If you own a small business, then there is a good chance you might still be learning the ways of owning a company – and that is absolutely fine. We have to start somewhere, after all.
When it comes to knowing the difference between a cash discount and a surcharge, it can be difficult to know what is what. Fortunately, it is actually really easy.
The difference between a cash discount and a surcharge is that a cash discount is applied to the price of an item, while a surcharge is applied to the total amount due on the invoice.
For example, if you receive a $5 cash discount when purchasing an item for $100, then your invoice would show a total of $105 instead of $110. If you received a $10 surcharge on the same purchase, however, your invoice would show a final total of $115.
In both cases, the customer pays less than they otherwise would have paid, but in different amounts. The main difference between the two is the way the discounts are calculated.
A cash discount is only applied once; whereas a surcharge is applied each time the customer makes a purchase from you.
So, let’s take a look at both a cash discount and surcharge in more detail.
What You Need to Know About Cash Discounts and Surcharge?
Cash discounts and surcharges are common terms used by businesses to describe how customers pay their bills.
They are often used interchangeably, which can make them seem very similar. However, there is a big difference between these two types of discounts.
Let’s go over some key differences:
How Are They Calculated?
A cash discount is only applied one time, so it will not change with every transaction. On the other hand, a surcharge is applied every time a customer purchases something from you.
This means that a cash discount is always subtracted off of the invoice before any additional charges or taxes are added.
When They Can Be Used?
A cash discount can only be used when paying for goods or services. It cannot be used to reduce the amount of money owed on a bill.
In contrast, a surcharge can be used to reduce the total amount owed on a bill. For example, a surcharge could be used to lower the interest rate on a loan.
What Type of Businesses Use Them?
Both cash discounts and surcharges can be used by any type of business. However, they are most commonly used by retailers and service providers.
Who Uses Them?
Business owners use cash discounts and surcharges because they want to offer incentives to their customers. These discounts and surcharges are typically offered as part of a promotion or special deal.
Why Do They Exist?
There are many reasons why companies use cash discounts and surcharges. Some of those include:
To Encourage Repeat Business
Many businesses offer discounts or coupons to existing customers. This helps them build loyalty among their clients.
To Incentivize New Customers
If you are trying to attract new customers, offering discounts or coupons may help you get their attention.
To Reward Loyal Customers
Loyal customers deserve rewards. So, businesses give out cash discounts and surcharges to reward their best customers.
Where Should I Use Them?
You should use cash discounts and surcharging when you want to offer incentives to your customers. Most people think of discounts and surcharges as ways to save money.
But, they are actually much more powerful tools for motivating your customers.
Is There Anything Else to Know?
Yes! Here are some other things you need to know about cash discounts and surcharges:
Both Are Legal
Although they are sometimes called illegal “bait-and-switch” tactics, they are perfectly legal under federal law.
Both Are Effective
Studies show that using discounts and surcharges increases sales and profits.
Both Are Easy To Implement
You don’t need to hire an accountant to set up a discount or surcharge program.
Both Have Strong ROI
A study found that businesses who implemented discounts and surcharges saw an average return on investment (ROI) of 15%.
Both Are Widely Accepted
According to research, almost 90% of consumers accept discounts and surcharges.
Both Are Highly Customizable
Companies can customize discounts and surcharges to fit their specific needs.
How Do I Set Up My Own Program?
It’s simple! All you need to do is decide how much you want to charge each of your customers. Then, divide this number into two parts.
The first part is what you will pay yourself. The second part is what you will keep for yourself. Next, calculate the percentage of the second part that you want to keep.
Finally, create a coupon code that matches this percentage. When someone uses this coupon code, they receive the discounted price.
Can I Charge More Than One Price?
Yes! You can charge different prices to different groups of customers.
For example, if you sell products online, you could offer free shipping to certain customers and then charge extra for faster delivery. Or, you might offer a discount for students.
Is There A Downside To Offering A Surcharge Program?
No. In fact, there are several benefits to offering a surcharge program. First, it gives you control over pricing.
Second, it allows you to increase profit margins by charging lower prices but to a high volume of customers. Third, it encourages customer loyalty.
Fourth, it provides a great way to reward your most valued customers. And finally, it makes your company look good.
Cash discounts and surcharges are powerful marketing tools. They’re also very easy to implement making it suitable for even small businesses to try.
There are so many advantages to doing so that it’s worth considering whether, or not, to include them in your next promotion.
Hopefully the above article has helped you to understand the differences better, as well as the advantages both a cash discount and surcharge can do for your business. This is especially true if you are looking to reward loyal customers and to build up revenue. We have build out an extensive processing library for you to reference.
Paul Martinez is the founder of EcomSidekick.com. He is an expert in the areas of finance, real estate, eCommerce, traffic and conversion.
Join him on EcomSidekick.com to learn how to improve your financial life and excel in these areas. Before starting this media site, Paul built from scratch and managed two multi-million dollar companies. One in the real estate sector and one in the eCommerce sector.