How much is your late fee?

Back in February, in issue #3 (you can read it here if you missed it), we took a look at cut-off fee policies and a study I did for the 2010 Logics User Meeting. Today let’s take a look at the rest of that study and review what the survey respondents charge for late fees.

Flat amount or percentage of unpaid balance?

Of the 56 Logics customers who responded to the survey, 32 of them, or 57%, charge a late fee that is a percentage of the unpaid balance. The other 24 customers, representing 43%, charge a flat amount late fee, regardless of the balance due.

Flat Amount or Percentage?

Late Fee as a Percentage

Of the customers who charge a late fee that is a percentage of the unpaid balance, those percentages range from 1% to 12%, as represented by the following graph:

Late Fees by Percentage

Late Fee as a Flat Amount

Of the customers who charge a flat amount, those late fee amounts range from $3.00 to $25.00, as illustrated by the following graph:

Late Fee Flat Amounts

Impact of the Late Fee

So how do you go about determining how much to charge as a late fee?

It seems to me that the purpose of a late fee is twofold – to compensate the utility for the loss of operating cash and potential interest income because your customer didn’t pay on time and, secondly, to serve as a punitive measure (which is why some utilities call the late fee a penalty) to entice your customer to pay on time. Of these two reasons, I would argue that the punitive aspect outweighs the cash flow and loss of potential interest income, especially with interest rates as low as they are today.

Late Fee as a Percentage of Average Bill

Looking at your late fee as a percentage of your average bill is a good metric to see what the impact of your late fee is and how you compare to other utilities.

For the Logics customers that participated in this study, the impact of the late fee ranges from just under one percent (.98% based on an average late fee of $.82 with an average bill of $83.94) to over 40% (42.04% based on an average late fee of $25.00 with an average bill of $59.47) based on the following graph:

Late Fees as Percentage of Average Bill

As you can see, that is an extremely wide range!

So, what is the right amount to charge?

In determining how much to charge as a late fee, a utility has to take into account what is fair and equitable to its customers while at the same time insuring that the late fee is significant enough to make the customer want to pay before incurring the penalty.

Charging a late fee as a flat amount disproportionately impacts your customers with low bills. A senior citizen living alone who receives a minimum bill every month pays the same late penalty as a large industrial user. This hardly seems fair does it?

A more equitable approach would seem to be charging the late fee as a percentage of the unpaid balance. This approach insures that customers with lower bills are assessed a lower penalty. However, if the late fee is too low it may not serve as the motivating factor to pay the bill on time that you intended it to be.

The most creative solution to the flat amount vs. percentage dilemma is a hybrid of the two options. In this case the utility charges a percentage with a minimum amount, for example 5% with a minimum of $10. Oftentimes this is expressed as “5% of the unpaid balance or $10, whichever is more”.

If you have any questions about your late fee or would like assistance implementing a revised late fee policy, please give me a call at 919-232-2320 or e-mail me at gsanders@logicssolutions.com.

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© 2011 Gary Sanders

Who trains your new hires…?

In a meeting with a new customer recently, I was asked my opinion if they should train a new employee in-house or send the new hire to our training facility at Logics to be trained. Without hesitation, I recommended they send the new hire to our training facility.

Let’s take a look at why having your software vendor train new hires is a better value than having a current employee train the new hire…

The Funnel Effect

The Funnel Effect is an analogy I use when describing training employees in the use of a new software application. Here is an illustration of the Funnel Effect…

The Funnel Effect

Let’s examine each of the various levels of knowledge in the funnel…

Complete knowledge of a software application

The full knowledge of any software product, especially complex utility billing systems, is vast and requires spending considerable time learning the application. The top level of the funnel illustrates this full knowledge of the system.

Knowledge level of initially trained employee

Even the most eager and attentive employees won’t retain everything they are taught during training. Initial user training generally focuses on the fundamental processes required to accomplish the basic functions in a software application. For example, with word processing software this training would focus on typing, formatting and printing a document. In the utility billing world this training would focus on updating accounts, entering meter readings, calculating and printing bills and posting payments.

In a study titled “An investigation of training activities and transfer of training in organizations” published by Alan M. Saks and Monica Belcourt in the Winter 2006 issue of Human Resource Management, the authors report that 62% of employees apply training on the job immediately, 44% after six months and 34% after one year. As you can see, even immediately after training, the knowledge level of an initially trained employee is going to be considerably less than the full knowledge of the system.

Knowledge level of new hire trained by initially trained employee

Going live with new software is often a chaotic experience and, especially while paralleling systems, the knowledge that is reinforced through daily activities is generally the basic function of the system. While some employees will take advantage of opportunities to learn more about the system, others will be content to learn only what is required to accomplish the day-in, day-out requirements of their job.

Given the statistics in the previous section, an employee who is trained by a newly trained employee can be expected to retain only 38% (62% x 62%) of the full knowledge of the system. If the new hire is being trained a year after the initial employee was trained, the retention rate drops to 21% (34% x 62%)!

Knowledge level of second new hire trained by first new hire

As you can see from the previous section, with every employee that is trained by another employee, there is a resulting loss of knowledge of the system. By applying the statistics above to one more new hire, the best case scenario is a retention level of 24% (62% x 62% x 62%).  In reality, the second new hire most likely isn’t going to be trained immediately after the first new hire. If the training of each new hire takes place a year after the previous employee was trained, the retention level drops to 7% (34% x 34% x 62%)!

Who would you want training your new hires…?

While we’re talking about training, what about your current employees?

Refresher training

One of the types of training that we at Logics recommend for our customers is refresher training. Refresher training provides an opportunity for employees who are familiar with the daily operation of the system to review what they initially learned, hopefully being reminded of some features that they had forgotten about. It also provides the opportunity to learn more about the management and reporting capabilities of the system.

I highly recommend refresher training. If you are a Logics customer, give your Account Manager a call to learn more about refresher training. Even if your software vendor isn’t Logics, I encourage you to contact them to see what additional training opportunities are available.

If you have any questions about new hire training or refresher training, please give me a call at 919-232-2320 or e-mail me at gsanders@logicssolutions.com.

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© 2011 Gary Sanders