Should I Use Credit for Sales Growth or Maximizing Profit?
By: Robert Graham, SVP SKO Brenner American
In our last blog, we discussed how flexible credit policies can create convenient payment options for customers to make your product or service more marketable. We also noted that when taking in credit payments, finding a balance between “loose” front-end policies and “tight” back-end policies was important for maximizing profits.
Following that logic, it shouldn’t come as much of a surprise to know credit policies can impact your financial health in different ways. Depending on your business objectives, you can either focus on maximizing collections, or pursuing sales growth.
The first thing to recognize is that different business and/or marketing goals will drive different policies. For instance, Company A may be more concerned about aggressive sales growth as they penetrate a new market segment. In their case, a more liberal credit policy will open up the opportunity for more sales. On the other hand, Company B is more focused on maximizing profits from the clients they currently have. Such a strategy would require a “tighter” collections policy to achieve maximum payments.
The second thing to understand is that when reviewing your credit offer, your company’s “personality” will affect which policy to employ. A cataloguer or continuity program with high customer lifetime values must operate differently from a short form, single pay direct response marketer. Some business factors to consider include:
- The billing amount.
- Your cost of goods.
- The timeliness of your product (is it a holiday or seasonal product).
- The variable fulfillment, delivery and billing charges.
- The payment history of the market segment.
- Long-term customer values.
- The payment history of similar credit programs.
- Competitive practices in your market.
- The cost of account screening and recovery vs. the cost of order fulfillment.
As you can see, there are several variables which can determine if your company’s collection policy should be “looser”, “tighter” or somewhere in between. No one is going to understand those needs better than you (or your company’s CFO). However, there are third party accounts receivables (AR) companies, like SKO Brenner American, who can customize payments solutions for your business.
To learn more about how credit and collections policies can work for your bottom line, visit SKO Brenner’s info page or contact Robert Graham directly at (631) 870-5520