# Finding Value Depends Upon the Formula You Use

June 28, 2017 by Harry Stoll

Is it better to receive more or pay less?

In the early 1980’s I worked in the kitchen at our local A&W Family Restaurant. I remember my boss working long hours, struggling to make ends meet and her biggest beef was with consumers.  Customers were not buying the corporation’s newest market entry: The Third Pounder.  Yep, 1/3 pound of beefy meat patty.  It was introduced to compete directly with McDonald’s iconic Quarter Pounder.  The Third Pounder was priced the same or very close to the competing big burger from Ronald and friends.  Furthermore, in blind taste-tests, the Third Pounder from A&W outperformed the McDonald’s Quarter Pounder.  Literally, The A&W Third Pounder was priced the same and delivered more meat that tasted better than the Quarter Pounder, but even with millions of dollars spent on advertising, The Third Pounder failed.  Consumers simply would not buy it.

After a few studies and focus groups, A&W figured out the problem. A lot of American consumers stink at math. Misunderstanding the value of one-third, customers believed they were being overcharged.  Why, they asked the researchers, should they pay the same amount for a third of a pound of meat as they did for a quarter of a pound of meat?  The ‘4’ in ¼ being larger than the ‘3’ in ⅓ led about 50% of consumers astray.  50% of consumers believed ¼ was larger than ⅓!

Often, one of the first questions I hear from business owners about debt collections, is “What percentage do you charge?” Now, please refer back to the first question on this blog.  With debt collections, just like any other product, price alone doesn’t always show you the big picture.  You may pay a much lower commission rate to one collection agency than you might to another, but what will you receive?  A better way to evaluate a perspective collection agency’s performance or value is to ask about Netback or utilize the Netback Formula yourself.

The Netback Formula is a simple ratio. This is the formula:

NF = Total Dollars Collected – Commission Paid to Agency

Total Dollars Placed with Agency

This formula provides true cash recovery as a percentage rate, and can be used to compare performance between agencies and provide a business owner or creditor a more meaningful value to base a decision upon. Unlike the Third Pounder compared to the Quarter Pounder, it is true that paying one debt collection agency 28% commission is less compared to paying another agency 33%, but don’t be fooled by price alone. What if the agency that you pay less also delivers less? And what if the agency you pay more delivers significantly more results? Which would be the better deal then?

Example: Based on placements of \$100,000

Agency 1 charges 28% commission rate and collects at a 20% overall collection rate, their netback would be:

\$20,000 – \$5,600      = .144 net in real dollars this equates to \$100,000 x .144 = \$14,400

\$100,000

Agency 2 charges 33% commission rate and collects at a 25% overall collection rate, their netback would be:

\$25,000 – \$8,250      = .1675 net in real dollars this equates to \$100,000 x .1675 = \$16,750

\$100,000

At first look it may appear that agency 1 with a 28% commission rate is the better deal. But when all factors are weighed, agency 2 puts 16% more money in your pocket.

At UCS, we have over 67 years of debt collections statistics to refer to and experience to rely upon.   We have refined our procedures and processes, including our fee structure and commission rates.  As a result we have gained many efficiencies in debt collections that you may find advantageous.  UCS is highly competitive with our commission structure, but even more so with our returns.

United Credit Service, Inc. is a full service, licensed revenue cycle management and debt collection agency in Wisconsin providing effective, customized one on one management and recovery solutions for our business partners. Visit our website at http://www.unitedcreditservice.com, call 877-723-2902, or check out our YouTube video.