Psychology can play a huge role on why you’re not collecting as much as you should and how you can optimize your efforts to collect even more. The study of how the mind works and effects our behaviors gives a lot of insight into the actions of our customers – and more specifically why they are avoiding payment. Understandably, however, many accounts receivable professionals aren’t psychology experts.
Psychology is a complicated subject. There are many different areas of study, beyond just the basics. There are psychologists who deal strictly with patients in a clinical setting, psychologists who do comparative analyses with our behavior versus animals and psychologists who spend all their time conducting experiments. An accounts receivable professionals time isn’t spent wisely by studying all these different branches of psychology, instead they are better served by focusing on the behavioral branch.
There are a few different theories that stem from behavioral psychology that can explain why customers aren’t paying on time.
GOAL GRADIENT THEORY
The goal gradient theory suggests that people become more motivated to reach a goal when they feel they are closer to reaching the end goal. One common example of this is complimentary punch cards that you might get at a coffee shop. Studies conducted by Scientific American showed that customers using a loyalty punch card were more likely to buy more coffee when they were getting closer to reaching their free cup. This can be translated to the accounts receivable field by creating more incentives for customers for paying on time.
The recency effect of psychology shows that, understandably, people are able to recall most easily those things that were presented to them last. Although this may seem obvious, this psychological behavior needs to be taken into account and put into action in the accounts receivable department. To get more customers to pay on time, it’s important to send constant reminders to customers. Keeping yourselves at the forefront of your customer’s minds will ensure they remember to pay you first, before all other vendors.
FUNDAMENTAL ATTRIBUTION ERROR
This psychology theory is more to do with ourselves than our customers. The fundamental attribution error theory is when we assume someone is at fault due to issues with their own internal personality, as opposed to an external factor they had no control over. For example, if a customer paid late, we might assume that they did this because they are lazy or they are doing it out of spite, when in fact they may have been unable to make payment because the invoice wasn’t approved by management. For these situations, it is best to step back and have a conversation with the customer to find out what is really going on.
Prospect theory is a behavioral economic theory. The idea is that people view losses and gains differently – holding losses with more value. Scientific American found in their study that, due to this theory, people are more likely to pay off small debts than large debts, no matter what interest will incur on either accounts. For this reason, accounts receivable professionals may want to focus more on collecting large debts first as they are the most likely to go unpaid.
Now that you understand the theories, how do you put them into action?
Find out in this guide