By: John Whitmarsh, CFO & Matt Welton, VP of Lending
When was the last time that you sat down and actually dug into your private label credit program to figure out where the growth opportunities and weaknesses were?
Chances are it’s not something you do regularly since trying to find meaning in all that big data you’ve collected can be a bit overwhelming.
The good news is, the data needed to evaluate your credit strategy and figure out which levers to pull to make a difference is right at your fingertips. It’s a well-known fact that credit drives revenue growth, increased repeat spending, and loyalty. The question is, how do you get more?
Below, we’ve made it easy to understand the numbers every CFO should know. These key metrics will give you a high-level view to help you figure out if and where to invest your time and resources to drive growth for your company. Read on to get all the facts.
1. Total Credit Applications
- The first step to understanding your credit program’s performace is knowing how many customers are applying for credit, either online or in-store. Once you know this number, there are several questions to ask yourself to get a well-rounded picture of what is going on:
- What’s the marketing budget to promote financing?
- Are store associates educated and confident enough to offer it to every customer?
- How easy it for shoppers to apply? Can customers apply online or right at the point of sale register?
- Are the terms & conditions of the credit offer transparent to the customer?
- Investing in ways to grow this number should be a no brainer. It’s a well-known fact that credit results in more repeat spending, higher NPS scores, and greater purchase frequency. However, what’s even more important than the number of credit applications coming in the door are how many customers are getting an offer which leads us to the next metric.
2. Approval Rate
- Approval rate is the percentage of credit applications that are approved for a credit offer. The factors that affect approval rate are how many lenders and which lenders you partner with. As pymnts.com clearly articulated in their article on retail financing supply and demand, traditional banks such as Synchrony Financial, Citi Bank, and Wells Fargo have conservative underwriting. And this is not unusual for a lender – most lenders, whether the big players or the smaller ones, typically play in their own swim lanes, so the main way to increase approval rates is by increasing the lending partners you work with.
- Partnering with more than 1 lender not only allows you to improve the customer experiencebut it also results in significant incremental revenue. Consumers who traditionally wouldn’t be able to participate in retail credit, i.e. thin credit files like millennials, are even more loyal than consumers with great credit.
3. Acceptance Rate
- Acceptance rate is how many customers get the offer, and choose to accept it. More specifically that means how many customers sign the terms and conditions and actually open the account. Many factors can affect whether customers accept an offer including:
- Price– what does the interest rate look like?
- Credit limit– Are customers getting enough financing for what they are looking to purchase?
- Willingness to buy– does the customer need the product right then and there?
4. Credit Utilization
- Credit utilization is the percentage of how much credit has been offered, and how much of it has been used. Whether consumers are utilizing the amount of available credit is really dependent on awareness.
- One note of caution though – just because utilization is high doesn’t always signal a good thing. For example, if consumers aren’t approved for a very high credit line, then credit utilization could be very high, above 75%. That might signal that you need to find a partner that can provide greater spending power for each consumer. Understanding whether consumers max out on credit right away vs. after several repeat purchases will provide greater direction here.
- Fallout is the number of consumers that fall through the cracks as a result of having to fill out another credit application. As you can imagine, the more steps in the process, the less likely a consumer will make it all the way through.
- If you have a waterfall application process – which means that a consumer’s financing application is automatically prescreened for other offers upon an initial decline, fallout is 0. This is the ideal scenario. Research indicates that over half of consumers are less likely to make a purchase if they have to fill out multiple applications.
6. Average Financed Amount
- Average financed amount means what is the average ticket size of purchases using financing. Knowing how this number compares to non-financed purchases is paramount. If you compare the initial purchase of non-financed purchases with financed purchases, you should see on average lift of about 15-30%.
7. Blended Cost of Credit
- Blended cost of credit is definitely not a foreign concept to any retailer. A common misperception however, is that expanding your credit program has a huge impact on margins.
- The key takeaway here is that the blended cost of credit doesn’t increase exponentially when you add more lending options to the mix. The difference between offering no credit loyalty program and offering full spectrum financing is a little less .8%, or 80 basis points.
8. Repeat Sales
- Benchmarking here is definitely dependent on industry – some retailers are big ticket, low velocity – like buying a new mattress while others are small ticket, but high velocity – meaning customers come back again and again – like a Target.
- The point here is that the more customers that have more money in their wallet will spend more. It’s about empowering more customers with spending power. In traditional primary only credit programs, 50% of customers are alienated – and this number will likely increase in upcoming years since many millennials have no/minimal credit history. The key, is giving more consumers purchasing power and as we explained above, that can only be achieved by adding additional credit options.
9. Value of Credit
- What we want to see is what the impact on revenue is and how much of that is really NEW sales – sales that would not have walked through the door if it wasn’t for financing. Research shows that incremental sales of a primary credit program are roughly 40%. Incremental sales on adding more lenders increases to 75 – 90%.
After evaluating these retail credit metrics, you should have a good grasp on what needs to change to meet your revenue marks for the next year. Additionally, don’t rule out exploring new credit solutions if that is what your numbers point you to. Remember that it’s never too early or too late to invest in retail credit.
Want to hear more about the 9 numbers to consider when evaluating your credit strategy? Watch our webinar now.
John Whitmarsh is Vyze’s chief financial officer and has been recognized as CFO of the Year by the Austin Business Journal.
Matt Welton is Vyze’s vice president of lending and customer success.