Common pitfalls of collection strategies: part one of three

By on June 21st, 2016 in Industry Insights
Common pitfalls of collection strategies: part one of three

There are multiple reasons for adopting one collections strategy over the other. Every collections strategy has built in areas of weakness that cause it to make less money than possible. Strategies shouldn’t be stagnant, and as new tools present themselves, strategists can continue to fine tune their strategy and improve returns.

In the following three post series, adapted from our free eBook Building a Collection and Recovery Strategy, we’ll review the top three pitfalls we see with common collection strategies. They are:

  • Under-charging when selling or over-paying when outsourcing
  • Only focusing on a small percentage of customers in an outsourced strategy
  • Losing customer relationships in a sell or litigation heavy strategy

In this first part, we’ll focus on mis-pricing your portfolio when debt sales are part of your collections strategy.

When selling debt or outsourcing, the lender’s interface with vendors is almost deceivingly simple. Companies tend to mix high yielding accounts with low yielding ones – and end up recovering less from the former so they can get rid of the latter. That is often the result of a rudimentary segmentation and pricing strategy at the seller. Even when segmenting, collection strategists often settle on a simple champion/challenger model for each segment to get the best price or lowest contingency rate.

This limited model is based on two issues:

  • First, the assumption that collection services are commoditized and don’t offer any unique technique, so price is the only differentiator. If everyone is the same, why segment?
  • Second, there isn’t a lot of data feedback in collections to allow proper behavior-based segmentation. Collection agencies aren’t set up to provide high quality data feedback, and debt buyers will often not want to share. The only mode of operation is to sell or place and forget about the debt for a while.

Want to use our tools to optimize your strategy? Visit our website to learn more.