How Does Cash Discount Program Work?

A cash discount program can be a great way to encourage customers to choose their business over others.

It can also encourage customers to pay more quickly instead of paying on credit or leaving it to the last minute to settle their bill.

These programs can be a helpful and efficient way to ensure you manage your cash flow by receiving payments quickly and without the worry of credit card processing fees.

But how exactly does a cash discount program work for businesses?

In this article, we are going to be taking a look at exactly what these programs are and how they work.

Let’s get started.

What Is A Cash Discount Program?

A cash discount program gives your customers an incentive to pay in cash or to pay quickly by offering them goods or services at a discounted price compared to purchases made on credit.

By charging a little extra for transactions using credit, this encourages customers to pay by cash instead.

Why Offer A Cash Discount Program?

There are several reasons to implement a cash discount program at your business. Let’s take a closer look at some of the benefits a program can offer.

Reduction In Credit Card Processing Fees

Credit card payments are convenient, but they also have a lot of hidden costs that businesses have to pay.

Every credit card payment involves paying processing fees, such as a transaction fee for every purchase, monthly fees, equipment fees, and interchange fees.

These charges can add up to 3.5% of every purchase and can be a major overhead, especially for small businesses that only have small profit margins to begin with.

Easier To Budget

Processing fees can be difficult to work out as they can change depending on the type of card used, whether it’s swiped in person or taken online, and even in the amount of money spent.

Cash discounts are more stable and flat, so you will know exactly how much money you will be receiving from each transaction.

Quicker Settlement Of Accounts

For many businesses that have small profit margins, waiting for invoices to be paid can be a great strain on a company’s finances.

By offering a discount for any invoice that is paid with a specified time limit, you can ensure that your cash flow is more efficient and fluid and plan accordingly.

Reduction In Chargebacks

As well as reducing your credit card processing fees, a cash discount program can also reduce the amount of “friendly fraud” and chargebacks.

These occur when a customer asks their cardholder to reverse a charge and leads to their payment being debited from the business’ account.

Although chargebacks are a useful tool to protect customers from fraud and any unauthorized charges, they can also be abused.

Can Encourage Growth

By implementing a cash discount program, you give your customers the choice of paying by credit or cash, while offering an incentive to choose cash and to pay quickly.

Although credit has become the payment method of choice, many customers like being able to pay in cash and will pay more quickly if they receive a discount.

A discount program can increase customer satisfaction, which in turn will lead to a higher rate of customer retention. 

How Does A Cash Discount Program Work?

In practical terms, a cash discount program works in many ways and these should all be considered before you decide to implement one in your business.

Amount Of The Discount

The amount of the discount is usually expressed as a percentage of the cost of the goods. The main factors you should consider are how much your credit card processing fees are and how large your profit margins are.

A cash discount program aims to save money compared to credit card processing fees, so don’t offer a discount that will leave you out of pocket.

The Circumstances Of The Discount 

If you sell to other businesses or sell in bulk, customers often don’t pay in cash at the point of purchase.

However, you can still encourage both cash payments and early settlements of invoices by extending the cash discount to include quick payments.

If you do decide to extend cash discounts to quick settlements of accounts, then you will need to decide what time frame will count.

Many invoices have a payment date of 30 days, so a cash discount could be offered on payments made within 7 or 14 days.

Signage

For customers to take advantage of a cash discount program, they need to know it exists and to understand it.

This is most easily achieved by having signs notifying customers that the business implements a cash discount program and then outlining the main benefits.

Signs should be displayed prominently, in both the shop window and at every checkout, so that customers don’t miss the opportunity to pay in cash.

It’s also important that every employee fully understands the program and is able to explain it to any customer that asks. As even the most prominent sign can be overlooked, a clerk explaining the program at the point of checkout can be invaluable.

Applying The Discount

The discount should be applied at checkout and this should be done consistently and transparently. It shouldn’t be applied manually, and should instead be programmed into your checkout terminals so that no mistakes are made.

It’s also important that any receipts or invoices produced clearly state that a cash discount has been applied. This makes it clear to the customer that they have received a discount and will encourage them to do business with you again.

Final Thoughts

A cash discount program is an easy and effective way for businesses to reduce their credit card processing costs while also improving their customer service and retention.

By offering your customers a discount, you can reduce your own costs and grow your business. Take your credit card processing to the next level by visiting our payments knowledge hub.