Let me be direct: Early pay discounts are costing you money. Whenever I make that comment at a conference or even just in a one-to-one conversation with a dealer, I typically get one of three reactions:
- You don’t know what you are talking about.
- What do you mean?
- I know, but I can’t take them away.
Look, I get why they exist. I also understand the competitive pressure of not offering early pay discounts, when other suppliers are. I am not suggesting that you should weaken your ability to win new customers or keep existing ones. My argument is that if you look carefully at what you are getting in return for offering a 1% or 2% early-pay discount, you could be spending that money in a way that is much more impactful or – perhaps even better – spending less to achieve the same result.
Dissecting the Impact and Cost of Early Pay Discounts
Proponents of early pay discounts argue that they help incentivize faster payment, and they increase stickiness and loyalty of your best customers.
Take a closer look at the accounts-payable processes of your customers. We at BlueTarp have the benefit of observing how tens of thousands of contractors pay each month. Here’s what we see:
Once statements are delivered following the 25th of every month, we immediately begin seeing a stream of payments, even though the payments are not technically due for a few weeks. Just as some households pay bills promptly when they arrive, so do some businesses. They tend to be strong, sturdy businesses with exceptional credit and capable, back-office team members. Roughly three of 10 companies will pay upon receipt, regardless of the presence or absence of an early pay discount. On the other end of the spectrum, you’ll have three or so companies that are chronic slow payers. Some are explicitly cash-strapped and lack the funds to pay promptly…no matter what discount exists. Others simply are more disorganized in how they manage their AR and AP functions. That leaves four or so companies in the middle that could be conceivably influenced to pay early.
About the Author
Scott is president and CEO of BlueTarp. He has spent the majority of his twenty year career in financial services helping businesses grow more rapidly through the effective use of credit.More Content by Scott Simpson