Gravity Payments — Marketing Reinvented

What Gravity Did?

In April 2015, Dan Price increased the minimum salary of his employees at Gravity Payments to $70,000 a year. The average salary at this small business lender was at $48,000 a year. This would result in a $2.2M additional expense to the company’s profits. So why would Dan pay his employees 46% more for doing the same job?

To understand this, we have to understand the field in which Gravity Payments operates in — Small Business Lending.

What is Small Business Lending?

In the US, there are 28M Small Businesses. And because businesses have all sorts of expenses, they require working capital to maintain operations. Banks are not always willing to lend to them because sometimes they might be too small or too fragmented. The average business applying for such a loan has ~$570k in annual revenues, been around for ~8 years, but span over 700+ industries.

Each industry has it’s own unique fingerprint. They can range from seasonal businesses: pool cleaning and ice cream shops, to year round businesses, such as restaurants in the middle of a metropolitan city.

Small Business Lenders are willing to take the risk and lend to these businesses because of the high interest that they put on their loans. The industry leader, OnDeck, have on average, a 52% APR on their loans.

Just a reminder, every state has it’s own usury rates, the maximum rate you can charge interest on. For example, New York state is only 16%.

How Gravity took the $2.2M of Marketing dollars and made it “organic”

Most people find lenders through Google search. Therefore, lenders spend A LOT of money on Google Adwords. OnDeck spends $10k/day on the term “business loan.”

Gravity payments was also spending a lot of money on Google Adwords, until it decided to switch it’s marketing strategy.

By doing something “crazy” that would get lots of headlines, it would 1) increase the company’s visibility, 2) give Gravity a lot of goodwill, and 3) supercharge their SEO.

SEO is how well the website ranks on Google based on a search term. One of the largest drivers of SEO are backlinks — sites that link back into another site. News outlets — CNN to Inc Magazine to popular blogs — Business Insider to Huffington Post picked up the story.

Now Gravity Payments can stop spending on paid acquisition via Google Adwords and rely solely on organic traffic.

How Competition is not Great for Lenders

With attractive lending rates bring lots of willing lenders. Basically the barriers to entry in becoming a lender are close to nothing. Jared Hecht, the former founder of GroupMe, founded Fundera — a marketplace for lenders to compete on loans.

Because small businesses are only valuing the rate at which the lender will lend to the merchant, unlike a startup evaluating a VC’s connections to talent, possible acquiring companies, etc — businesses tend to go for the cheapest loan.

However the interest rates on these loans have a lot baked in. Because loans by nature can default at anytime in their lifespan, the lender has to protect themselves. These lenders do their own due diligence on the merchant, and based on the outcome, provide a rate they feel comfortable with.

In theory, there is a bottom to the competition. A lender that is willing to provide a discounted rate just to win the business, will not be around for very long.

Using Data to Beat the Competition

The quality of the lender can be summed up with 2 metrics: the aggressiveness of their rates and how low their default rates are. OnDeck was the first lender to apply machine learning data to their underwriting process. The OnDeck score spits out the optimal interest rate for an application by looking at 100+ external data sources, 10M+ small businesses in it’s database, and 2000+ data points per application.

They use their previous wins and losses as lessons to train their algorithm.

Now, rather than a human underwriter having to spend weeks doing their due diligence, the algorithm approves or declines an applicant almost immediately.

In a fiercely competitive market, throwing money at the problem (outspending on Adwords) is not a scalable solution. One must outwit the competition with new ideas on marketing or just be smarter than everyone else. Learn what your audience demands, and invest in giving it to them.

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