a conversion and an abandoned cart. 30% of consumers who used retail financing claimed they would not have purchased the items if it weren’t for the six-month financing option.  

  1. Differentiates Your Company from the Competition

A proven differentiator in advertising is consumer finance. Everyone has witnessed how automakers and furniture retailers take the lead with consumer financing schemes:  

  • “Financing with no interest!”  
  • “Low deposit required!”  
  • “90 Day Same as Cash!”  
  • “Everyone Gets Approved”  
  • “Four equal payments per month!”  

They wouldn’t carry it out if it weren’t effective.  

Offering consumer financing can set you apart from the competition, increase customer retention, and make you stand out.  

You should implement it as well if you have a solid consumer financing provider on your side.  

  1. Retail Financing Builds Brand Loyalty 

According to HubSpot, 93% of customers believe they are willing to make more purchases from a brand they trust.  

Offering retail finance options and maintaining a lower price than the competitors would keep customers returning. Additionally, you’ll gain their trust once you’ve developed that relationship with them.  

Despite having several options for the products they want to buy, 90% of consumers still report being brand loyal. Long-term customer retention is made possible by brand loyalty.  

Brand loyalty is difficult to earn, especially in today’s world, where one negative customer experience can quickly spread to other potential customers via social media. You can keep your target audience coming back if you can provide them with unique experiences, which they won’t be able to get elsewhere.  

  1. Increases eCommerce Conversion Rate  

By allowing clients to make regular loan payments that fit their budgetary limits, consumer financing can help your firm close more sales, thereby increasing conversion rates.   

You can remove the biggest obstacle to closing a sale—the high purchase price—by bringing up financing possibilities at the beginning of your sales conversations. Consumers value financing because it increases their purchasing power and enables them to obtain the exact products they want without paying the full price upfront.   

According to a recent Forrester survey, businesses saw a 32% boost in conversion rates after offering point-of-sale (POS) financing to customers.  

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  1. More Customer Retention 

It’s more complex to provide a product or service that your customers see as better than your rivals, but the reward is ultimately worthwhile. You’re on the right track to retaining customers if you’ve created a market niche for your company that addresses a significant customer pain point.  

For example, retailers can provide consumer credit to their customers at checkout. Consumer credit differs from traditional credit options since it is more flexible about the type of security it will take.   

This implies that while banks require assets to be placed as collateral, retailers may only need an operating history or credit score. This allows them to offer consumer financing options even when people have little money down and few other resources available, thereby increasing retail profitability.  

You must invest in your customers if you want them to return. This means going beyond age, demographics, and location to understand customers through data-driven methods. The key to improving the customer experience,” according to Mona Champaneri, Managing Director of Experiences and Product at Kin + Carta, “is to analyze habits, emotions, and expectations, as well as anticipate the customer’s needs in the micro-moments.”  

Whether you are encouraging customers to make an online purchase or boosting employee efficiency, focus on consistently adding value to the end user. The greatest impact can be achieved by moving the user up the value chain,” she added.  

  1. Enhance Customer Satisfaction

An essential KPI and benchmarking tool for customer satisfaction is the Net Promoter Score® or NPS®. The NPS approach measures customers’ likelihood to recommend a company to a friend or acquaintance and offers insights into customer loyalty.  

A study conducted across 20 different industries tried to determine the connection between the true value of customer financing and higher NPS. The result was clear: 

  • 92% of promoters are likely to make more purchases with higher NPS score. 
  • 67% are likely to make a new purchase even after a negative experience. 
  • 62% are likely to try a new product. 
  • Respondents recommend the retailer to an average of 3.5 people. 

You may determine what customers want in terms of products and features by measuring NPS. For example, asking a follow-up NPS question like “What can we do to make your experience better?” encourages your consumers to offer their ideas. 

As a retailer, offering your customers equal monthly payments or other financing alternatives and solutions can increase customer satisfaction and loyalty, as well as your cash flow, which can drastically improve the NPS. 

  1. Increases Customer Loan-to-Value (LTV) Ratio

Offering multiple customer financing is a wise strategy for increasing customer LTV if you run a retail business. Once your product or service becomes valuable or, better yet, irreplaceable to a consumer, try to move that customer up a tier. 

Typically, recurring revenue is crucial to customer LTV. Your ability to provide goods or services on a financing basis, such as BNPL, will significantly boost the LTV of each customer. 

Since happy customers are much more likely to stay with your company than unhappy ones, a high NPS score helps in improving customer LTV. Hence, a proven method to keep your churn rate low and grow your clientele is to concentrate on improving your NPS. 

Tips for Improving Consumer Financing Awareness (for Retailers)  

  • Inform the customer that they are not required to look for a different lender. You’ve already got a financing partner on board.  
  • Let them know that they can submit their applications online and that the procedure is simple. (It is usually recommended to go with providers with an online option.)  
  • Include a privacy statement on both your financing agreements and website. Make sure you let your customers know that you value their privacy and will keep their consumer credit information secure.  
  • Inform them that your approval rates are higher than those of other lenders, particularly banks.  

The Future of Consumer Financing in a Digital Economy  

Consumer financing continues to grow and is expected to be worth $500 billion by 2027, up from $161.8 billion in 2021.  

Consumer demand for digital services is now the market’s driving force. Companies that can customize the digital customer journey to reflect the best-in-class customer experience will win,” said Steve Wagner, Managing Director of Global Decision Analytics.  

Automating consumer financing is an effective way for businesses to stay ahead of their competition and increase profitability.   

By leveraging the power of technology, businesses can streamline their processes and reduce costs while providing better customer service. Automation can also help in improving accuracy and reducing errors in the process of consumer financing. Additionally, it can help businesses quickly identify potential customers and offer customized financing solutions.   

About the Author

Premal Dave

Premal brings more than 17 years of experience in being a strategic partner & adviser to start-ups as well as Fortune 500 enterprises in digital transformation, concept to commercialization and full-stack engineering. He has fostered & managed executive relationships responsible for multi-year technology programs in Financial Services, Healthcare, Retail, Utilities, and beyond. He believes in transforming client relationships to long-term strategic partnerships through mutual trust, transparency & client first approach. He is passionate about technology, travel, motorsports, and above all, spending time with family. He graduated with a major in Marketing & Advanced Financial Management and holds a Diploma in Business Administration with a Management Development Certification Program from IIM-Ahmedabad in B2B Marketing.

Prior to joining TechBlocks, Premal has held strategic sales & business development positions at Automation Anywhere, InfoStretch among others.

Premal Dave