How to avoid bad debt
Sometimes it’s difficult to avoid bad debt and something we hear about a lot from clients is that they’ve had trouble with getting payments in from their customers after they’ve been working together for some time.
Having had our own experiences in the past, we thought it may help to offer an insight into why this happens and what you can do to avoid bad debt and reduce the amount of non-payers you experience.
For reasons we will explore further in this blog, the customers expectation has often simply not been met. This is not always the fault of the service provider. This article explains the science beautifully:
For most customers price by itself is not the key factor when a purchase is being considered. This is because most customers compare the entire marketing offering and do not simply make their purchase decision based solely on a product’s price. In essence when a purchase situation arises price is one of several variables customers evaluate when they mentally assess a product’s overall value.
Value refers to the perception of benefits received for what someone must give up. Since price often reflects an important part of what someone gives up, a customer’s perceived value of a product will be affected by a marketer’s pricing decision. Any easy way to see this is to view value as a calculation:
Value = perceived benefits received
perceived price paid
For the buyer value of a product will change as perceived price paid and/or perceived benefits received change. But the price paid in a transaction is not only financial it can also involve other things that a buyer may be giving up. For example, in addition to paying money a customer may have to spend time learning to use a product, pay to have an old product removed, close down current operations while a product is installed or incur other expenses.
So, if a customer has made payments to you in the past but is now unwilling to continue to pay, you’ll probably find there’s one of a few things going on:
Here are the reasons:
- They are broke – this is the obvious and most common ‘excuse’ given but often the case is that they don’t see the value you are providing for their hard earned cash.
- You have not provided what they ‘expected’. Again, this is often used as a reason and is usually because they have not really understood what they were going to receive for their money.
- You are being perceived as a soft option. This means that the customer has lowered the priority of your service and then pays other businesses before you, as part of their budgeting priority.
Here’s why it happens:
- If they are genuinely broke, there’s really not a lot you can do. Be polite, explain that you cannot work for free and move on swiftly. As most sales professionals will tell you – don’t sell to broke people.
- When you tell a customer what you are providing for their money, they develop an expectation. Quite often it’s a summary of the detail you give them, because they don’t really understand the details of your offering. This is often the case when your service is based on ‘experience’ or a talent that makes you specialist in your field. It’s a bit like a dentist charging £55 – £250 for a ‘simple tooth extraction. It’s take about 5-10 minutes to remove a tooth and yet they can charge huge amounts for this seemingly simple procedure. If the dentist were to explain exactly what training they had to endure and the years of studying required to become a qualified dental surgeon, you’d probably find it easier to swallow (pun intended!). In reality, what dentist has the time to spend explaining their training to every patient?
- It’s completely natural for people (especially business owners) to want to save money where they can. Think about it, say a friend lends you £50 to buy something you need. Your really grateful and as soon as payday comes you plan to square them up. Now imagine you get an unexpectedly high business phone bill or internet line. If you don’t pay, you’ll be cut of and have services restricted. You need to make a choice. Do you pay your friend or the company that’s going to cut your services? Your friend knows you personally and will likely understand your problem. The company only knows your account standing and if you don’t pay, you’ll be cut. The person in the call centre has never spoken to you before and knows nothing about you. You can try and explain that you have a commitment to pay your friend but we all know how much weight that carries with big companies. You knock your friend and the company gets paid. Ce’st la vie.
What you can do to avoid bad debt and minimise the amount of non-paying clients:
- Make sure the client knows exactly what they are going to receive for their money. List all services clearly and make sure it’s in writing.
- Don’t be afraid to restrict services. If you don’t pay your phone bill, your phone gets cut. Small companies often allow non-payers to continue using services through fear of losing them. Does it not make you wonder if the big companies worry about this? The fact is, they were once small companies and have been through the small business phase and have learned that it doesn’t pay to be kind in business. This is why they have long contracts with lots of small print with conditions of trading etc. One slip up and you’re cut off or fined. We’re not suggesting that you create huge complicated contracts, but don’t be afraid to restrict your services if a customer doesn’t pay. Maybe allow a bit of a grace period but don’t be afraid to lose a bad payer.
- Impose a penalty for late or non-payment and make this clear from the start. Right from your pitch you can begin to explain how you operate and make sure your prospect understands how you do business. Clarity is the key here.
- Hide behind a third party. You need payment because you have to pay third parties for their services. This is a good way to make the whole process less personal. It’s not you personally that is being strict, but your third party supplier.
- Make sure your customer understands the actual ‘value’ of your services. The key here is that you need to ‘educate’ your customer so that they realise what they are getting for their money. It’s easier to explain fully before you close the deal than after, when you’re both in a negative, emotionally fuelled situation because payment has been missed.
- Keep it professional – lot’s of clients will try to ‘friend zone’ you in order to gain special treatment or freebies. Don’t get it twisted, these people are manipulating your relationship for their own benefit. Learn to recognise when this is happening and keep it strictly business.
It’s your responsibility to ensure that your prospect knows exactly what they are paying for before you agree price and shake hands on a deal. More often than not, a prospect buys on the basis of their understanding of your offering. If this is different to yours in any way, you will almost certainly have conflict down the line. If you want to avoid bad debt, be crystal clear in your proposal.
If your service is monthly, send monthly reports detailing what has been done and what they are being charged for. If you maintain this understanding throughout the contract term, you will have a lot less trouble asking for the money, and your customer will have a lot less trouble paying for it.
Contact us if you have any questions about learning how to avoid bad debt or you have something to add to this article.