Disastrous debt interactions -and how to avoid them
Disaster #1: Losing Customers
“Indebtedness is both a financial and psychological phenomenon. Absence of emotional intelligence in the collection of debt frequently results in disastrous interactions between collector and customer.” — John Bachman, PhD from “The Psychology of Debt”
Early in the development of Positive Collections Strategies – PCS – we found this quote in an academic journal, and it resonated with what we’d been hearing from the hundreds of customers and collectors we interviewed.
Today, with the Covid-19 income crisis, debt is once again a highly emotional issue, and it’s all too easy to trigger the wrong feelings that lead to bad outcomes.
Let’s talk about one such disaster resulting from an “emotionally-deficient” collections strategy — losing customers.
But wait: aren’t we talking about “bad” customers who do not pay their bills on time? “Good riddance to them!” you might be thinking.
What about all the good money you invested in acquiring those customers?
And won’t many, or perhaps even most, of those “bad” people get back on their feet and become “good” customers again once the economy turns around?
Finally, contrast the damage an angry ex-customer could do by posting negative reviews or filing a regulatory complaint — with all the new business a happy customer could generate by giving you referrals.
The truth is that coming to a peaceful accord with your debtor is a win win: saving bad debt losses at the same time as it saves customers. A little “back of the envelope” math can demonstrate this.
Consider if you have 100 seriously delinquent customers, with an average balance of $1000. By seriously delinquent, I mean they did not pay over 3+ billing cycles, and did not respond to polite letters and phone calls.
Scenario #1: “Annihilation”
Let’s say you threaten to sue all those delinquent customers and that succeeds in getting 20% of them to pay in full. Consider the other 80%, however. Not only do they remain non-payers, chances are they will also become lifetime non-customers. Who, after all, wants to do business with a firm that threatens to sue them in the middle of a national crisis?
Here’s the hypothetical math:
Bad debt write-off ($100,000 receivables minus $20,000 collected): $80,000
Cost @ $200 to acquire 80 new customers to replace the ones you lost: $16,000
Net loss: $96,000
And that’s before you consider the “knock on” effects on your reputation from negative reviews and the like.
Scenario #2: “Negotiation
How about instead of making threats, you make positive offers to settle each of those $1,000 accounts at an average of $600, and payable in 3 monthly installments of $200. Because you met them part-way, more customers will accept your offer. Let’s say it’s 60% or 600 of them. (The rest might be too hard-up to pay anything.) Here’s the revised math:
Bad debt write-off ($100,000 receivables minus $36,000 collected): $64,000
Cost @ $200 to acquire 40 new customers to replace the non-payers: $8,000
Net loss: $72,000
By resisting the impulse to play hardball, you cut your dollar loss by one quarter and the number of customers you lost by one half. And what about the customers who didn’t or couldn’t pay? The door is still open to them to return (unlike ones you’ve threatened to sue. ) Once the economy improves, you can ask them to settle that bad debt as a prelude to doing business once again.
Even though these numbers are hypothetical, they’re not out of la la land. Over 18 years in PCS, we’ve seen results like this, or better, over and over again.
That’s the win win for today. Next time we’ll talk about avoiding the “scorched earth policy” of ruining a customer’s credit record.
Stay tuned.