Understanding Cash Discount
A cash discount is when a business offers a discount to customers who pay by cash or check, instead of with a credit or debit card. The business owner adds a customizable service fee to all credit and debit card transactions, and then rewards customers who pay by cash or check by giving them a discount.
Interest in cash discount programs is on the rise because they can offset payment processing costs for business owners. While cash discounts are successful for some businesses, they aren’t the best solution for everyone. How can a business owner determine if a cash discount program is the right choice for them? There are several factors to consider, but let’s start with the basics.
If you offer a cash discount, you may see more purchases made with cash or check as opposed to credit or debit card. Many business owners assume that is a good outcome because they don’t pay a tangible processing fee on cash transactions, as they do for credit and debit card purchases. However, don’t be fooled into thinking that cash is free. It will cost you time or money to count the cash and take it to the bank. Cash also gets stolen. Small businesses are susceptible to theft of cash by employees. According to a study by the Hartford, the most common insurance claim among small businesses is burglary and theft, including employee theft. In addition, many studies have shown that customers who pay with credit cards spend more money. So, you may or may not want to motivate customers to use cash rather than card or check.
We’ve seen that cash discounts are common in certain cities, and rare in others, which is an important consideration for you. If your customers are accustomed to seeing cash discounts at other businesses in your area, then they are more likely to accept – or even expect – a cash discount from you. On the other hand, if you are the only business in your area with a cash discount program, you may receive complaints from those who prefer to pay via credit or debit card.
What is the mix of new vs. repeat customers for your business? If you rely heavily on repeat customers, consider the impact of the service fee on non-cash payments. All else equal, customers who prefer to pay with credit or debit cards may choose to frequent the competitor down the street that doesn’t have a service fee. On the other hand, if your business relies on tourists on vacation, you don’t have to worry about the potential impact on future purchases.
Are your customers required to buy your product or use your service? If so, they will appreciate having payment options, even if some incur a service fee. For example, people must pay their rent, taxes and utility bills. On the other hand, consumers decide if and when to purchase a new set of golf clubs or fashionable handbag, and a service fee may cause certain customers to walk away from a discretionary purchase.
If you proceed with a cash discount, you should also consider transaction size when you determine the service fee. A percentage fee is the most common (e.g., 4%). If your business has an average ticket price of $1,000.00, cash discounting may not be the answer, as your new cost is $1,040.00. In many competitive markets the loss of customers may outweigh the benefits. For lower average ticket prices it may make all the difference in the world. For example, 4% for a $3.75 cup of coffee equates to only $0.15, so a coffee shop might consider cash discounting because statistically 98.3% of all customers will not have any issue with paying the additional fee..... saving you hundreds or thousands of dollars per month.
Evaluating each of these factors will help you determine whether a cash discount program is right for your business.