Rafi Mohammed

Should You Offer Different Prices for Cash or Credit?

Posted on July 27th, 2011 (0 Comments)

Reprinted from the Harvard Business Review website.

This is part of the HBR Insight Center Marketing That Works.

I use my credit card to pay for everything. Regardless of whether I am buying a $2,000 washer/dryer set or a $4 latte at Starbucks, I never use cash. Credit cards are convenient, document purchases, include various types of insurances, allow up to 60 interest-free days of float, and provide miles on my favorite airline, JetBlue. Since I pay my bill in full each month, the price for these benefits is reasonable — an annual $40 fee.

Despite this affinity, if merchants start offering a 2-3% discount to pay by cash, my love affair with plastic will wane. I won't ditch credit cards entirely, but I'll definitely say "charge it" less frequently. While 2-3 cents on every dollar adds up, the real root for my cash preference is philosophical. It would irk me to pay an additional 2-3% to use a credit card when paying by cash is "free." As a result, I'd patronize retailers that offer cash discounts over those with higher "same cash or credit" prices.

If you share my mindset, it's tempting to start offering both a credit card as well as a lower cash price for your products and services to attract similar-behaving customers. Georgia liquor store Tower Beer Wine Spirits charges $34.98 (cash) or $35.75 (credit) for a 1.75 liter bottle of Bombay Sapphire Gin, for instance.

In our current ho-hum economy, consumers remain price sensitive. So why aren't all retailers providing cash price options? Shouldn't Wal-Mart, the low price leader, be offering even lower prices for cash?

While merchants are quick to grumble about the 2-3% fee they incur for the privilege of accepting credit cards, they reap strong benefits. First, accepting plastic reduces the expense of counting, transporting, and preventing cash theft. Just as important, consumers aren't limited to spending what's in their wallet. Accepting credit cards can result in higher discretionary purchases.

While the outcome of a cost-benefit analysis on offering lower cash (vs. credit) prices varies by company, there are two distinct cases when doing so may be particularly attractive:

Low Dollar Purchases/Small Operation/Discount-related Brand. If prices are low in an absolute sense (less than $20, for instance), offering cash prices may not restrict additional purchases. In addition, the cost of encouraging cash payments may be low in a smaller operation if the owner (or one trusted employee) is in charge of handling cash. Finally, offering cash discounts may be in line with a retailer's low price brand. In Boston, for example, many unbranded Mom & Pop gas stations (with limited convenience food selections) offer discounted cash prices to differentiate themselves from well-branded, higher-priced competitors such as Mobil.

High Dollar Purchases. A few percent on a large purchase ($25,000 in jewelry, for instance) can be meaningful even to high rollers. A discounted cash (or certified check) price can attract and engender loyalty from consumers who would not be swayed by a 2-3% discount on a smaller purchase amount.

So would 2-3% cash discounts cause you to visit your ATM more often? Should your company be offering different cash/credit prices? I'm eager to hear your opinions.

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