Can pricing minimize collection costs?

More than you might think.

I received some gentle chiding recently when someone asked me to “send a case of what I was smoking.”  This was in response to my statement that “my goal is to provide such a WOW experience that I don’t have the need for collection efforts.”

That request prompted me to reflect on whether my statement was arrogance, a lofty goal or whether it had some merit.  As I looked back on my 21+ years in business I realized that there was only one instance in which I wasn’t paid in full for my services.  That statistic amazed me.  I didn’t realize how accurate my earlier statement had been.  This reality has given me additional insights into how this happened and I want to share them with you.

The key to minimizing collection costs is to create WOW experiences, yet most companies preclude that possibility by taking on customers that don’t value what they have to offer.  Imagine for a moment that you purchase something in which you’re only moderately interested.  You almost didn’t make the purchase, but the price was so low that you thought “Why not?”

Now let’s assume that something goes wrong – some expectation you had wasn’t met.  Are you going to pay for that purchase or are you going to sit on the vendor’s invoice until they contact you for payment?  If you’ve already paid aren’t you going to seek a refund?  If the vendor is unwilling to refund the money are you likely to call the credit card company or your bank to stop payment?

That’s exactly what your customers will do as well.  If you want to get a sense for how costly this is, talk to your collection staff about how much effort they put into collecting this money.  Ask your sales force how much time they spend trying to salvage these customer relationships and how successful they are.  Now consider the fact that you discounted your price to get these customers in the first place and you’ll quickly discover that you would have been better off without them.

How do you minimize these collection costs, the hits to your company’s reputation and regain the profits you so richly deserve?  First, have a clear picture of whom it is that values what you offer – values it enough to pay premium prices to get it.  These are the only people for whom you can create a WOW experience.

Second, exceed their expectations.  That’s much easier to do when you’re getting premium pricing.  You not only have the financial resources to exceed their expectations, your staff has more time to spend on each of your customers because they’re not dealing with collection issues.  Plus your sales force can spend more time finding new ways to serve these customers rather than spending that time in futile attempts to salvage customers who’ll only buy at discounted prices.

One of the ways to define your ideal customer is to look at those customers with whom you enjoy your greatest success.  Define those customer values and qualities that allow you and them to enjoy such great success.  Then adjust your marketing messages to attract more of those customers.

It’s counter-intuitive, but being more selective in accepting new customers can dramatically reduce your collection costs.