The road to DR profitability
is more obtainable due in part to payment options
that make consumer purchases simple and affordable.
One of the hottest techniques is the use of credit
card "multi-pay” or “easy-payments”
credit terms.
“Multi-pay” offers are irresistible
to the impulse purchaser. Many direct marketers
of exercise equipment, household, health and beauty
aids, and other product categories that wish to
increase sales, retain customers and maximize
profits use “easy-payments” offers.
Installment plans allow companies to offer a higher
quality or perceived value product while maintaining
a more affordable price point for the consumer.
Before implementing an easy payment program,
credit polices should first be evaluated based
upon how they contribute to reaching company growth
and profit objectives. A credit policy that is
too strict restrains growth; a policy that is
too lax will reduce profits. The extension of
credit and its potential bad debt risk should
be considered a variable cost of doing business.
Sales Lift Needed to Offset Soft Declines Credit
Drag
| Number of Installments > |
2 |
3 |
4 |
9 |
| No Recovery Effort |
18.0% |
27.0% |
37.0% |
80.0% |
| Implement a Customer Retention Program |
14.8% |
22.1% |
30.3% |
65.6% |
| Add a Collection Effort |
12.4% |
18.6% |
25.5% |
55.0% |
As with most opportunities that appear too good
on the surface, the there is a hidden cost or
“credit drag” to “multi-pays.”
Credit card soft declines are a reality with this
type of offer. Soft declines often occur when
the card expiration date passes, the account is
stolen, lost or closed, and at its limit. As the
payment terms are extended the likelihood of a
soft decline increases as well as slowing a marketers’
cash flow.
With “soft declines”, unlike “hard
declines”, the cardholder is often unaware
that a decline occurred. The marketer will need
to initiate recovery effort with the customer
to reinstate the payment process and restore the
relationship. This effort should yield a 35% to
50% payment conversion when both a customer retention
and collection campaigns are conducted in tandem.
The first recovery stage goals are reinstatement
and payment. This approach recognizes the long-term
value of the customer relationship, such as future
sales with new offers or reinstatement in continuity
programs. This recovery effort is postured as
coming from the marketer, notifying the customer
of the situation, and requesting an alternative
form of payment. Often these accounts can be converted
to a single pay. Typically, during the first 60
days of a retention effort, 18% - 25% of accounts
will be paid or reinstated.
For those consumers who do not respond to a customer
retention effort, their account should be placed
with a collection agency. The agency’s primary
objective is payment. When selecting a collection
agency be sure that it specializes in direct marketing
offers and tailors its approach to meet both the
financial and sales objectives of the marketer.
A good third party recovery effort will last six
to seven months and yields an additional 18% -
25% of soft declines.
Collection agencies that specialize in meeting
the direct marketers’ needs will offer both
customer retention and collection resources.
Why offer easy payments when there is an inherent
risk? Quite simply, the benefits outweigh the
risk. “Multi-pay” offers are a proven
way to boost responses. Most responders can be
up sold or enrolled in a continuity program that
enhances the long-term value of the relationship
for the marketer. This is especially true when
the proper recovery techniques are applied to
convert the “soft” credit card declined
account back into paying customers. Remember,
it is far less expensive to convert a soft decline
account than acquire a new customer. |
