Payment terms and marketing: Can you break the conventions and succeed?

bulldozer with cash

Architectural business practice consultant Enoch Sears advocates in a recent eletter that architects should set up systems where clients pre-pay for services, often with their credit cards.

Of course, in proposing that approach, he is bucking the norms, where professional practitioners deliver their services, and then their bills. The problem, Sears rightfully points out, is that creates incredible cash flow stresses — as the costs of running the practice including overhead expenses and salaries must be paid often well before the clients are invoiced, then paid.

Yet fast pre-payment seems contradictory to the sorts of messages marketers generally want to deliver. At least in the retail space, the “easy payment plan” and “no cash down” offers predominate, with financing services providing the backbone behind many businesses (and in some cases generating a significant portion of the revenue.

My first reaction on reading Sears’ pay-up-front model was, “Oh sure, try that on your real customers and see for yourself” — and then I quickly came back to earth when I realized my own business’s unconventional invoicing policies explain in part why we are still in business after three decades.

At the start, I used a 25 per cent cash prepayment discount to generate the cash flow essential for business survival on a new business with absolutely no capitalization. Of course, I set the price to be profitable at the “discount” rate — anyone who paid full price was just providing a bonus.

Once I established enough trade credit to balance receivables and payables, I switched the rules to a prompt payment system — if you pay our invoices within 15 days of publication, you get the 25 per cent savings; if you want conventional 30 day terms, you pay the higher “gross” price. (The two price system avoids any suggestion of usurious interest rates on overdue accounts.)

The model has worked like clockwork ever since we started with the system’s foundations in 1988 — but I have failed to convince other business owners that it could work for them.

How effective is it?? Quite often clients rush their payments by courier to meet the deadline. But the biggest advantage occurs when our accounts receivable clerk works on the longer-overdue accounts. Our practice is never to enforce the Gross rate; effectively if someone six months overdue sends us the lower net payment, we will write off the balance. But enough slower payers indeed send us 25 per cent more that our bad debt write off level is -2%.

That’s right, we book a profit of 2 per cent on our overall sales volume from advertisers paying the Gross rate. We deduct the actual write-offs from the additional revenue to come up with that number. And you can imagine that an additional $10,000 in revenue on $500,000 in sales is a pretty nifty bad debt bonus.

So, yes, let’s consider ways to break the conventional rules about payment cycles and discounts. If you are queasy about demanding cash up front, set your billing rates as if the cash discount is your real price, and tack on a 25 per cent “gross rate” payment penalty if your clients want to pay in arrears. And follow Sear’s advice and offer to collect the money by credit card. In the end, I expect whatever you pay in credit card fees will be more than offset by the clients who indeed prefer to pay a whole lot more for being a little late.

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