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This is the second blog of a three part series on risk-debtor management. In this blog we explain how companies should be -somewhat- lenient towards non-paying customers but also stringent when they have too. As we have discussed in our earlier blog, on average, Product-as-a-Service (PaaS) companies spend about 5-10% of their revenue on risk-debtor management, a substantial amount. Careful debtor-management is critical, as you do not want to distance customers with very stringent debtor-management. As a company you'd rather keep a customer from churning or becoming non-paying, and achieve a happy -paying- customer base.
What is Debtor-Management?
Before you activate a customer you will need to make sure that you have captured a mandate for Direct Debit or ‘Automatische Incasso’ that allows you to start recurring billing, in case of most propositions this could be €0.01 cent, their first periodic payment, or for example shipping fees. To have a good debtor-management relationship, it is quite common to let the client pay X amount of months in advance in their first payment. Furthermore, some companies charge a deposit to make sure that in case of non-paying customers they have something to fall back on. For B2B-transactions it is even more important that you capture the (e-)mandate well, since they have no charge-back rights like consumers have in Europe.
Then, it is important that when a customer could not pay because of insufficient funds, you are able (and allowed) to retry two more times (three times in total) to make sure that you can deduct the money, as it could be a temporary case of insufficient funds. If that did not work; it is common to send the customer a message stating that you have tried three 3 times and provide them with an alternative payment method or link. Friendly reminders help best here, as you always want to strike a good balance between warnings and official extra charges due to failed payments. You don’t want to loose a customer as they might have 'valid' reasons for not being able to pay. PaaS-companies noticed that friendliness is key here in keeping a good and healthy customer relationship.
It remains important to keep a good documentation of retries, dunning messages and warnings here, as they might help you at a later stage if possible debt-collection is necessary. Documentation surrounding the debt-management process is therefore also one the most labor intensive (and thus expensive) parts of a whole process. Automating this can often save quite some time. Debt-collection should always be the last resort, more on this in the third and last of this blog series. First some important lessons from the PaaS-industry.
Best practices within the industry include:
- A lot of companies can already decrease debtor risk hugely by adapting the proposition. Contract periods (little flexibility), initial payment or deposits are good actions to undertake here. Creating a good balance between easiness of sign-up and fixed contract terms is crucial. Giving a first month for free often results in a higher non-paying risk.
- In a normal B2C-proposition consumers have 56 days to charge-back their money, even if they did receive the product and/or services. This may lead to a large time spending on debtor-management and case building. Proper administration of all processes are thus important, good software helps here.
- Most companies acknowledge that designing a good debtor-management flow (architecture) to limit non-payers is a huge value added activity.
- PaaS-companies, often with expensive assets, generally value getting back the asset, over getting their money back for the months unpaid.
- Have a good dunning system in place; text messages and SMS work pretty well; these are a more personal approach then emails or official dunning letters.
- Many companies have a high cost in charge-backs; these are expensive for one, and require administrative load because companies need to gather evidence and documentation to show they billed correctly. Again documentation proves to be an important aspect.
- Companies need to send a message stating they will deduct money from the bank account of consumers in time; this will also help decrease the non-paying customers. Often providing the option to change the date of billing is a very useful tool in decreasing the debtor-risk, as different people get their salary on different days.
- Planning a good debtor-management strategy is well worth the effort as most PaaS-companies noted. Easy and solid documentation through software platforms was often highly valued.
As we can see from PaaS-companies within the industry debtor-management is an important and often overlooked aspect of any subscription or recurring business model. Having the right flow and systems in place can help companies get the most out of these inconvenient situations. Get in contact with Firmhouse to learn how our software can help you in providing a pleasant debtor-experience.
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