Tim Nicolle

This article was first published on MoneyControl: here.

How ‘Narrow and Deep’ strategy allows fintech start-ups to deliver services efficiently

Customer lifetime value is, arguably, the most important parameter for identifying the next unicorns.

Tim Nicolle

Generating sufficient customer lifetime value is a fundamental issue many emerging and promising companies stumble upon. First, they find that their cost of sale overwhelms the actual profitability of a customer. Then they notice their customers quickly moving elsewhere, either out-growing the service provided or being poached by hungry competitors. And finally, they can find that their addressable market space is simply not big enough – profitability becomes impossible because the profitable niche is not big enough.

This is why investors focus on identifying companies that can create adequate customer lifetime value when it comes to their capital funding decisions. Customer lifetime value is, arguably, the most important parameter for identifying the next unicorns or appreciating which of the current flock of unicorns might have the staying power to build a substantial enterprise.

Insufficient lifetime customer value appears as the technology vision of the business crashes into market realities. Imagine a well-executed product with a high level of automation entering the market, only to find that there aren’t enough people willing to spend enough money to sustain its operations into profitability. This happens either because the cost of sale gets too high or the lack of customer longevity is found to be too short. Some promising businesses find these realities painful to bear.

So, what should fintech businesses do if their customer lifetime value is insufficient to scale revenues to the right level? The answer, of course, is identifying and implementing the right strategy to transform the current business model.

Most start-ups start with a “narrow and deep” model instead of “wide and shallow”. ‘Narrow’ means that they have a single product whereas ‘deep’ means that their focus on that product is all-encompassing. This allows them to deliver services better, quicker and cheaper than everyone else.

A narrow and deep fintech business can quickly build a competitive advantage in the market through its specialization and single-minded focus. This is because, like banks, wide and shallow fintech businesses do something of everything but nothing exceptionally well. But, in case the narrow and deep model runs into trouble and customers don’t stay long enough to contribute to the bottom line, there are two strategies fintech businesses can go for:

1. Opting for a wider and shallower route:

New-age financial businesses and fintech platforms can move into parallel markets with additional services. This allows them to expand their market footprint from an initial, simple core product and cross-sell by offering an ever-increasing range of products to their loyal customer bases.

The challenge, here, is to ensure that the focus on the original product doesn’t get diverted as it can dilute the brand’s success and value proposition. A failure to be a master of everything can leave the business as an expert in nothing. Expanding into more services also often necessitates additional skill-sets and technological frameworks that are beyond the platform’s core competence.

2. Staying narrow and deep:

But expanding geographically: This means businesses can take the same well-executed financial product out to newer markets in order to scale. But new markets may have incumbent players who have to be dislodged. The cultures and consumption habits in these markets might also differ and might not be conducive to replicating the success of the original product. Then there is always regulatory friction when new geographies are tackled. The geographical expansion also requires a different skill set to the original core competence of the platform.

The Indian fintech market has scaled new heights in the last 10 years, but the journey hasn’t been all smooth sailing. Businesses operating in this space faced major challenges in producing sufficient customer lifetime value for creating a profitable and defensible business. Fintech companies that tried to expand their offerings while failing to build on their core value proposition have experienced disappointment; their new models don’t work out, or they weren’t able to sustain the quality of service delivery. However, those who strictly focussed on the addressable market space of the core product were able to build a profitable business early on.

So, then, how do you identify the winners?

It is clear that, for a fintech business, it is crucial to focus on retaining customers as much as it is to acquire them in the first place. However, the path to success is one that emphasizes on creating a narrow and deep presence in a core market with a core product, as that demonstrates the ability to forge a sustainable path to profitability without diluting the value proposition.

Tim Nicolle

The author is CEO of PrimaDollar, a UK-based global trade finance fintech.

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