Advanced Customer Ranking techniques in modern ERP

In this post I will dive into the waters of Customer Ranking techniques and how they can be supported by the existing Small Business ERP that is in use. By the term “supported” I not only mean extracting valuable info as per the customer’s behavior (and thus be able to make decisions about their credit situation) but perhaps also the software being able run the entire process. Of course, such processes do not apply to all kinds of businesses. In this discussion, we assume the business model of a company selling B2B and in credit. Obviously, for a B2C sales model that is being served by, say, an e-shop where all sales are cash, there is no reason to examine low-volume, private customers.

Having clarified the above, I define the “process” as the following series of steps:
·         Extract behavioral data from the basic Accounts Receivable (A/R) system. Data like open balances, overdue invoices, maximum overdue time ever recorded, average invoice payment delay and other indexes that the CFO will define.

  • Feed the system with additional data that do not and cannot exist in a typical A/R system, like published Balance-sheet figures and indexes of the customer under evaluation (turnover, total accounts receivable, open loans from banks etc.)
  • Additional data may also include objective or subjective views of the Company that concern the Customer, like ranking of the business relationship, so far (good, average, bad), reputation of the Customer in the local market etc.
  • Having collected all the above data, a mechanism should be in place to examine each of them, one by one (and in combinations, if needed), to produce a final result such as a Customer Ranking Index (1-bad to 10-good) or characterization (1-Unreliable to 5-Reliable) or whatever ranking range the CFO sees fit.
  • Up to this point, the Customer file has been “characterized” in a good-to-bad range. Now, this ranking can be used to make additional decisions for each customer. Decisions may include:

>  Alter the current Credit Limit of the Customer, upwards or downwards (upwards means that good customer behavior is rewarded; this can be used also as a CRM function: how do you communicate this increase of the credit limit to the customer? Through an integrated CRM function, perhaps? See here:
>  Change the Credit Terms with which you do business with that customer (e.g. for a low-ranked customer, you may want to ask for a larger down payment or even 100% down, before goods shipment)
>  Advance the customer to a pool of “best” (or “worse”) clients, where your CRM of collections process is different, less or more strict.
Now, in order to automate the process as much as possible, especially the last part, the “decision-making” and “making it happen” functionality, I think that the best way to achieve this, is through a Ranking System that is integrated with the rest of the general A/R system. You see, if the Decision-making process is detached from the customer files and parameters, then all you can do is get some kind of “report” from the Ranking System, examine it and then apply the suggested changes manually in the A/R module of your ERP. If the Ranking System was integrated with the ERP then the application of Changes on the actual Customer Records would be one click away (with the possible addition for some higher-authority review-and-approve process/workflow, too).
Once more it is proven that a fundamental business process such the customer examination and ranking can be better served by an integrated system that combines process-specific functionality (the Ranking System) with general ERP objects (=Customer, Invoices etc.) and parameters (=Credit Terms etc.). Although a large ERP may provide this functionality out-of-the-box, we have yet to see smaller products (and especially Cloud SaaS) offer something similar. SMB Cloud Accounting Platforms are struggling for market share and each of them has something less or more to offer in specific areas. But that specific Customer Ranking process and module is something that is missing from the market.


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