Posted on 15/02/2018

Customer scoring stimulates sales and simplifies credit management

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Do you believe in the benefits of customer scoring? That’s great! Now you just need to implement the framework. We understand that it’s not clear as day and there can be some challenges along the way.

The first pitfall: data

The first pitfall is data. Companies have a wealth of in-house information, ranging from purchase figures to payment patterns. Unfortunately, this data often sits in separate databases that are not linked to one another. The information itself also tends to be rather biased based on various factors. 

Let’s take the case of Customer A. You know A as a punctual payer, although in reality A is in serious financial stress. It only pays its main suppliers promptly. All other creditors have to wait for their money. As far as you’re concerned, there are no visible signs of danger, but A is definitely heading for insolvency.

Objective external data

Thankfully, there is an easy solution: supplement your insights with external data. Amongst other things, it will give you valuable information about the payment behaviour of your customer(s) when it comes to other suppliers. External data provides greater objectivity, which is an absolute precondition for taking the right decisions. Having external data will not only help you to detect potential threats, but will also assist you in identifying opportunities. Providers of business information, such as Graydon, focus not only on risk, but also forecast the growth potential of businesses. 

Draw the right conclusions

Now let’s go back to the payment patterns of Customer A. The company pays 80% of its invoices on time, 15% late and 5% very late. Translate those three percentages into a single metric. In this example, Customer A scores pretty well. Other, less exemplary customers can make grim reading. By simplifying the data, you can draw straightforward comparisons. 

“Boil down as much data as possible to a single metric– one that is usable and understandable.”

Leading to arguments

Customer scoring is not only made more difficult through a lack of objective data. Internal conflict between sales and credit management also throws a spanner in the works. Salespeople usually want to generate as much turnover as possible, resulting in them being too willing to grant customers credit. Much to the dismay of credit management, these payments have to be monitored closely. On the other hand, the debtor manager then risks reacting too abruptly if a good customer happens to pay late once. Much to the frustration of the salesman. This rigid behaviour leads to arguments. However, you can overcome this easily enough. Specifically, credit managers can develop a customer score or rating system in conjunction with their sales colleagues.

Implementing customer scoring

This exercise requires time, but is actually easier than you think. First define the parameters that are important to you when it comes to assessing a customer. These will differ from company to company, but will include payment behaviour, customer loyalty, growth forecasts, turnover, etc. You can then draw up a scorecard based on these criteria, combining all of the individual scores. Using weighting, you can finally arrive at a single value. Carry out a number of samples and check the score using a number of actual cases from your customer database. Consult and discuss. Take the time you need to do this so that everyone agrees on the final score or rating. Once you have this final score, you also have a permanent system that you can apply to all of your other customers. Then work with your sales department to draw up action plans that will benefit the whole company.

“Use the scorecard to establish action plans for the whole company.”

Practical application: win-win for both sales and credit management

The following example makes it much clearer to understand. Customer X sells office items and wants to establish a presence right across the market and service all customers. For each category of customers, Customer X has outlined a specific marketing and payment approach.

Group A contains all ‘dream customers’ – problem-free payers who you can always rely on. Company information from external suppliers also shows that these companies are healthy and have outstanding growth opportunities. All of the companies in group A receive a high-quality brochure. Three days later, they are visited by a sales rep. 

The companies in group B are a little less appealing. They receive a shortened version of the brochure that encourages them to get in contact. If any interest is displayed, sales may then opt for a personal approach.

C customers are companies that have a demonstrably greater chance of becoming insolvent and have no outlook for growth. They are also noted as slow payers. Yet X still wants to do business with them – but only if they pay up front. In a (budget-friendly) letter, C customers are offered a substantial discount in exchange for payment in advance. 

This case demonstrates how customer scoring creates a win-win situation for both sales and credit management. A well-defined customer scoring system stimulates sales and make debt collecting easier. The result: more turnover and fewer payment problems. The one condition for this is that sales and credit management sing from the same hymn sheet. If they do, it can only be good for your company.