Serious question - have you ever told a customer that you would no longer sell to them as a result of their late payments?
At what point do you say to a customer that consistently pays late, that you are no longer interested in doing business with them!
At what point does the cost of doing business exceed the benefit of doing business with a habitual late payer ?
We have all had to deal with this type of customer at some point, they are the biggest thorn in our side, they are the ones that will always pay, but they will always leave it to the absolute last minute (and often under threat of legal action). Managing these types of customers takes a lot of time and resources.
We all know that generally speaking the cost of acquiring new customers is considered to be higher than the cost of holding onto your existing ones.
Acquisition costs are easy to measure as they can be directly attributed to the sale and can include costs such as marketing, advertising, sales and marketing staff costs, etc. However retention costs are a little harder to measure as they generally vary from company to company. Retention costs should include all expenses incurred in retaining and cultivating its existing customers.
One costs that rarely seems to be included in the cost or retaining your customers are the costs associated with your habitual late payers. When you have a customer that consistently uses multiple excuses and delays their payments, there is a cost to the business. At the very least there is the cost of chasing the debt. This is not only the cost of the credit controllers time, but the time of everyone else in the organisation that had to spend time helping to resolve the query. Then there is also the cost of financing the debt. A payment delay hurts the organisations cash flow. Other standing costs still need to be paid and if your customer delays payment, you still need to pay your staff, your suppliers, your rent etc. Financing this might result in an overdraft or some other form of short term loan which will incur interest payments.
This is a real cost to the business that never seems to be included in calculating customer retention costs.
So the question that has to be asked is - are these customers worth keeping?
As always, the answer is never simple.
Often there are strong reasons to hold onto certain customers, no mater how bad they are at paying you. Perhaps the overall value of their business is worth the pain? Perhaps they are an important company in your sector and there is a value to having their logo on your website as an anchor to secure other customers?
So what are your options?
You could try and protect your cash-flow and drop them by politely refusing to take any new orders from them and refer them to one of your competitors.
Or you could keep them as a customer and while you continue to work on reducing their payment days (which could take years) you can push your other customers to pay you on time and use this to fund any shortfalls caused by your bad payers.
If you do keep them as a customer, you need to be realistic, knowing that every time you make a sale that it will be X number of months before you receive a payment.....so plan accordingly!
photo credit: Kai Pilger on Unsplash