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Many organisations still treat their debtors in the same way when sending out payment reminders. The type or size of the customer is not taken into account, or else people proceed on the basis of gut instinct and experience within the company. Loyal customers are given the benefit of the doubt, or perhaps a new, large customer that has just been won over is treated more in a more relaxed manner.
And even if segmentation has been applied, it remains rather limited. With, for example, a division into the key accounts, where the higher amounts of money are handled, and “other” categories.
But treating all your customers in the same way will not produce the best results. If you really want to lift your credit management to a higher level, thorough segmentation of your customer base is a must. Only then can you start working in a more customised way.
What is customer segmentation for debtor management?
The explanation is quite simple. You divide customers into homogeneous groups based on important criteria. These can be groups of all kinds: based on the size of the customer, the credit risk, the type of customer or customer group, but also based on figures known within credit management such as the outstanding amounts owed on invoices, or the number of times invoices have been issued.
The purpose of segmentation is to make your processes in credit management and debtor management work more optimally and efficiently.
Why customer segmentation is so important
Segmentation and profiling give you a better idea of who your customers are. They also help with decision making. After all, some customers require more effort and resources.
Improving customer satisfaction and experience
Segmenting customers dramatically improves customer experience (CX). When you keep communication with customers personal and thus work in a customised way, this improves customer satisfaction. By working with segments, you can better organise and implement this “customised working”.
Using an efficient communication process, you address customers in a specific way, in their own language, and through the desired communication channel. You allow the content of the message to vary based on numerous factors, such as the size of the company, its type, sector and corporate culture. For example, communication with customers who almost always pay on time is handled differently from communication with customers who need to be constantly followed up.
Clear workflows and visibility into priorities
An inefficient process will cost you money in the long run. When you start classifying customers based on payment behaviour, you can assign priorities. When you know which customers pay on time and which don’t, you can organise and adapt your debtor management accordingly. More time and resources will then be spent on customers who are likely to pay late, and less time on customers who you know will pay on time.
This prioritisation makes it easier to create action lists within accounts receivable management and offer them via portfolios to team members for processing. Because these lists don’t include unnecessary actions, the productivity of each team member increases. For example, you no longer need to call certain customers who you know are going to pay anyway, but a polite payment reminder via email is sufficient.
Segmenting customers not only has advantages for accounts receivable management; it can also be a useful tool for managing the commercial team.
Adapted to changes in customer behaviour
Customers do not necessarily remain tied to one segment. For example, a customer may experience a temporary difficult period, and then return to paying on time. The segment to which this company initially belonged therefore changes with it. Quality software for debtor management anticipates this and can automatically assign customers to another procedure when the underlying data changes.
You can link certain actions to each segment, such as a discount for paying early enough or other incentives. Good payers who miss a payment once get a slightly more polite reminder than customers who persist with bad behaviour.
For customers who regularly dispute an invoice or pay late, you can apply different credit terms, or even deny credit until the outstanding balance has been cleared. You can even charge extra fees to customers who regularly pay late. Customers who have a temporary payment problem can be offered an instalment plan or other payment arrangements.
In organisations where the capacity to manage receivables remains limited, segmentation is of paramount importance. Segmentation makes it easier to distinguish between those customers in arrears who need personal contact and those who respond to automated messages. In this way, the valuable time of credit collectors can be reserved to make the contacts that are really necessary, while other parts are on autopilot.
How should you segment your customers?
Which segments you apply for your debtor management strongly depends on the type of organisation and the business processes that are used. It is important to remember that customer behaviour is not a fixed given and is subject to change. Segments should therefore be reviewed and adjusted regularly.
Know your customer
For marketers, it is the most normal thing in the world: gaining insight into the behaviour of the customer or customer groups. Because if you predict that behaviour well, you can take targeted action.
It should be no different for debtor management. In which sectors are your customers active? Do they serve one or more sectors? What are the developments in that sector? What is the payment behaviour in that sector?
Payment behaviour remains one of the most important characteristics on which to segment. For example, customers who pay their invoices on average within 30 days can be classified as fast payers, while customers who take more than 30 days on average can be considered slow payers. Within this classification, you can further refine. Think for example of the outstanding amount.
Historical payment data are important but other information about your customers also plays a role. For example, you may be able to deduce from your contact with a customer that they use certain tactics to keep postponing the due date of the invoice. So look for patterns and see if they are chronic. That kind of behaviour can help you segment.
A pre-condition is of course that such data are kept via notes on a customer record. In iController you can consult all file history in one place.
Always try to estimate, insofar as possible, what you need to do to get a customer to pay in time. For customer A it might be an appropriately timed communication, for customer B a payment reminder at a fixed time.
Some customers still prefer paper invoices, others go all out for e-invoicing. The invoicing method calls for a different approach to segmentation and to setting up the procedures for these segments.
Old customers versus new customers
You can set up segments based on how long you have been working with certain customers. A loyal customer may require a different approach to a new customer.
The historical payment behaviour of a new customer is, after all, still unknown to your company: a solution could be to park this customer in a temporary segment for new customers.
Creditworthiness and risks
Risk management is an integral part of good credit management. Not only do you assess new customers on their creditworthiness, but it is also best to monitor the existing customer base continuously.
Knowing which customers show the most risky behaviour gives peace of mind and provides security. For this, you need to rely on trade information and data from external credit insurance companies. But you can combine those data with internal data such as payment behaviour.
At iController we think the credit score is so important that it is embedded in our tool. Apart from the credit score, which is provided by one or more external parties of your choice, an additional variable is integrated in the risk score: the specific payment behaviour of your company.
This way, you immediately know which customers show a high, average or lower risk, and you can, for example, allocate more resources to customers with a higher risk who are still inclined to pay.
Procedures can also change when a customer’s risk level changes and can be adjusted depending on the customer’s profile and personal preferences.
Customer size and turnover
The amount you invoice to each customer can be an important indicator when segmenting. Debtor management may be easier to handle with larger customers that have well-resourced financial departments, as opposed to smaller customers, which require a lot of time in relation to the amount to be collected.
How should you implement a customer segmentation strategy?
- Determine why you are going to segment.
- Identify the customer segments.
- Adapt the debtor management, procedures and workflows to each segment. Find out which communication method you are going to use, set up templates (in different languages if you work internationally) and link these to procedures. Set up these procedures as automatically as possible, with the right software.
The automatic payment reminders are different for each segment, from polite payment reminders via e-mail to stricter communication via a registered letter. It is up to the CFO or credit manager to work out these procedures as well as possible.
- Keep adjusting segments and procedures
Segmenting your customers may seem like a daunting task, but the advantages it can bring more than compensate for the effort required. Software for debtor management such as iController really helps you work efficiently with segments. By setting up automatic procedures with segments, the software will take a lot of manual work off your hands. No two customers are identical, so don’t treat them as though they were.
Segmenting also helps improve your cash flow, encourages more cooperation between departments within the company, and ultimately helps your company grow.