Improve Your Accounts Receiveable with Customer Segmentation

Treating all customers the same will not get you the best results when it comes to getting paid on time.

Customer segmentation centres around the fact every customer is different in terms of their financial stature, market trends, relationship with the business and the collection efforts required to get paid on time.

It’s these differences that should determine what you do and how you do it to get payment into your bank account.

Clearly, it’s impractical to have a different process for EVERY customer. Grouping them by specific characteristics allows you to have bespoke processes and controls for each segment.

What is Customer Segmentation?

It’s exactly what it sounds like, categorising customers into groups based on set criteria. What those criteria are is up to you and will depend on your unique business, but some of the most common are:

  • Credit Score – high or low risk
  • Size of Customer – i.e., the value of business transacted (monthly, quarterly, or annually)
  • Credit Terms and average time to pay
  • Length of time they’ve been a customer
  • Payment method (BACS, DD etc.)

Why Segment your Customers?

There are several benefits to customer segmentation, including:

Saves time and money on your collections process

Segmentation allows you to prioritise those customers in the higher-risk segments. This means that you can focus on collecting debt from customers who are more likely to pay late and spend less time chasing payments from those who always pay on time.

For example, a customer with a history of disputed invoices would need a different collection strategy to identify disputes as early as possible to one who pays by direct debit.

Improved productivity means less time wasted on unnecessary activity, like chasing people who always pay, albeit one day late. This leaves more time to manage the more complex or problematic accounts or allows you to utilise that resource elsewhere in your business.

Improved customer relationships

Many see credit control as a potential relationship buster. In reality, it’s another opportunity to build the relationship if approached in the right way.

The collections process covers several touchpoints with your customer in the day-to-day activity. Customer segmentation allows you to ‘personalise’ your credit control activity for each using credit control strategies targeted and tailored to address their specific needs, such as sending polite reminders to those who occasionally pay late and supporting good payers who are having temporary cash flow difficulties with payment plans or partial payment options.

For those customers who regularly pay late, you can apply late payment fees, suspend supply or employ debt collectors.

This flexibility means that you can constantly adjust your credit control strategy to reflect the changing behaviour of your customers in response to economic changes.

Respond to changes in customer behaviour

With the economy’s volatility, you need to be able to identify, respond and adapt to changes in customer and market behaviour. Customers will move through different segments during their relationship with you. The quicker you can identify trigger events, the less impact they will have on your cash flow.

For example, a customer who accounts for a significant proportion of your turnover will need to be monitored more closely as any negative change there could devastate your business.

Improved results

Measuring something gives you the information you need to ensure you can achieve what you set out to do.

Accounts receivable KPIs, such as Daily sales Outstanding (DSO) or Collection Effectiveness Index (CEI), are an essential tool to measure the performance of your credit control process.

By segmenting your customers, you can track which segments are performing well and which need more attention. Having this more refined view helps you better forecast your cash flow and drives the momentum for process improvement.

Getting Started with Customer Segmentation

Now all this may sound like a lot of work to implement, but the investment will be worth it, and it doesn’t have to be complicated.

Firstly, you know your customer base, so you should be able to identify the best way to segment them.

Once you have defined your segments, you can start to tailor your processes to each segment. Remember, done is better than perfect, and you can learn and refine as you go.

We are here to help you if you think this is something you’d like to implement but are still unsure where to start or what the options are. Why not book a call to find out more?

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