ANALYSIS | Payment structures
Money, money, money…
The pricing model used by retailers varies wildly when it comes to how much money they take up front. Consultant Toby Griffin weighs up the arguments...
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very purchase has risk attached for both the seller and the buyer. The saying ‘you pays your money, you takes your choice’ suggests a norm where money is handed over before the goods are taken or ordered. These two issues – risk and timing – are the backbone of our decision-making process when setting the structure of a business’s pay ment terms. Having worked in six different businesses within the KBB industry, I have seen all manner of payment terms, from one extreme to the other, with everything from payment on account (ie no deposit or interim payments); 25% deposit and balance on completion; 45% deposit, 45% on delivery, and 10% on completion; to 80% on order and 100% on order. All of the businesses concerned
are successful and have happy cus tomers, good financials, and are growing, so I can safely say that there is no correct answer here.
So how and why do so many businesses within our industry vary so wildly on what is a pretty important subject? Ask your finance director if you think that it isn’t! Let’s first look at the arguments for
‘front-loading’ payments, where you take most or all of the money at the point of order. Turnover is vanity, profit is sanity and cash is reality. Having the money
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in your bank rather than your customers’ is generally a very good idea. And so, from a pure cash-flow perspective, front-loading of client pay ments means you are safe to order the products – particularly if on pro forma – and take delivery, knowing that the money will be there to pay for them, even if the installation or completion of the project is delayed. Of course, unless your paperwork clearly states that deposits are non-refundable, a customer has sound legal grounds to request the return of a deposit. In all of my years, however, I have only once had to give back a customer’s deposit. Taking a large chunk of money
upfront shows total commitment on behalf of the customer, and pretty much guarantees that the project is going ahead. You can book in installers, order products, and rejoice at another sale, confident that this is a ‘goer’.
Power is another important factor. Up until the point the first money is handed over, the power is
entirely
with the customer. When money changes hands, the power dynamic changes too. The relationship is then a legal one and, in the eyes of the law, both parties are on an equal footing, and, apart from certain consumer protection rights, the retailer can avoid having to make
expensive, awkward compromises or commitments in order to please the customer from then on. I’m not saying that the retailer should not be accommodating and customer- focused, but it then becomes a choice to do so.
So although sometimes an awkward conversation, is it really a problem to ask for a big financial commitment upfront? As Barry Collins, MD of Schwarz Kitchens in Eastbourne, once told me: “Cus tomers have decided who they are going to buy from before they get to the point of finding out payment terms. They have usually committed hours of one-to-one time with their
PAYMENT BEFORE OR AFTER? – THE PROS AND CONS BEFORE
PROS
● Confidence to order products for project ● Shows commitment from the customer ● Good for cash-flow
● Gives customer peace of mind ● Helps cash-flow for trade customers CONS ● Customer may be reticent ● May hinder ability to close the sale AFTER ● Can lengthen the snagging process
● Insoluble disputes may call for legal action to be taken
· January 2022
PHOTOGRAPH: PEXELS-SUZY-HAZELWOOD
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