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Pay by Instalments

Disciplines > Marketing > Pricing > Pay by Instalments

Description | Example | Discussion | See also

Description

A way to make the price of what you are selling seem less is to let your customers pay it a bit at a time. This is particularly useful for price-sensitive customers and those who have a regular but small income.

Ways to pay by instalment include:

• The whole price divided by the fixed amounts.
• A non-linear payment plan, for example with declining or increasing payment amounts.
• Downpayment of a percentage of the price, followed by regular fixed amounts until the whole price is covered.
• Delayed payment, with the first instalment starting after a free period.

Because of the risk involved and the benefit conferred, it is common for the total instalment price to be larger than paying the full price up-front. In a competitive market, this may not be possible and a sale benefit can be 'zero percentage interest'.

Example

A furniture manufacturer offers furniture payment plan with 25% deposit and 24 monthly instalments.

A department store offers products 'free for the first six months' with payments starting after this. They also have a 'month off' per year in recognition of others costs over the Christmas period.

Discussion

We generally view money into the future differently to money now, as we discount future payments so they do not seem so significant today. This makes instalment payment methods seem more attractive (especially when early payments are low or even zero).

Instalment payment is more common in lower socioeconomic groups, where incomes are low and people have little or no savings. They can hence only pay a smaller amount every time they get paid. Instalment payment is also common in consultancy and large projects, where you are paid as you deliver parts of the product. Payment before the final delivery is particularly important when you are incurring significant cost, for example in developing software, buying building materials and so on.

Ensure you know your market when offering instalments, including how much they can pay on a regular basis, otherwise you can end up having to write off a bad debt or incur further expense in a court case where, even if you win, you could still not get your money.

When you are selling to people who will pay back over a long term and whose income is expected to rise, then you may want to offer a 'low start' deal, with lower early payments that rise later. You will need to be careful here either to vet the customers for security or ensure you have a way of getting your money back if they stop payment (repossession of cars is a common example here).

When you offer instalment payment, you are effectively acting like a bank, giving people the full amount of the price (in the form of the product) and collecting regular payments. Do not forget that this collecting of payment will cost you money. It may be a simple process but it will still require activities in collection and money transfer. If payments are not completed in time, you will also incur the cost of follow up, from nagging letters and phone calls to trying to recover the items that you sold them.

You can also be creative with instalments in other ways. For example if you are selling to a business who will be using your product or service to earn money, you can negotiate to receive a proportion of the revenue they take. This makes the deal easier for them and more certain of payment for you (as long as they stay honest and in business).

See also

The Black Art of Pricing