Pricing is obviously the biggest lever for maximizing operating revenue—price too high and occupancy suffers; price too low and you’re leaving money on the table.
But there are other levers that affect revenue as well—let’s talk about one of those elements of demand management that is so often misunderstood: credit scoring and acceptance.
How are credit score cutoff decisions made in your organization? Are they made by operations or by the pricing and revenue management organization (if you have one)? Do you manage to a decline rate (i.e. keeping decline rates above or below a certain amount) or are they based on an analysis of the expected default rate or bad debt? Does your credit scoring vendor even know what the expected default or bad debt is expected to be by score? Many systems are rule-based rather than outcome-based, so they don’t really know what to expect.
I strongly believe that credit scoring is about managing risk, so:
1. You should use a tool/vendor with a validated model that forecasts bad debt by score
2. You should manage to a bad debt ratio rather than a decline rate; that ratio might vary by exposure just like your pricing should vary by exposure
3. Decisions should be made by analysts, not operators
Strong opinions there. Do agree? And if you disagree, why? Let’s talk about this and maybe we’ll all get a bit smarter about how to manage credit scoring decisions.
Donald is CEO of Real Estate Business Analytics (REBA) and principal for D2 Demand Solutions, and industry consulting firm focused on business intelligence, pricing and revenue management, sales performance improvement and other topline processes