Heading Off Collection Problems - A Four-Step Process to Balance Bad Debts
"Bad debt is like a utility bill," says the credit director of a New York City-based music and book club. "That is, if you want a 'zero' utility bill, you have to accept an office with no light. Then, you can't get any work done. However, if you use too much light, your utility bill is too high and you can't make a profit." The key, then, is to decide how much bad debt is tolerable to operate your business properly.
But he doesn't just wait for a collection problem to land on his desk. "It's too late by that point," he says. "There's little you can do to ensure profit once a debt has been incurred."
Instead, he involves himself in the business from beginning to end, and does all he can to find customers who are, from the start, good credit risks.
He offers four steps that have helped maintain high profits.
- Screening. He spends a great deal of time and effort on the application procedure. He wants to be sure that the credit they extend will be collectible.
The club's membership application, although very short, is an extremely effective screening tool. It asks only for name, address, type of music preferred, a list of the recorded products the applicant wants, and whether or not the applicant has a telephone and/or a credit card (without actually asking for those numbers). With this information, the club can determine if an applicant is a good credit risk. A lot can be learned about an applicant by the address, the music selected, and whether or not the applicant checked the "Yes" boxes for telephone and credit card.
"Most companies have very lengthy applications, asking about age, place of employ meet, educational background, and so forth," he observes. These companies are well informed, but the more complicated an application is, the fewer applicants it will attract. "Direct mail survives on numbers. We can't afford to have our application turn anyone away."
- Working With Marketing. He works with the club's marketing department concerning the ads it plans to run and the media it plans to use. Demographics, he knows, have an effect on credit and collections. "In other words, we don't want to advertise in a medium where we will get high response rates, but poor performance," he says.
- Working with Customer Service. Working with Marketing insures that the club will attract the best memberships. Working with Customer Service ensures that otherwise good memberships don't go bad. "It's very important to 'nurture' your receivables," he notes. "The success of our club is based on longtime, satisfied members."
When the club sends a member a bill for products shipped, he wants to be sure that
- it is for the products ordered,
- it is clear in terms of its messages/requirements, and
- the member received the products and is satisfied with them.
- Collection Procedures. The club sends out reminder notices to slow-buying members, telling them that it is in their best interest to place some orders before their time runs out. If a member does not make the required number of purchases, he or she receives a bill for the amount due, but also receives a club brochure so that an order can be placed. "We don't believe in making people pay for something they don't receive," he notes.
If members don't live up to their commitments, or if they order products and do not pay for them, he relies on traditional collection letters and collection agencies. "I don't like the idea of calling overdue members," he says. "It causes negative reactions, and our tests show that it really isn't cost-effective.
"Several thousand of our customers have been with us for over 20 years," he concludes. "And many customers have purchased over $1,000 in products during their membership." Which shows that a good credit plan can lead to record profits.
Editor's Note: This article originally appeared in the Credit & Collection Manager's Letter.