Another element, which is usually not included in the collection costs, are costs arising from insufficient quality of the credit and collection systems as well as failures in the functioning of the entire organization. The main reason for their exclusion is the difficulty of calculating them, so we will have to settle for a few examples of such costs.
Time of sales/service personnel and others to assist with the collection activity.
A significant component is the time dedicated by people who are not professionals in the field to the collection effort: salespeople, service people and other elements in the organization such as drivers, technicians, and other employees. The alternative cost of hiring a salesperson for collection activities, which is practised in some organizations, can be extremely high (sometimes up to 50% or more).
Managers time
The administrative overhead is also a considerable cost added to the other collection costs and is difficult to calculate. For example, it is difficult to estimate the loss of business of a salesperson or sales manager due to spending time collecting money from customers.
Settlement discounts
Part of the collection activity generates credits as a “gesture of goodwill” – for example, when the customer, during the negotiations on the settlement of his debt, requests a credit in exchange for immediate payment of the debt. When the amounts are reasonable, many organizations tend to adopt the method to advance the client’s payment and prevent his transfer to legal treatment. However, this is an expense section that must be strictly monitored since an unethical collector may grant customers large credits in order to increase his collection results compared to others.
Credits monitoring
Collection activity from customers sometimes leads to requests from the customers to receive partial or full credit for the debt, and sometimes, the customer conditions the payment of the balance of the debt upon receiving approval from the organization for the credit. Giving credits to customers requires skilled personnel to control those credits to prevent inappropriate credits from being given to customers.
Customer Churn in Collections
A significant loss encountered in the realm of collections is customer churn, which aggressive collection tactics can exacerbate. This issue is complex and highly sensitive, encompassing several dimensions.
On one side, there exists a group of customers who, intending to sever ties with a company, stop making payments to signal their desire to end the relationship. In these instances, the collection process itself is not to blame for the customer’s departure, as the decision to leave was made independently of any collection efforts.
On the flip side, since a customer’s initial step towards ending their relationship often involves halting payments, a prompt and proactive response from the collections team can sometimes alter the course of action. By recognizing these early signs and taking immediate, positive steps to engage the customer, the collections department has a unique opportunity to potentially prevent the customer from leaving.
This delicate balance highlights the critical role of collections in managing customer relationships, underscoring the need for strategies that are assertive yet sensitive to the potential impact on customer retention.
Undoubtedly, one of the main reasons for customer abandonment is poor customer care, insulting, disrespectful treatment or simply a wrong response to the real reason for non-payment. In this case, we must put a price tag on the cost of losing the customer. One of the ways to do this is to take the cost of acquiring a new customer instead of the customer who left. Another way is to multiply the customer’s monthly income by the average time that customers remain customers of the organization and thus estimate the loss of future revenue from that customer.