Customer segmentation in accounts receivables

Customer segmentation and its impact on AR

Customer segmentation for accounts receivable departments is a great way to allow us to sort customers according to their different characteristics.

Indeed, segmentation is not a new concept, with most B2B businesses using segmentation for their marketing and sales efforts and segmenting customers by type of business.

The reason why businesses segment is varied and for different purposes. For example, reasons for segmentation can include increasing sales, building customer loyalty, or, now, for many credit control departments, making the accounts receivable element more effective.

And this is where Direct Route UK comes in.

In this post, we explore customer segmentation further, its impact on AR, and the benefits that it can offer.

What is customer segmentation?

Customer segmentation involves subdividing your customers into various groups, with each customer within this group having the same/similar characteristics.

For debt management firms and credit control departments, segmentation is often based on factors such as:

  • Age of the debt – length of time invoices have been left unpaid
  • Amount outstanding – value of the debt/invoice
  • How often do customers make payments – on time all the time, occasionally missed, always late?
  • Types of delinquent customers – intentional, accidental, disorganised.

Each business will ultimately segment based on its objectives and department aims, with key processes and strategies built into each segmentation group that will enable collection processes to be more effective and efficient as you cut down on the number of invoices you chase.

Why customer segmentation?

As we’ve mentioned, not all customers are the same, so it sometimes seems incredulous that we continue treating them this way.

To improve your AR and get paid faster, customer segmentation allows you to approach the issue of overdue invoices more strategically and tailor specific actions to each customer group. This personalised and targeted approach can provide you with a much higher chance of collection success.

In addition, to understand customer payment habits, segmentation provides a clearer understanding that not all customers are the same and that some approach overdue invoices and outstanding debts completely differently. Again, this allows you to tailor your approach to these customers, dedicating the right resources and time in the right areas.

Helping to define what action you should take, the aim of segmentation in accounts receivable is to get customers to pay their invoices on time or, in an ideal world, early.

Benefits of customer segmentation in accounts receivables

Promotes targeted collection strategies to improve your financial situation, especially as you can prioritise collection time and resources more efficiently.

Reduces the average collection period and build-up of bad debt – avoiding non-payment as you improve the performance of your AR processes. You can also measure how customer segments perform against each other and which ones need more attention.

Promotes effective communication strategies, as you have defined actions in place for each group, including overdue invoice emails, phone calls, letters, etc. You can also adapt to changing customer behaviours faster and more effectively, showing flexibility and agility in your collection processes.

Introduces robust collection policies, saving you valuable time on your collections. With clearly identified segmented groups, you can then implement additional policies such as early repayment discounts, payment plan options, late payment fees, notice of debt collectors if invoices remain unpaid, etc.

Improves customer relationships – customers understand the consequences of late payments, communications, emails, and phone calls can be targeted and differentiated, which customers respond to better, making them feel valued and appreciated. By maintaining a good relationship, you have a higher chance of success.

Teams become more productive and efficient as they manage customers better.

How to implement segmentation

It would help if you started by working with the information that you have, as well as working with your company’s credit criteria and collection processes.

Looking at your customer base, we would advise analysing payment behaviour, i.e., what percentage of customers pay on time compared too late?

How many long-term clients do you have vs. new ones? Which group needs the most attention, and how can you tailor your approach to achieve better results?

Are your customers low or high-risk? Make sure to check their credit suitability and apply fewer resources to lower-risk customers.

Identify the size of your customer’s business to you. Smaller companies may require more attention as they may find it more challenging to pay on time.

After segmenting your customer groups, tailor your AR process to each segment, create dedicated invoice follow-up processes that incorporate the correct tone of voice, ensure communication is sent at the right time of day, etc.

Direct Route

Our team works with you to collect outstanding invoices and implement robust credit control procedures that free up your credit control team’s time, so they can focus on other areas of the business.

If bad debts and overdue invoices are affecting your business’s cash flow, contact us today at +44 7860197476 or email memberbenefits@directroute.co.uk for further information.