Why your clients want to pay you in advance
Historically the accounting profession has always given clients credit. It may be 30 days. It may be two months. But we give credit.
I don’t know why. Perhaps it’s that we are in the service industry and feel we should.
But guess what? Behavioral economics says it’s not what customers want. They actually want to pay upfront. And it makes sense for you too.
If you prefer to watch rather than read you can watch the video here.
The benefits for you
There are numerous benefits when your clients pre-pay.
1. It improves your cash flow
When you get the money upfront you have more money in your bank account and so your cashflow is instantly improved.
2. It can eliminate cash collection
How much time do you spend chasing money after you’ve done the work? Too much.
3. You can eliminate bad debts
If you get paid before you start the work then you can never have a bad debt write-off, which for some firms can mean thousands of pounds of profits lost. That’s just crazy.
4. You can create predictive revenue streams
By changing the way customers pay, you can create recurring payments where the client pays you the same amount every month. Now you have created a more predictable revenue stream for you.
How it helps your clients too
But it’s not just about the benefits to you – which in truth are pretty obvious.
It’s also about the benefits to your clients. Again I believe there are four:
Paying you upfront gives the client 100% certainty as to what the job is going to cost them. Unlike pricing by time they know exactly what the final price will be.
2. The saliency effect
This comes from the field of price psychology and behavioral economics. It relates to the fact that the greater the association of money coming out of our pockets the greater the payment pain.
Think about it.
Your client pays you in cash at the end of the job. It hurts. They can feel the money coming out of their pockets.
Let them pay by card however and it’s a whole different ball game. There’s a breaking of the link between the physical payment pain and paying on card. It doesn’t hurt. In fact it’s the reason why we have escalating credit card debt.
Suddenly the payment pain is reduced and the willingness to pay is increased. Perfect.
3. The timing effect
This is another behavioral economics factor. It concerns the fact that the bigger the gap between the date of making the payment and then enjoying the product or service then the more the customers enjoy the experience.
Take your annual holiday for example. You usually book it early and pay a deposit, paying the balance a few months later but certainly before you go on holiday.
The payment is complete. It means you enjoy the holiday.
Just think of it in reverse. If you relaxed on that holiday but on the last day all you think isn’t “Wasn’t that a great holiday,” Instead it’s “I’ve still got to pay for this”.
Now you think twice about booking a holiday for the following year because it feels expensive. You’ve been put off.
It’s the same with any product or service. If you have to pay afterwards it hurts.
4. Reducing the pain further
By letting clients pay by monthly recurring payments brings together both the benefits of timing and saliency.
It helps the client manage their cash flows better the same way as it does yours. It goes under the radar and is less noticeable coming out of a bank account.
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Wishing you every success on your pricing journey
Chartered Accountant, public speaker and #1 best-selling author of
“Effective Pricing for Accountants”
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