When it comes to improving your accounts receivables process and getting you paid faster, treating all your customers the same will not yield the best results. You need to be using customer segmentation in order to better understand your customers and their payment habits.
Different customers have different needs, and by understanding these needs you can create a accounts receivables process that is tailored specifically for them.
When it comes to accounts receivables, customer segmentation is one of the best ways to improve your results. See how to use customer segmentation to enhance your accounts receivable process.
We will also provide some tips on how to get started!
What is customer segmentation in accounts receivables?
Customer segmentation in accounts receivables is almost exactly what it sounds like.
You are essentially categorising customers into groups based on certain criteria. These criteria can be anything from how much they owe to how often they make payments.
The goal of customer segmentation is to create an accounts receivable and debt collections process that is more efficient and effective, while also cutting down on the amount of invoice chasing you have to do.
The benefits of segmenting customers in your accounts receivables
There are several benefits to customer segmentation, including:
Saving time on your collections process
An inefficient collections process will cost you money in the long run. Time is money, and by streamlining your collections process you can save time, and therefore, money.
By reviving your customers into segments based on payment behaviour, you can prioritise effectively and allocate your collection time and resources more efficiently.
When you know which customers are more likely to pay on time or have a history of paying late, you can manage your accounts receivable accordingly. This means that you can focus on collecting debt from those customers that are more likely to pay late, and spend less time chasing payments from those customers that always pay on time.
This improved accounts receivables process will save you valuable time and resources which can be better spent elsewhere in your business.
Improving results and KPIs
Accounts receivables KPIs are an important and effective way to measure the performance of your accounts receivable process.
By segmenting your customers, you will be able to see which segments are performing well and which segments need more attention. Adopting a more granulated approach to collections will give you a clear view of the accounts receivable landscape, and help you to improve on your results, KPIs, and ultimately your business’ bottom line.
Improving customer relationships
Personalisation is a critical factor in differentiating yourself from your competitors, and this applies as much to your accounts receivables process as it does with sales and marketing.
When you can personalize the accounts receivable experience for each customer, it makes them feel valued and appreciated. You can enhance your business’ use of personalisation by dividing your customers into different segments.
This is especially important if you are dealing with customers who have overdue invoices, as you want to maintain a good relationship with them in order to get paid as quickly as possible.
Equally, long term customers with a history of paying promptly, may not appreciate receiving the same level of payment chasing as those who consistently pay late.
Adapt to changing customer behaviors
Having multiple accounts receivables segments that customers can move through allows you to be flexible and adapt to changing customer behaviors.
For example, you may have a segment for customers who always pay on time, another for those who occasionally pay late, and another for those who regularly pay late.
You can then treat each group differently – offering early payment discounts or incentives to those who always pay on time, sending polite invoice reminders to those who occasionally pay late, and supporting good payers who are having cash flow difficulties with payment plans or partial payment options.
For those customers who regularly pay late, you can apply late payment fees or employ debt collectors.
This flexibility means that you can constantly adjust your accounts receivables strategy to reflect the changing behavior of your customer base in response to economic changes.
How to segment customers to improve your accounts receivables
Exactly how you segment your customers will depend on the specifics of your business, but there are some basic segments that you can use to get started, including:
Fast vs slow-paying
Payment behavior is one of the evergreen segments you can use to group your customers. Fast-paying customers are those who always (or almost always) pay their invoices on time, while slow-paying customers are those who regularly pay late. For example, customers who take on average below 30 days to pay their invoices can be categorized as fast payers, whilst those who take over 30 days on average may be classified as slow-paying customers.
You can further segment your fast-paying and slow-paying customers by looking at how much they owe you. For example, you might have a group of fast-paying customers who owe you $1000 or less, and a group of slow-paying customers who owe you more than $1000.
Long term vs new clients
As we mentioned earlier, personalisation is an important differentiator, and applying a one-size-fits-all approach to collections could see you alienating consistently fast-paying customers, while not applying enough pressure to be paid on time by newer customers.
Segmenting your accounts receivable data can help you identify which debtors need the most attention, and allows for a more tailored approach to collections, which in turn can get you better results from a variety of different customer types.
High risk vs low-risk
Credit checking is an important part of the onboarding process and an excellent way to keep on top of your customer's credit suitability, but it can also allow you to more accurately segment your customers.
You can use customer segmentation to identify high-risk and low-risk customers. This will help you focus your debt collection efforts on those customers who are higher risk and more likely to pay and apply fewer resources to those who are lower risk.
Continued credit checking throughout your business relationship with a customer will also help you to keep track of any changes in their credit risk level and enable you to re-classify them as necessary. For high risk vs low risk customers, we suggest implementing contingent credit limits for each segment of your customers.
Size of customer business
How much business a customer provides you with is another key factor in customer segmentation.
Larger customers are usually easier to keep track of and manage accounts receivables for, while smaller customers may require more attention.
It can also be more difficult to get paid by smaller customers as they may have less money available to pay invoices and might be more in need of structured payment options, such as payment plans, if economic conditions suddenly take a turn for the worse.
You can also use customer segmentation by the size of your business to identify potential upsell opportunities with your larger customers or offer discounts to your smaller customers to encourage them to do more business with you.
How to implement a customer segmentation strategy
The first step in implementing an effective customer segmentation strategy is to identify your customer segments.
You can do this by looking at factors like customer location, size of business, industry, or even the type of product or service they purchase from you.
Once you've identified your customer segments, you can then start to tailor your accounts receivables process to each segment.
Creating a dedicated invoice follow up schedule, based on the information from your customer segments, is a good way to start.
For example, you might have one chasing schedule for high-risk customers, and one for low-risk customers. These schedules can be set up to automatically chase each customer segment for payments with a unique tone of voice, on the times and days that you choose, all using automated accounts receivables software.
These automated reminders can be backed up by a combination of polite email payment reminders, SMS payment reminders, and accounts receivables phone calls adapted to each customer segment, to create a holistic approach to invoice chasing that gets results!
An excellent way to improve your accounts receivables process
While customer segmentation might seem like a lot of work, the benefits in terms of improved accounts receivables results make it well worth the effort. By taking the time to segment your customers, you can improve your collections process and get paid faster. Furthermore, you can use accounts receivable automation tools like Chaser to make the customer segmentation process easy.
It's important to remember that not all customers are the same, and by using customer segmentation in your accounts receivables process you can improve your results. Segmenting customers into different groups will allow you to direct your collections efforts in a way that is more likely to result in prompt payments.
Ready to segment your customers, follow up on payments in the most effective way possible, and get invoices paid faster? Try accounts receivables automation for free, for 14 days.
