Offering Customer Financing is an established way to drive more revenue for your business, but at what cost?
Here’s the dilemma some businesses have.
On one hand, offering consumers a “buy now, pay later” option is a surefire path to more sales, particularly if you sell a high ticket product or service, and on the other hand, the costs to your business associated with it could take a major bite out of your profit margin. Whether you simply swipe a credit card to make a sale or offer an in-house financing option, there’s a hit to your bottom line.
Many businesses simply choose to absorb the fees and chalk it up to the cost of doing business. After all, a slice of the pie is better than no pie at all. And the fees for accepting credit card payments or many customer financing options is relatively minimal. But what if you operate on a very slim margin or the fees to make a sale through financing are more than minimal? Or what if you simply don’t want to absorb the cost? There’s a path forward for you.
Passing on the costs associated with Customer Financing is probably not as simple as just adding it to your customer’s invoice.
Disclaimer: I am not an attorney so everything I’m about to say should not be construed as legal advice.
While surcharging for most credit cards has been litigated and has become an accepted practice in most states, the same can not be said for surcharging the costs associated with customer financing. It is not kosher to simply tell a customer, ” the financing I’m offering you is costing me $100 of your sale therefore I’m going to increase the cost of your product (or service) by $100.” In other words, you can not charge a higher price to people because they are using your in-house financing option.
But if that was the end of the story this would be a much shorter article and probably not worth writing.
What is the cost value of your product or service?
Let’s accept this premise.
Every business (there are some unique exceptions) can set the pricing of their product or service at will. At the same time, every business can decide to have a sale and reduce their pricing for any reason at any time.
In certain industries, haggling is almost an expected practice. And when was the last time, as a consumer, you paid the manufacturers suggested retail price? Really, it’s the market that establishes a fair price. If your business is charging too much, or too little for that matter, you’ll find out soon enough. The fair market price is what the market is willing to pay.
This is particularly true if you sell something that’s intangible. If you are a life coach, for example, you set the value. There’s no established pricing and the sale proposition often comes down to establishing need and credibility. No two life coaching programs are identical so it’s impossible to compare one verses another. If you can achieve a connection in some way, it then comes down to simply closing the sale.
I once attended a conference hosted by a renowned marketing guru. He had a special breakout session on the topic of how to earn more revenue by raising prices. My assumption was that there was going to be some deep thought approach to perhaps establishing a concierge service in order to justify charging clients more money.
After a pretty lengthy delay, the guru came onto the stage, took a deep breath and said, “here’s the secret to charging more money for your services. DECIDE TO CHARGE MORE MONEY FOR YOUR SERVICES AND JUST DO IT!”
So simple, yet so profound. Often, it’s the cost of the product or service that sets the value in our minds, not the other way around. Someone can look at what what seems to be two identical products. One costs three times than the other. Most people will make the assumption that the more expensive product must be superior and therefore worth the price. Sometimes, it becomes a matter of pride and prestige to purchase the more expensive product. Regardless, the value is in the eyes of the beholder.
Consumers have two financial sensitivity perspectives and it revolves around how they plan on buying.
For consumers that have the money, the sale often comes down to price. It’s not necessarily about comparing one price to another, but instead, the affordability of the amount being asked for the product or service.
If you’re a consumer looking to purchase a car, for example, and you are intent on buying with cash and you have $20,000 on hand, a $30,000 car is deemed unaffordable. It may be a better value for the money, but if you don’t have it’s beyond your means.
On the other hand, if you are a consumer that does not have the cash and you must either use your own financing means (a credit card) or seek out third party financing (customer financing), the critical element of the sale is will the monthly payment fit into my budget.
It’s no longer about the $20,000 car, it’s the amount that the car costs each month. That monthly payment is really all that matters. The end price of the car is less important as long as the payments are in-line with what the consumer’s perceived budget can handle. And a monthly payment makes the cost more fluid. An additional $500 may only increase the monthly obligation by $10. That’s a lot easier to wrap your brain around. Often, a new car owner has no idea how much they actually paid because their focus was shifted to the monthly payment.
Here’s how your business can legally and ethically tap into both sensitivity points and increase your profit margins at the same time.
Let’s recap. You’ve determined that the costs to your business associated with offering customer financing, or some of the customer financing solutions available to you is prohibitive and you need to find a way to offset some or all of those costs. At the same time, you don’t want to lose your competitive advantage when it comes to people paying with their own resources and are basing their purchase on price.
Here’s a way to accomplish both.
Step 1, increase your price. Just do it. Determine how much of the customer financing cost (or discount) you want to offset.
Let’s say you’ve been selling a product or service for $5,000 and you want to offset up to a 10 percent customer financing fee. The new price of your product or service would now be $5,500. It’s that easy. Don’t look back. It can really be anything because I’m going to show you how you can have your cake and eat it too.
With customer financing, there could be a range of fees depending on the programs/lenders and the consumer’s credit. If the solutions your business has runs from 3% up to 15%, the 10% increase won’t cover you on all transactions, but perhaps it covers you on the average transaction. On some sales, you may fall short but on others you will come out ahead. It’s important to standardize your pricing and look at your book of business as a portfolio. That’s what the most successful businesses do. You can always adjust your pricing over time to account for any market changes. If you find that the average cost of financing has shifted on you, adjust your full price to account for the change.
Step 2, determine what your cash discount will be. This is how you will stay competitive when you need to be. If you feel that you can live with the previous $5,000 net price, make the cash discount $500. Once again, it’s important to have a standardized approach with this method but you can always adjust when needed. Let’s say you want to finish your month strong, you can have a limited time only $750 cash discount. You still even have room to negotiate on a particular sale if that’s common for your business.
Step 3, package it. Every business handles pricing differently. Some lead with pricing while others focus on sales proposition and leave the pricing for the close. Regardless of your approach, it has to be dealt with in the sales cycle.
Of course, I’m coming to you through the lens of financing so I obviously believe that it’s an important ingredient that needs to be put out there early front and center. We are living during a time where most people are living week-to-week, or close to it. And even people that have resources are feeling financially uncertain and are less likely to deplete what they have. Studies have shown that a large segment of consumers want to compartmentalize major purchases by utilizing third party financing.
So my suggestion is to at least get the idea of financing out there early so your targeted audience do not exclude themselves before you’ve had the opportunity to make your sales proposition.
Here are some ideas on how you can frame the approach.
- Buy today and save $500 or finance and pay as low as $117 per month
- Buy today and receive a $500 instant rebate or pay as low as $117 per month
- Finance and pay $117-$188 per month or get a $500 cash savings