February 2005 - Grasping the Credit Concept

Why is credit and collection management important? Establishing a sound credit and collections policy will stimulate response, reduce promotion costs and protect your company from non-essential write-offs.

By Robert Graham

In direct marketing, offering credit to your customers and prospects is critical to your success. When you fulfill an order from a bill me, multi-pay or easy-pay offer, COD shipment, installment payment plan or continuity program, you have created a “credit situation” with your customer. Realizing this can assist you in effectively using credit to dramatically boost your response.

An effective collections management policy can prevent an easy pay and other types of credit shipments from inadvertently becoming a free offer. It is always important to remember that it is never a sale until it is paid. Used effectively in tandem, credit and collections have a major impact on the success of your marketing strategies-and ultimately your profits.

If given the option, most businesses would operate on a cash-only basis. Keeping this in mind, offers that allow the consumer to use your product or service in advance of payment in full may run a risk of creating bad debt.

Most people make the assumption that any bad debt, no matter how small, is too much. This, however, is a fallacy and marketing misinformation. Avoidance entirely of any bad debt may cause you to miss significant profit opportunities, because credit is a sales stimulator and marketing tool.

Companies should balance the credit offer to maximize paid responses. Credit policies considered “too tight” restrict growth.

As a marketer, you have several leverage opportunities to make your sale. Your most important leverage opportunity is your audience. If you don’t reach the right person, it doesn’t matter what you say. The next important opportunity is constructing the right offer for your audience. Creating the right offer entails fine-tuning a combination of product, price, promotional incentive and credit terms that your customer (or prospect) will find irresistible.

However, many direct marketers overlook incorporation sales stimulating credit policies as an integral component of the offer. Unfortunately, the finance department usually generates most credit policy construction. Often this is a shortsighted approach since credit is really a marketing tool deserving of marketing guidance at the very least. A good credit and collections policy will:

  • Stimulate qualified response
  • Reduce promotion costs
  • Protect from non-essential write-offs

Direct response buyers expect the extension of credit. As a marketer, use credit to overcome consumer resistance to buying now. It is as powerful as using comprehensive product descriptions, guarantees and testimonials to overcome resistance to purchase.

The extension of credit, and the subsequent risk of bad debt, should be considered a variable cost of doing business. Credit policies should be evaluated based upon how they contribute to reaching growth and profit objectives.

Balance the credit offer to maximize paid responses. “Too-tight” credit policies restrict growth, while “too-loose” policies reduce profits. The goal is developing a coordinated credit and collections policy by loosening the front-end credit policy to optimize sales, while “tightening” the backend collections system minimizes bad debt.

Which set of credit and collection policies is right for your business?

Your first consideration should be to bring policies in line with business and marketing objectives. A business objective of aggressive growth will drive different policies than a goal of maximizing profit (see chart on the left).

In the pro forma, using a more liberal credit offer, such as an easy payment, free trial or installment offer, led to a response lift of 25 percent with the same media dollars spent (see chart below). This resulted in an increase in net revenue and the number of additional customers by 11.8 percent. The benefits of this policy example far exceed the write- off that occurred.

When reviewing your credit offer, your company’s “personality” will further reduce your credit policy options. A cataloguer or continuity program with high customer lifetime values must operate differently from a short-form, single pay direct response marketer. Some factors to consider include:

  • Billing amount
  • Your cost of goods
  • Timeliness of your product (Is it a holiday or seasonal product?)
  • Variable fulfillment, delivery and billing charges
  • Payment history of the market segment
  • Long-term customer values
  • Payment history of similar credit programs
  • Competitive practices in your market
  • Cost of account screening and recovery vs. the cost of order fulfillment
Credit Policy - Pro Forma
This chart shows a range of credit policies on the sales and profits of a hypothetical company.
Credit Policy
Media Budget
Response Rate
# Orders
Average Sale
Net Sales
Pay Rate
Write Off
Net Revenue
Paid Customer
Tight $500,000
Control $500,000
Looser $500,000
Variation from Control
Tight $ -
$ -
Looser $ -
$ -


Customer Retention & Collection Effort - Pro Forma
Customer retention and collection campaigns must be in place to reinstate customer relationships.
# Accts Recovery
$ For Recovery
Recovery Rate
Gross $ Recovered
Recovery Cost
Net $ Recovered
# Accts Retained
Cum Paid Customer
Customer retention
Customer retention

As more aggressive credit offers are used to stimulate sales, the likelihood of payment default will grow. It is crucial that customer retention and collection campaigns are in place to reinstate customer relationships and promote cash recoveries. Following are seven customer retention and collection strategies that might help you.

  1. Your approach will differ depending on the type of default and recovery campaign objectives. The most common defaults occur from bill me, negative option continuity program and credit card, multi-pay offers.
  2. When a payment default occurs, your customer needs to be notified of the situation and what remedies are available to him or her.
  3. Once a default has occurred, you’ll need a billing system that will allow scheduling a follow-up campaign and post payments, coordinating a contact that includes notifications and telephone contact, and stopping action once the account is resolved.
  4. The initial recovery campaign is postured as a first-party contact (the marketer) with the payment and retention of the relationship as primary objective. Acquiring a customer is expensive and the capability to sustain that relationship for future sale is paramount.
  5. Once a first-party contact campaign (typically a letter series and inbound telephone customer service) is exhausted, proceed to third-party contact or collections. This service can only be provided by a licensed collection agency.
  6. Depending on the systems and call center capabilities of your fulfillment resource, the ability to resubmit a credit card or send beyond a single follow-up letter for a defaulted account is limited. Remember, the core competency of most fulfillment houses is the pick-up, shipping and billing, as well as providing customer care on the order.
  7. In the past several years, collection agencies have recognized the need to both first- and third-party outsource solutions for direct marketers. They have integrated a process that blends accounting, mail and in-bound and outbound telephone resources to follow up on consumer accounts-both customer retention and collection recovery campaigns.

An effective recovery effort on the backend facilitates credit terms that yield significantly higher responses and order rates. The retention and collection campaign that handles bad debt is self-funding, yields additional revenue and customers.

Robert Graham is senior vice president of the consumer division of SKO Brenner American, an outsource solution provider of billing and collection resources. He can be reached at (928) 777-8813, or via e-mail at [email protected]. To submit comments, point your browser to creditfeb.marketing-era.com.


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