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Customer scoring

A must for every credit manager

In customer scoring, you categorise prospects or existing customers on the basis of various criteria. The aim is to get a clear insight into the potential of your business contact. A positive exercise that stresses opportunities rather than risks. The advanced use of data and clever automation are key elements towards making customer scoring a success.

Why customer scoring?

Simply: because every business contact deserves a bespoke approach.

Or do you treat a customer who has contributed to your turnover for a number of years in the same way as a customer who only places an occasional order? The answer is obvious and yet many credit managers pull out all the stops when a customer fails to pay. This may be deemed as a drastic approach, and one that does not always take account of the actual circumstances or the customer’s payment record.

Or do you treat major, substantial prospects in the same way as small players on the market? Also in this case it appears logical for sales people to focus more on companies with the highest potential. 

You may well be applying customer scoring already without being aware of it, although it is bound to be based purely on gut feeling. Of course, properly implemented customer scoring goes beyond these simple examples.

The fact is that studies conducted by Graydon and Credit Expo have shown that barely 53% of credit managers classify customers into categories. This is a missed opportunity because without segmentation it is impossible to implement appropriate procedures and strategies. Still not convinced? If you do not segment your customers, you will never get the most out of your customer or prospect file.

Customer Scoring: The simplest way to improving profitability

What are the benefits of customer scoring?

More effective and more efficient credit management

Thanks to customer scoring, you can focus sharply on the customer. It means that each customer gets a bespoke approach. When major customers pay late, deal with them personally. In the case of small, less profitable customers, you can send them an email or a letter by post. By implementing customer categorisation, you gain time and you will be working much more efficiently as you will have full visibility and gain an understanding what to do for each type of customer.

More profit and more satisfied customers

Can you mention your most profitable customers off the top of your head? They are not necessarily the biggest ones. A lot depends on their payment behaviour and the efforts you have to make to get your money. A customer who pays late costs you energy and therefore money. Thanks to customer scoring you will get a clear picture of the profitability of all your customers. Use the segmentation as a basis for realistic agreements on e.g. supply and payment conditions. Customers who pay in time can be offered better conditions. Be clear and transparent. Your customers will be grateful to you.

More efficient sales

And why not use customer scoring to categorise your prospects? Collect as much information as you can about payment record, creditworthiness, growth potential and the market in which the prospect operates. It alleviates the need for the sales department to spend time on customers who cause problems afterwards.

How to implement customer scoring

Step 1: Determine scoring criteria

What is it that makes the difference between a good and a bad customer? This simple question is an excellent starting point to determine the criteria you will use when scoring your customers. Tip: involve your colleagues from the sales department in this exercise, in particular if you are also going to score prospects. Need inspiration? Below are a few frequently used criteria:

Customer size

Do you prefer small companies or would you rather have large firms? It’s up to you.

Creditworthiness

A healthy company deserves a different approach than one on the verge of bankruptcy.

Payment behaviour

With slow payers you will have to be strict. With this in mind, take a close look at the payment record of your current customers. For prospects you can use credit information for this purpose.  

Order size and ordering frequency

Customers who place large orders regularly are more interesting than small ones that only place an order once. 

Sector

The sector in which an organisation operates is also important. When dealing with public corporations, you can be certain to get paid. Even though you will often have to wait for your money longer. In the food sector, the opposite is often the case.  

Step 2: Start with a simple matrix

Have you pinpointed all the criteria? If so, you can go ahead putting your customers into categories on the basis of the criteria. Don’t make things too difficult for yourself. Start with two properties that are important to you and put them in a table. The outline below shows the “size” and “payment behaviour” criteria. You can create various categories for both criteria, e.g. fewer than 20 employees, between 21 and 50, more than 50.

PAYMENT BEHAVIOUR / SIZE

Size: Companies with

  • 1-20 employees = column 3
  • 21-50 employees = column 2
  • >51 employees = column 1

Payment behaviour:

  • Due date not exceeded = row A
  • On average exceeded by 30 days = row B
  • Exceeded by more than 30 days = row C

Step 3: Categorise your customers

Put each customer in the appropriate segment.

Step 4: Determine your policy

An overview is useful but you can get even more out of it. Therefore, determine for each category what your specific policy should be. The segment at the top left shows your exemplary customers: large companies that pay promptly. With regard to these organisations, you can safely assume that when they fail to pay a mistake has been made. It means that you should not immediately send a sharply worded reminder but first phone your contact. Major customers that pay badly can be dealt with more strictly. After a first reminder, you could for instance immediately involve the sales department.

Tip: Be as specific as possible. For each category, work out an appropriate credit management process. This will be different for each company, but if there is a consistent failure to pay the process could be as follows:

Payment reminder by e-mail 5 working days after due date
 +3 working days: phone call/calls
+5 working days: written reminder
+5 working days: phone call è +5 working days: involve sales
+5 working days: registered letter
+7 working days: refer case to a debt collection agency or a lawyer.

Step 5: Regular monitoring

Customer scoring is a dynamic process. It is not limited to mapping out your customers and processes just once. The fact is that customers may develop from bad to prompt payers (and vice versa), and it is therefore important that you check regularly whether your customers still belong to the same category.

Step 6: Automate your customer scoring

A manual matrix is perfectly suited to companies with a limited number of customers. But companies with hundreds or thousands of customers cannot conduct customer scoring manually. They should automate customer scoring. It goes quicker and prevents errors.  

How to score potential customers

There is no need for you to wait until a company is your customer before scoring it. It is in fact advisable to screen prospects beforehand. It will enable you to send out your sales team with a more targeted approach.

Perhaps you also receive leads coming in via your website. Even then, screening is advisable. To make things easier for potential customers, you may ask for them to enter a minimum number of data. However, you do not need a lot of data to know which company it is. An IP address, an email address or a telephone number is often sufficient. And once you know this, you will also know the sector in which the company operates, number of employees, creditworthiness, etc. You will able to put the lead in a category and follow your standard procedures.

Is it a company with high potential? If so, your sales individuals will be very eager to pay them a visit. Or is it a company that has been rejected by a number of other suppliers and is now trying to find out how you will respond? Give them a ring and agree appropriate supply and payment conditions.

How to successfully implement customer scoring

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