The road to direct response 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-payment 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.
As with most opportunities that appear too good on the surface, 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 percent to 50 percent 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 percent to 25 percent 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 percent to 25 percent 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.
