Psycology of PrePay Accounts?

Discussion in 'Business Operations' started by gkell88, Dec 8, 2001.

  1. gkell88

    gkell88 LawnSite Member
    Posts: 55

    We've always wondered whether discounts or convienience motivates customers to prepay.

    We offer a 5% discount for pre-payment, and our prepay amounts are always more than we expected. We need the money at the beginning of the year, but man that 5% adds up fast after our working capital is sufficient.

    What do you folks think? If we knock down the discount, will we substantially reduce prepays?
    How much discount is enough?
  2. 1grnlwn

    1grnlwn LawnSite Bronze Member
    Posts: 1,261

    I have no idea, but don't you hate doing all those "free" apps at the end of the year?
  3. brentsawyer

    brentsawyer LawnSite Senior Member
    Posts: 663

    This is easy to administer and evaluate. Figure what money costs you to aquire or have. This will represent your interest rate on your business interests. This will be different for all businesses because the amount of debt or amount of cash you carry will decide this. For example, if you currently are paying 10% on loans you have, figure 10% per annum for your discount rate and discount it to present value in excel. This is like giving your business a loan from your clients easily and fairly to you and them an incentive to pre-pay. When doing this, it is very important to do a present value, NOT 5 or 8% discount. E-mail if you need help.

    If you have enough cash to carry you and don't need the cash to float yourself, obviuosly you'd be better not offering the same discount. This time, you'd offer no more than a 3-4% discount rate per annum to clients because of the low interest rates you'd earn. Anything higher, your cheating yourself and losing money out the back door by doing so and wouldn't realize it.

    So don't offer anymore than what it cost YOU or YOUR BUSINESS to have cash. Once you have figured your cost of money for one account, you have an easy formula to figure the rest.
  4. Matthew Morgan

    Matthew Morgan LawnSite Member
    Posts: 45

    Bake a percentage into your prices.

    People love to feel like they are "winning" something. If they feel that they can save 5% or even 10%, they are happy and you have two big bonuses. 1) You get paid in advance, which means no late or no payers. 2) You are getting "free" money from those who don't pay in advance. This money being the percentage that you baked in before hand. Don't cut your own throat for the sake of a discount. If you do, only the customer wins. I prefer the win/win situation myself!

  5. 3% and no more for mowing and heavy labor costing jobs.

    5% on apps and higher profit margin jobs.

    One LCO that I know of here offered those exact rates.
    They are out of biz, know one knows why yet. I guess selling every peice of equipment and leasing new was to much for them. And they were the 4th largest here.

    But I've been tossing this around for the better part of this year.

    I would keep it to a minimum on the prepayers. 3% of $100k is $3000.

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