• February 1, 2009
  • By Denis Pombriant, founder and managing principal, Beagle Research Group

No Credit Where Credit Is Due

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Recession talk brings numerous prescriptions for recovery, and nowhere is this truer than in sales, where everyone seems to have a solution. While many of these ideas are good, they might miss the point on one of two counts: On one hand, it's a recession—by definition, sales lag; on the other, we might be inaccurately assessing the very nature of this recession.

On the first point, overoptimism is forgivable. Sales is always a hard job, so a can-do spirit is needed in a disappointing economy, even noble. But the second point is serious: Misdiagnosing our current situation could lead to wasted efforts targeting the wrong set of challenges.

There have been 18 recessions in U.S. history—and the seven since World War II have often been characteristic studies of production and inventory getting ahead of consumption. To combat an overfull supply chain, producers will idle capacity, lay people off, and have sales to reduce inventory. When inventories come back into alignment, demand stiffens and production starts again.

Recessions have become more infrequent of late, thanks to good, fast, and cheap computing that has enabled us to better manage the production/inventory side of the equation. The most recent recovery ended in December 2007 after six years; the prior recovery lasted an amazing 11 years.

But the current recession is not from the same mold as most of those that preceded it. This is a credit-driven recession started when the credit markets dried up in the mortgage crisis. Without credit, the short-term financing companies would naturally rely on to manage payroll or inventory is not available (or available at such high prices that it is effectively nonexistent).

A recession of this type will not be cured by the Federal Reserve lowering rates—in fact, it had lowered them to near zero at press time. Credit is not being extended further out; the lucky few with jobs or cash are leery of spending. The credit-card industry is expected to reduce the credit available to consumers this year by an astounding $2 trillion. Banks and other institutions are simply not lending, further tightening the economic lockup.

But the frozen credit markets present an opportunity to vendors of all sorts, as well as an unexpected challenge to creditors. There is now ample room in many transactions to disintermediate normal channels of lending and credit if vendors can manage to extend credit on their own. In a possible prelude, last October Kmart announced the reintroduction of layaway to entice customers to make purchases; Sears followed suit.

Layaway is an ancient practice brought unchanged into modern times like some Jurassic Park creature. Layaway went extinct long before there was technology to manage the process, and even now retailers struggle with paper files as they attempt to manage purchases and payments. But just add automation and national scale, and customers on all levels will find a new way of buying things and vendors will discover a different mode of selling.

Advantages would abound. Credit decisions would reside with the vendors, who would bear the onus of verifying credit-worthiness. A layaway model would automatically collateralize every transaction, reducing the need for high interest rates to control spending. Commercial lenders have only the interest-rate lever to control credit-card use but vendors can control their risks to a greater degree and keep interest rates low in the process.

Layaway is just one model. Vendor financing could become indistinguishable from conventional credit if, say, retail customers reverted to store charge cards to a greater degree, or if more businesses embraced a partial-payment model that closely mirrors the customer's revenue stream.

Most of all, vendor-customer credit-management functionality within CRM would foster an important tie. Customers come back to vendors that offer favorable credit terms, and credit forms—or at least did and could again—the basis of a loyalty mechanism. Before there were credit cards or even store charge cards, there was the personal account; customers made repeat purchases and payments and most never got far out of balance.

It's the credit system that's broken—and that's what's driving this recession. Smart vendors should see this as an opportunity, and help themselves to the profits. 

Denis Pombriant is the founder and managing principal of Beagle Research Group, a CRM market research firm and consultancy. He can be reached at denis.pombriant@beagleresearch.com.

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