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This is the first of three blog series on risk and debtor management. Risk & Debtor management are some of the most important processes that a PaaS-company should perform.
This process can be described best in three distinct steps:
- Acceptance Checks; the acceptance and rejections of potential clients to achieve a solid customer base.
- Debtor Management; keeping track of non-payers and reminding them to pay.
- Debt-collection; chasing after non-payers and retrieval of the assets.
In the first of these three blogs we will discuss the first step; Acceptance Checks. Arguably this is the most important one as it influences the other two steps in a crucial way.
How PaaS companies should deal with risk-debtor management
Risk and debtor management are some of the most overlooked aspects of any Product-as-a-Service (PaaS) company. They are the key to high retention and low churn, and might ultimately be why certain PaaS companies succeed and others do not. Good risk & debtor management is important, as a good client base can save you a lot of trouble and money over time. Hence, this blog series might be one of the most important ones we have yet produced.
We interviewed 12 companies that are currently providing (or going to provide) subscriptions or Product-as-a-Service (PaaS) propositions. In this blog we provide their best practices and summarize our most important findings. First things first, it is important to take a look at the current process.
How does the current risk-debtor management process look like?
Most PaaS companies currently have a process that can be described as follows;
As you can see the risk-debtor management flow consists of the three main building blocks; acceptance checks, debtor management and debt collection. All three blocks are vital in achieving a good bottom line. We will discuss them one by one below, but first we like to show how (potentially) big this challenge can be:
Size of the challenge
Because of (potential) insufficient risk-debtor management, companies tend to spend the following percentage of their revenue on non-paying customers, debtors, administration, depreciation of assets and debt-collection.
- 10-20% of their total revenue, including about 0,25 FTE.
- 5-10% of their total revenue, including about 0,1 FTE.
- 10% of their total revenue they’ve calculated for this in their business case.
- 5-10% of their total revenue. Debtor management has been well automated by now, but it is also a large mental burden; it takes away focus. Spent 5% of my time a week on this, which I would like to put in the business instead.
- 4-5% of their total revenue, they have 0,2 FTE working on this problem; chasing debtors and establishing/compiling files.
- N.A. of their revenue but had only a couple of cases where they lost a large sum of money equalling to more > €1500,- per case.
- 5% of their total revenue on debtor-management, however they retrieve quite a lot back from non-paying customers.
- 5-10% of their revenue and about 2-3 FTEs that spend some of their time on debtor management. Their priority is to lower the cost of chargebacks and payments cost/fee, as this is currently a high expense.
‘On average PaaS companies spend about 5-10% of their revenue on risk-debtor management, a substantial amount.’
However front-runners in this industry have showed this does not have to be the case, as long as you apply solid acceptance checks!
This step involves risk identification, fraud prevention and debtor default mitigation. A good set-up in this step will result in a positive compounding effect down the line. In essence, debtor management and debt-collection will be a lot lower if you do this right. We have noticed that currently there is no clear architecture among most companies to put prospects through an acceptance flow. Hence a good process of determining who you consider good clients to have is essential.
Furthermore, we noticed a lot of companies have built propositions that are highly likely to have a large debtor-base, and some companies have no acceptance checks or other checks in place at all. This will result in large potential cost down the line, that could have been prevented. This is how some of current PaaS-companies manage this at the moment:
Key take-aways and best practices within the PaaS-industry:
- Companies learn it the hard-way; and often start with no or ‘bad’ acceptance- checks; causing unnecessary high debtor costs. One of the interviewees explained:‘If the input of customers is good; you are already 2-0 in front.’ For successful PaaS companies it is quite common to reject a majority of their applicants. With one company rejecting even more than 60% of all potential clients coming in.
- We noticed that having one credit-checking agency is already a really good improvement, however some companies even had multiple credit-checking agencies to check credit-worthiness. Then when you receive one negative score; better be safe than sorry and decline that customer.
At Firmhouse we also believe that companies should not sell to people that would not be able to afford it, credit-checks can help with this. However, PaaS also provides a unique opportunity for consumers to get access to more premium products they ‘normally’ would not have been able to get access to, hence a good evaluation if they can really afford it is important here.
- Often these credit-checks are complemented in the acceptance check process with iDin-checks, cross-checks of bank account details and subscription details, social media checks or additional address checks. To make sure fraudulent names, postcodes or addresses are not served again it is increasingly common that companies have a blacklist of people or addresses they don’t deliver to.
- Build your proposition in such a way to mitigate potential fraud; if you want to provide the first months for free, make sure to at least have some deposit or safety net in -like a longer contract period- in place. Working on your proposition is another overlooked aspect of risk-debtor management.
- Sometimes beforehand you can already pick up some red-flags when a person shows interest; like bank choice (e.g. Bunq bank), but also types of questions they ask ‘Is the amount paid once or per month?’. Other red-flags could be certain postcodes or areas where they live, social media profiles that do not match up, different names on invoice and subscription. As explained, a potential address check, fraud and blacklists could help here.
- Almost all companies acknowledge that credit-checks are an effective tool for sifting potential customers. However, PaaS companies also clearly acknowledge the limitations of these checks. As they expect around 20-30% of the cases are actually prevented by this. Often that is the reason additional measures are undertaken in the acceptance process, to further increase the number of prevented cases.
As a reminder, credit-check companies do not have 100% coverage, and a very complete acceptance check process won't give you infallible results. There will always be a chance that fraudulent clients slip through the cracks. Be aware that 100% security does not exist. Make sure that you at least have some sort of acceptance in place before you will activate them as a customer, your future self will thank you later!
If you want to be notified by any future blogs on Risk-Debtor Management make sure to subscribe to our newsletter. If you want to know more about the future features that Firmhouse is building in regards to risk-debtor management, get in touch with our team!
P.S. It is quite common for companies that have executed a good acceptance flow, to underestimate the worth of a good process as they don’t have an idea of ‘how bad it can be’. With our experience within the sector we can now say that is a very substantial part of any PaaS business model. A potential ‘survivorship bias’ is at place here.