The root concept of cash discount and surcharge programs is the same. However, fundamentally they operate a little differently. Understanding the differences between these programs will help you select and implement the right one for your business. Here we will discuss the basics of these programs to understand what makes them different.
Cash Discount Programs
What is a Cash Discount Program?
A cash discount program is a reward program set up by business owners for their customers. In this program, the business owner rewards the customers who choose to pay their bills through cash, debit, checks, or ACH technology. This reward is available as a discount on the final price of the product/service utilized.
How Does a Cash Discount Program Work?
Let’s study the following example to understand how the cash discount program works.
Case 1: Customer chooses to pay the price using a credit card.
- Posted price = $110
- Cash discount = $0
- Final bill = $110
Case 2: Customer chooses to pay the price using a debit card, check, or cash.
- Posted price = $110
- Cash discount = $10
- Final bill = $100
As you can see, in case 2, where the customer pays with a debit, check, or cash transaction, the final bill is less than in case 1. Therefore, for the customers buying from businesses that offer a cash discount, the item’s final price is less than the posted price.
Posted price, aka listed price, is the price that the business owner lists on the price chart. In cash discount situations, this listed price contains the extra fees that the business owner charges to process credit card payments. Customers paying with cash clearly save more money than those who decide to pay through credit.
Pros of Implementing a Cash Discount Program
By offering a cash discount for consumers that pay via ACH solutions, you can:
- Attract More Customers: Customers who often pay with cash or debit transactions have a clear incentive to buy from businesses that offer cash discounts. Therefore, you can easily attract a larger customer base by implementing this program.
- Save More Profits: By incentivizing the customers to pay with cash, you can help them save the credit card transaction fees, aka processing fees. You also can save several other costs associated with offering credit card payment processing if you accept more payments in cash. By eliminating these fees that eat into your profit, you can easily make more money on the bottom line.
More about cash discount programs.
Surcharge Programs
Now that we have understood the cash discount program let’s discuss the concept of surcharges and how it’s different.
What is a Surcharge Program?
You can compare a surcharge program to a penalty program. Business owners set it up to save money on credit card processing cards. Surcharge programs are often frowned upon and considered misleading in some cases. This is why surcharge programs are banned in 10 out of 50 states in the U.S.
Unlike cash discounts (which are legal throughout the country), surcharging is banned in New York, Texas, Oklahoma, Florida, Maine, Kansas, Massachusetts, Connecticut, Colorado, and California.
In a surcharge program, the business owner penalizes the customers who choose to pay their bills through credit transactions. This penalty is levied upon any product/service utilized at the business.
How does a Surcharge Program Work?
Let’s study the following example to understand how a surcharge program works.
Case 1: Customer chooses to pay the price using a credit card.
- Posted price = $100
- Surcharge fees = $10
- Final bill = $110
Case 2: Customer chooses to pay the price using a debit card, check, or cash.
- Posted price = $100
- Surcharge fees = $0
- Final bill = $100
As you can see, in case 1, where the customer pays with a credit transaction, the final bill is more than in case 2. Therefore, for the customers buying from businesses that levy a surcharge fee, the item’s final price is more than the posted price.
In businesses that levy a surcharge fee, the listed price does not contain the extra costs the business owner charges to process credit card transactions. Therefore, customers paying with credit cards clearly need to spend more money than those who decide to pay through cash, debit cards, or checks.
Cons of Implementing a Surcharge Program
By implementing a surcharge program, you face the risk of showing misleading prices. The number one reason certain states do not encourage the use of surcharge fees is that it offers deceptive pricing. Ideally, the customers who wish to buy something should see a maximum final price they need to pay if they choose to buy a product/service. A “wrong/reduced” listing price creates mistrust between the customer and the business owner.
A Quick Solution – Dual Pricing
Dual pricing is the quickest solution to avoid misleading your customers while implementing a surcharge fee.
To implement the dual pricing, you need to add two prices to the listings of your products and services. The first pricing can denote a price that the customers need to pay if they choose to pay through cash, debit, or check. The second pricing can represent the product’s final price, including the surcharge fees. With dual pricing, you can effectively showcase the discount for cash at your point of sale. Therefore, customers can get an exact idea of how much money they will save if they choose to pay with cash.
How to Get Started?
To get started, you first need to understand both the programs in detail. If you still have any questions about these programs, check out this list of 10 FAQs.
Step #1: Choose the program
After you have understood the programs, it is time for you to choose the one that suits your requirements correctly. A cash discount is legal in all states; however, surcharges are illegal in 10 of the 50 U.S. states. Check out the “What is a Surcharge Program” section of this blog to know the states where surcharging is banned. You can always opt for a dual pricing model to be on the safe side.
Step #2: Consult with an expert
Digital payments are on the rise, so you should consider enabling more payment methods for your business.After choosing the correct program, it is good to consult with your financial expert once before implementation. Once you have selected the right program, do not hesitate to show it off to attract more customers.
Step #3: Calculate the cost of credit card payments
Now, it is time for you to calculate the overall cost of credit card usage before deciding on the final prices of the products. You should involve a professional at this stage to double-check the accuracy of all calculations. Even minor deviations in setting the price can eat into your profits enormously.
Step #4: Find the right payment processing partner
The top payment processors help you set up different payment methods like ACH and credit card payments while offering correct guidance to new business owners. They have a team of excellent relationship managers and finance professionals who can navigate the complexities of setting up a new business. These payment processors will provide a one-stop solution to all your payment processing needs and questions.
Step #5: Set up a payment gateway
You need to first set up a payment gateway before accepting any payments. Ideally, you should be prepared to accept payments through several methods, including ACH payment solutions, cash, credit cards, debit cards, checks, and ACH. The next-gen payment processors can help you set up a seamless online payment experience with hosted payment portals. Providing such an experience is critical to the overall success of your online business transactions.
Step #6: Start accepting payments
Once you are ready, you can start accepting payments and offer cash discounts with ACH merchant fees wherever necessary. Paying with a credit card has its perks. However, these perks come at a cost. Even if you pay your credit cards on time, the chances are that you are already missing out on cash discounts at several places. So, before you pay for something the next time, ask the vendor if they offer a discounted price if you choose to pay with cash.
Are you a business owner? Do you want to learn more about the different payment methods that can help you attract more customers? Want to set up payment gateways that seamlessly integrate with your business and do much more than just help you accept payments? Reach out today and schedule a 15-minute consultation call with one of our experts to get started!
Date originally published: January 26, 2022