What is Customer Risk and How do You Assess It?

By Mika Kankaras

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Ah, have you ever fallen for the aesthetically appealing food photos on social media only to leave empty-handed (and hungry)? Well, it happens even to the best of us. Or, maybe this is an even more familiar example - if you’ve ever had a friend who convinced you to order something from a new online restaurant, and after placing the order and waiting for the food, you've discovered the next - the restaurant is a complete ghost town.

This is a lesson many of us share, to do a little bit of online detective work before making a purchase, since it can save you from a major disappointment (and maybe even an empty wallet). All of these experiences got me thinking about customer risk, something that applies far beyond online shopping. In the business world, customers are fantastic - they’re the reason everything revolves around. 

But sometimes there are risks, and learning about them can only bring more strength to your business, no matter what the niche is, or help you build stronger relationships with the right customers. There’s plenty to uncover, so shall we begin? Let’s go.

 

Customer Risk 1

 

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Not all customers are created equal: same goes for the risks

The allure of thriving businesses and busitling with satisfied customers is undefinable. Yet, the path to success is rarely paved with only positive interactions. Similar to how a beautifully crafted pastry might conceal a hidden filling, some customers can present unforeseen challenges. This is where customer risk assessment waltz into the picture - a crucial process for understanding the potential downsides associated with welcoming new customers.

Customer risk isn’t a singular entity. It manifests in different forms, each with its own set of challenges. Let’s explore some of the most common “flavors” of customer risk and how they can impact your business:

The financially fussy: These customers fall into two main categories: 

  • Delinquency and default: Just imagine delivering a stellar service, only to have your customer vanish when the invoice arrives. This is the risk of delinquency and default, where customers fail to pay on time (or at all!). This can significantly strain your cash flow, hindering your ability to operate smoothly. 
  • Credit card calamity: Customers vary greatly in their financial responsibility. Creditworthiness is key - it’s essentially assessing a customer’s ability to repay what they owe. While offering services to someone with a shaky financial history might be tempting, it could lead to bad debates and financial strain down the line.

The fraudulent felon: Unfortunately, not everyone has honest intentions. Some may attempt to exploit your business through fraudulent activity. This could involve using false information or even engaging in illegal schemes. This not only damages your finances but also exposes you to potential legal repercussions.

The reputational rollercoaster: Well, the digital age has a double-edged sword for businesses. Happy customers can be your biggest advocates, but disgruntled ones can turn into a PR nightmare in a second. Negative online reviews, especially those that go viral, can seriously damage your brand's reputation. Remember, it only takes one bad apple to spoil the bunch, so keeping customers happy is paramount.

Regulation rebels: Going through the constantly changing atmosphere of regulations can feel like a constant slalom race. Compliance with regulations like anti-money laundering (AML) and Know Your Customer (KYC) is crucial. Failing to meet these requirements can result in fines, but more importantly, it can tarnish your reputation and make you appear untrustworthy. 

Disruption dominoes: Okay, just picture a customer who’s the embodiment of chaos - late payments, unreasonable demands, the whole package. These disruptive customers create operational headaches for your entire team. They divert valuable resources away from serving your other clients and can potentially delay other projects. The domino effect can be significant, impacting your overall productivity and efficiency.

 

Customer Risk 2

 

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Strategies for how to assess customer risk and tame the risk beast

So, you’ve identified some potential customer risks- what now? Don’t stress, there are effective strategies for managing these risks and keeping your business safe. It’s kind of like you’re hosting a party and you want everyone to have a fun and positive experience, but you also need a plan to ensure that something goes out of control. Here’s how to assess customer risk and implement strategies to keep your business party under control: 

  • The segmentation shuffle - just like you wouldn’t invite your wild college buddy to a formal dinner party, segmenting your customers based on risk makes perfect sense. Customer risk assessment involves grouping customers with similar risk levels. For high-risk customers, you might require additional verification steps, like requesting extra documents or conducting a deeper dive into their financial history. 
  • Extra scrutiny spotlight - sometimes, a guest at your party might seem a little suspicious, maybe they keep asking for your valuables. In the business world, this translates to enhanced due diligence for high-risk customers. This is essentially putting them under a magnifying glass to gather more information and ensure their legitimacy. How to assess customer risk in this scenario may involve more detailed background checks or a closer look at their financial statements. 
  • Setting boundaries with controls - so, there’s a wild card guest at your party who keeps trying to break the furniture. Boundaries are important, and so are controls in customer risk management. For high-risk customers, you might implement controls like transaction limits or require upfront payments to minimize potential losses. It’s all about setting clear expectations and protecting your business from any reckless behavior. 
  • Knowledge is power (and it prevents fraud) - educating your customers about responsible financial practices and fraud prevention is like giving them a party safety manual. The more they know about protecting themselves from scams, the less likely they are to fall victim to fraudsters and tricksters, which ultimately benefits your business as well. By empowering your customers with knowledge, you can create a safer environment for everyone involved.

By implementing these strategies, you can effectively manage customer risk and create a safe and secure environment for your business to thrive.

 

The role of technology in customer risk assessment

Gone are the days of rudimentary manual checks - the business world has graduated from the awkward “show-me-your-ID-at-the-door” approach to customer risk assessment. Technology has emerged as a powerful ally, offering a suite of sophisticated tools to streamline this critical process. 

Data analytics plays a central role, acting like a team of meticulous investigators. By analyzing vast amounts of customer data, it uncovers hidden patterns and red flags associated with high-risk customers. Suspicious transaction behavior or inconsistencies in financial information are no match for the precision of data analytics. This allows businesses to take a proactive, data-driven approach to risk identification, mitigating potential threats before they materialize. 

Models that use machine learning add another level of safety. These smart systems can learn from and change based on past data, which lets them automate the process of assessing risk. This not only frees up valuable staff time, but it also makes risk identification more accurate by taking subjectivity out of the picture. The evaluation process is more objective and consistent when machine learning is used. 

Customer Relationship Management (CRM) systems function as the digital equivalent of a comprehensive guest list. They serve as a central hub for all customer data, providing easy access to the information required for thorough risk assessments. Advanced CRMs can even identify potentially risky customers based on pre-defined parameters. This provides businesses with a complete understanding of each customer, allowing them to make informed decisions regarding potential risks.

Customer risk assessment used to be a reactive process, but technology has changed it into a proactive and data-driven protective measure. Businesses can make their environments safer and more stable by using data analytics, machine learning, and CRM systems. This will help them grow and be successful in the long term.

 

 

Customer Risk 3

 

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The final toast - why does customer risk assessment matter?

While going through the complexities of customer risk, from fraudsters to online critics, a key truth comes out: customer risk assessment isn’t a hindrance, but the foundation for a thriving, healthy business. By actively understanding potential risks, organizations gain a significant advantage. Financial losses from the fraud of delinqunecis are mitigated, protecting your bottom line.

Reputation, meticulously built, is safeguarded by minimizing negative customer experiences and regulatory concerns. Most importantly, a strong risk assessment allows you to cultivate stronger relationships with the right customers. Focus your resources on fostering trust and loyalty with those who truly value your offerings, not managing high-risk individuals

Neglecting customer risk assessment is akin to inviting uninvited guests to a party - a recipe for disruption. Invest in a robust program and watch your business not only survive, but flourish. This approach empowers you to navigate challenges with confidence, paving the way for long-term success.

 

Author:

Mika Kankaras

Mika is a fabulous SaaS writer with a talent for creating interesting material and breaking down difficult ideas into readily digestible chunks. As an avid cat lover and cinephile, her vibrant personality and diverse interests shine through in her work.

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