Credit and Collections Issues for Bill-Me Offers (2,137 words)
The near-ubiquity of credit cards in the United States has lightened the burden of collection for non-financial-service direct marketers. The exception: Those who make bill-me offers are still at risk. This means that any marketer that ships merchandise before receiving payment—book clubs, music clubs, magazine publishers, collectible marketers and continuity clubs, including a burgeoning field of coffee, tea and wine clubs—runs the risk of not getting paid.
Says Douglas Harpham, vice president of sales and marketing for North Shore Agency, a Great Neck, NY, collection agency, "Bill-mes are just as common as they ever were."
Adding a bill-me payment option to a mailing is a proven response booster, but it plays havoc on pay-up on the back end. Why? Typically, introductory offers are very soft ("Try it free at our risk!") in an attempt to maximize response. Any free gift, sweepstakes or special offer is likely to attract consumers who are in it for the freebie.
Marketers can only determine the balance between response and pay-up by testing offers and creative, including:
• Using a slightly harder wording for a bill-me offer. For example, instead of "Try two free copies with no obligation," test "Receive 12 issues for the price of 10."
• Changing premium offers from "free gift with order" to "free gift with payment."
• Choosing a premium that's tightly connected to the product.
While the right offer will improve your pay-up rate, don't rely on your offer alone to prevent delinquent accounts. Make sure you do your homework on who you mail as well.
Preventing Collection Problems
Says Bill Gossman of Advanced Software Applications, a Pittsburgh-based database company that specializes in risk management, "If you do a better job on the front end of who you mail to, there is less of a chance you're putting offers into the hands of those who aren't good risks."
Marketers have three options to eliminate bad credit risks: (1) modeling customers who pay and those who don't, (2) suppressing names based on past failure to pay, (3) both.
Modeling is the backbone of the credit-card and financial marketing industry, and it is utilized by other marketers as well. Risk-management companies, including Experian, Fair/Isaac and Acxiom can help consumer direct marketers score customer lists according to financial history, but these services are used most heavily by financial services companies that have more at risk with each offer.
Publishers and continuity marketers commonly use internal and third-party credit and demographic data to model the best and worst customers in their house files. However, these marketers usually prospect with response lists, and response-list rental agreements often forbid the use of external models.
So if you're a consumer direct marketer, what can you do to eliminate bad credit risks? First, use the models you've developed to make savvy list selections. Next, when using rental lists, use in-house suppression files to avoid prospecting to anyone who has already failed to pay for introductory offers.
Merge/purge prospect lists against this house file to suppress bad debt.
Another factor to consider is the lists you use. While your list selections can only imperfectly reproduce your models for less risky customers, some lists are risky, period. For example, Sean Buckley, assistant director of credit for Doubleday Direct, suggests proceeding cautiously with hotline lists, as these new customers might not have paid their bills yet to the marketer that is renting their name.
The Credit Index
Another option for improving campaign pay-up is running prospect lists by The Credit Index, a 65-million-record database compiled from the failure-to-pay, frequent-return and fraud files of more than 70 major direct-response marketers. Because the index is a co-op, only members who contribute to it may use it.
Explains Carl Tomasello, vice president of The Credit Index, "The primary use is for suppressing offers. After a marketer rents lists and runs their merge/purge, they send them to us and we streamline them and give them back a list."
This enhancement sometimes boosts response, but the main goal is to increase pay-up rates.
While The Credit Index is a consumer reporting agency governed by provisions of the Fair Credit Reporting Act, Tomasello says its data is completely different than the data compiled by credit bureaus, since few publishers or other direct marketers report bad debt to credit bureaus.
The service can be used not only to streamline lists before mailing, but to screen credit prospects who respond through a less targeted medium, such as DRTV, the Internet or a space ad in a mass-market publication such as Parade magazine.
Explains Tomasello, "If a consumer initiates the transaction and the company decides not to fulfill the order, by law the company must send a letter explaining why and where they got the negative information about them. They may require upfront payment, a credit card or additional credit history information."
Getting Delinquents to Pay Up
Despite your best efforts, some carefully screened prospects will turn delinquent. That's when your billing series kicks in.
Explains North Shore's Harpham, "You need to design a billing series that motivates them to respond."
A billing series requires a variation on direct-mail expertise, with some of the creative rules turned upside down. Hallmarks of a successful billing series are strength and clarity, and the primary motivators—guilt and fear—are negative.
According to Harpham, a bill's creative must do three things:
1. Tell the reader why you're writing: They owe you money.
2. Tell them what to do: Write a check, make it payable to XYZ, return in the enclosed envelope.
3. Tell them what will happen if they don't respond.
There are also three elements of billing letters: outer envelope, format and content. Here are some tips on maximizing effectiveness:
Get the envelope opened. The goal of the envelope for a billing series is the same as for any other direct mail piece: to get opened. However, Harpham advises that the tactics that work for acquisition offers won't work for persistent delinquents. Treat the second and third notice envelopes as normal, clearly marked invoices, but after that, Harpham warns, "Don't put the name of the sender on the envelope. Just put the address on the back. If they know they haven't paid for a magazine and they get an envelope from them, they won't open it."
However, companies with well-known brand names that inspire customer loyalty may have more luck using branded envelopes.
And most of all, he says, don't put "invoice enclosed" on the outside after the third or fourth notice. While diligent customers respond better to clearly marked bills, diligent customers are not the recipients of your fourth or fifth billing notice. The customers you're mailing now have a different psychology, and many are more likely to throw away a bill than a new offer.
For these customers, an envelope-opening code word is "priority" or "important notice." For example, the Wall Street Journal's billing envelopes read, "Highest
Vary your message and creative. If a customer didn't respond to a mailing the first time, you can bet he or she won't respond to the same envelope and language the fifth time.
"The key to getting a response is that mailings must change," says Harpham. "Always change the outer envelope, even if it's just the color."
Like all matters, envelope copy should be tested for effectiveness. Some publishers, such as Boardroom, use a consistent look throughout their billing series. Rodale Press, on the other hand, drastically changes the look for each notice.
Follow sound direct mail design. You have three seconds to convince customers to open envelopes and three seconds to get their attention once it's opened.
"If the letter is a jumble of words or just an invoice, you'll lose customers," Harpham says. "You must continually change the message and how you communicate it. It must be different each time, and letter geometry is essential."
A billing letter must have good eye flow and be easy to read. Use boxes and large fonts. Take the most important sentence of the paragraph, and put it in bold and center it on the page.
Always include a headline. A headline is necessary for two reasons:
1. It serves as a central point of focus.
2. Often it's the only part that gets read.
Strengthen the wording with each mailing. Don't be afraid to get tough.
"Some direct marketers have soft billing series for fear of alienating customers, but if the offer is clear to start with and the billing service is firm but polite, people who don't respond after two or three mailings aren't good customers anyway," says Harpham.
The tone should escalate in urgency, from the friendly "perhaps you missed our previous bill" to a more severe wording each time. Generally, magazine publishers and continuity marketers take a gentler, more gradual approach to a billing series because they have more of an interest in continuing the relationship than companies that are marketing one-shot collectibles or books.
The second notice, which usually follows the first by about a month, should give the consumer the benefit of the doubt. Second notices may use the words "duplicate bill" on the outside envelope copy and usually give a diplomatically-worded reminder that the bill is past due.
The third notice may lay on guilt with conscience-fighting language that emphasizes that the consumer has an obligation to the creditor. That is, the creditor has supplied the product or service, and thus the consumer has a duty to keep up his or her end.
Another strategy frequently used by publishers is to increase the urgency by emphasizing the benefits of the subscription and threatening to cut it off.
This example is from a Rodale Press third notice:
Have you overlooked something?
I'm talking about the bill for your subscription to ORGANIC GARDENING.
Time's running out ... your subscription is about to be cancelled because we haven't received payment.
It's not something we like to do, but we must (and will) if you don't act right away.
At the fourth notice, up the ante. At this point, it may be time to assume the customer has little intention of paying. For example, Rodale Press cancels the subscription if no payment is forthcoming from the third notice and uses the fourth notice to try to trigger a payment to restart the subscription.
Collectible marketers have less to leverage than magazine publishers and tend to use powerful words like "debtor," "delinquent" and "collection alert."
Suggests Harpham, "Say the customer will be delinquent. Say that they will be reported to the collection manager, then be sure the next bill comes from the collection manager."
Call in help when necessary. The next stage may be a third-party collection agency or reporting to the Credit Index.
Says Tomasello, "One benefit of The Credit Index is that it gives collection agencies something to threaten. When there is serious delay is an account—six to nine months—tell customers they will be reported to The Credit Index. That gets to consumers who are worried about their credit."
When to bring in a collection agency is a matter of opinion. Says Harpham, "Using a collection service adds seriousness. After four or five letters, a collection agency increases the impact. You should see an immediate up-tick in response."
But don't leave it to a collection agency to do all your heavy lifting. Some marketers are so worried about alienating customers that they keep their entire collection series very mild to keep their own hands "clean." In this case, calling in a collection agency is not only a big shock to the consumer, but it's also less effective.
Says Harpham, "If the in-house letters are very soft, it affects the impact of collection letters as well."
How many billing notices are necessary is usually a matter of arithmetic. Most marketers use up to five or six, then pass big balances to a collection agency and write off small ones. In general, when to give up collecting a debt depends on the balance of the order, but the key is to track response and calculate return on investment for each mailing, just as you do for acquisition mailings. However, billing series generally succumb to the law of diminishing returns: Each mailing receives lower response than the previous one.
"The response curve should be exponential [approaching a limit of zero]," says Harpham. "You should always have responses come at lower rates each time, but you should never have a drop-off of more than 25 percent. If you do, something's wrong. It might be the creative or the product or the way it was fulfilled."
Even when you've optimized your lists, offer, billing and collection cycle, you'll end up writing off some debts. Not every debt is collectible, and even good prospects go bad now and then.