How To Successfully Implement Cash Discounts
There is an art to using cash discounts effectively. Without the proper promotion, explanation, and calculation, you could lose rather than save money on the endeavor. Every business can offer their customers cash discounts, including retail stores and hotels. Some upscale boutiques may allow customers to pay for items in smaller installments. Or, a hotel may allow a valued client access to a cash discount for a large bill.
Calculating Cash Discounts
It’s all good and well to understand the importance of cash discounts and all the good they can do for your business. It’s quite another to actually know how to make one. Depending on your industry, there may be other factors that influence your calculations, such as competitor prices and discounts. But stay true to your business model and values—your clients will value whatever offers you make.
Business math is all about understanding the variables and seeing how they translate to your business. Investopedia explains the cash discount formula as follows:
“Percentage discount [if paid within xx days] ÷ Net [normal number of payment days].”
Percentage Discount
The percentage discount is the reduction amount you promise to the client. You may tell them they get five or fifteen percent off their purchase. You also want to note the amount of time that the discount applies. You don’t want that five percent offer to last forever, so you may put a limit of ten days on it.
Net
The net amount is the total number of days the client has to pay the invoice. While this number may vary, you're paid within and net days should correlate. For example, you likely wouldn’t give a client 29 days of discount to pay a 30-day invoice.
Once you have these numbers, plug them into the equation and go from there. Though you don’t solve for a specific unit, the calculation is in the decision-making. When you decide how many days to allow the client to pay, you should calculate how soon you’d like the payment. When determining the percentage, you should calculate the decreased price that doesn’t put you at a loss. If you need help making decisions like this, it’s helpful to have a point-of-sale system. For example, retail accounting software like ours at Business Software Solutions can help a store make wise cash discount decisions for their customers.
You may decide to give better discounts to one client because of a long or strong relationship. However, you calculate the cash discount, make sure the client has an enticing imperative to pay it early.
Marketing Cash Discounts
You can have incredible savings and deals, but they won’t mean anything if the world doesn’t know about them. Marketing is key to the success of your cash discount. When you send promotional emails to your clients or reach out about a regular invoice, you should let them know about your offers, especially as new orders come in. You can also make it a permanent advertisement on your website for prospective clients to see. When people understand your willingness to work with them and find a mutually beneficial solution, they’re more likely to contact you.
Get together with your marketing team to find the right way to phrase your commitment to cash discounts. Find fun infographics and customer reviews of your cash discount opportunities. You can even create a whole webpage of frequently asked questions about your cash discounts so people can figure out just how they work. With the right marketing, a little bit of information can go a long way and secure a purchase from new clients.
Knowing how offering a cash discount can benefit your business can transform how you operate. They are a great way to establish rapport with new customers and secure long-term partnerships. If you have any questions pertaining to POS software and hardware, reach out to our team today.
