I played a lot of sports when I was a kid. But not because I wanted to. Both of my parents grew up athletic, but apparently the sporty gene skips a generation. I was much more interested in string cheese than soccer, and preferred sitting to moving. In a quest to get me more active, my parents constantly signed me up for new sports. One of the more abhorrent was ice hockey. I would end up quitting most of the others, but my parents really stood their ground on this one — probably because they had already bought the 1200 necessary pads.
That said, my dad quickly encountered a problem. It turns out you can lead a lazy kid to a hockey rink, but you can’t make him do anything on it. My dad would watch all of my games and most of my practices, eager to watch me succeed. But instead of watching me score any goals, he’d only hear other parents murmuring, “Geez, whose kid is that? Why is he lying down?”
Desperate to save face and get me to burn at least a calorie or two, my dad came up with an inventive plan to get me to hustle. At a baseline, if I didn’t lie down for the entirety of the game, I could get mozzarella sticks afterward. But on top of that, there was an additional incentive program. If I scored goals during my game, I would be rewarded in the form of beanie babies. This plan followed a tiered structure — the more goals, the more beanie babies. There were no cutoffs or caps, so I was incentivized to keep trying until the final buzzer.
My dad’s plan worked. I wasn’t going to get recruited for college or anything, but I started making goals. And the other parents stopped trying to figure out whose kid I was. When you determine what somebody wants and what they’re capable of, you can hack their behavior through incentive structures such as the above. In a B2B context, this unsurprisingly comes down to economics. Companies want to minimize their costs of goods sold and maximize their profit margins. The relevant incentive here is cash.
So how can we use this to get buyers to pay earlier? And how do we factor in efficiency and capability?
Option 1: Uniform discounts included across your invoices
The most common form this takes is offering a set discount if your buyer pays within a certain number of days. For example, a 2–10 net-30 invoice says that your buyer can take off 2% if they send payment within ten days of the invoice’s issue date. Uniform discounts have a lot of issues, and they’re usually inefficient. From a rate perspective, the value of the discount will be too low for some buyers (who will choose to pay later and forfeit the discount), and far too high for others (who would have paid earlier for a lower discount rate).
From a time perspective, having a set deadline for the discount can work against you. There are often legitimate reasons a buyer can’t pay within ten days, or within a month, even. If your buyer misses the discount deadline, their incentive to rush their payment is immediately gone. This would be like my dad offering me a beanie baby if I scored a goal in the first half of my hockey match (game? meet?). If I don’t make any goals in the first half, then what do you think I’m doing in the second? I’m lying down on the ice.
Option 2: Dynamic discounts deducted at the point of payment
In this structure, the size of the discount is variable and depends on both the buyer and the date that they send a payment. The discount might decrease each week until it hits zero on a specific date. This solves some of the inefficiency issues of uniform discounts, because buyers can receive different discounts based on their historical performance.
But there are logistical problems on the buyer’s end, which can complicate your planning. When buyers send a payment, the amount often has to be formally approved internally. So with dynamically decreasing discounts, the buyer will need to correctly calculate the net amount that they need to send, based on the payment date. If a separate person is responsible for sending the payment, or if more than one person needs to submit approval, the discount calculation will likely be incorrect. By the time the payment is sent, the discount calculation can be invalid, and you receive an incorrect amount. So now what do you do? Issue a new invoice for the discrepancy? Let it slide and eat the cost? Either way, it’s a headache.
The discount value must also depend on the date the payment is sent, rather than the date it is received. Thus, if your buyer pays via check (adding on 7–10 business days to your timeline), there is no economic incentive for them to switch to ACH instead. And because it’s impossible to predict the mail, there’s no way to preemptively factor the transit time into the discount amount.
Option 3: Dynamic incentives awarded upon receipt of payment
This option is a more powerful and far more efficient version of the dynamic deduction of discounts. In this framework, the value of the discount is not deducted from the invoice at the moment the buyer sends payment. Instead, the value of the incentive is awarded back to the buyer when the supplier gets paid. Here’s how we do it at Afox:
After issuing an invoice, a supplier creates their incentive offer. Afox’s software guides you toward the most effective terms. Each incentive offer has two details: an incentive ceiling and a sunset date. The incentive ceiling is the maximum percent value that the buyer can earn back by paying earlier. The value of the incentive decreases on a daily basis, until it hits zero on the sunset date.
The buyer is responsible for sending the full invoice payment to the supplier — no deductions. On the date that the full payment is received, we calculate the current incentive value and charge it to the supplier (via credit card or other standard payment methods). We then award the incentive to the buyer, who is able to either withdraw their credit for cash or apply it to other upcoming invoices.
At Afox, we’ve streamlined the process to require minimal effort. For suppliers, simply set the terms of your incentive and you’re done. For buyers, simply choose when you want to cash out. Dynamic incentives solve the logistical problems inherent to discounting. Suppliers can keep their incentives in place far longer than a discount, and can avoid the burden of dealing with accounting errors or other payment miscommunications. Buyers are rewarded for quicker payments, and bear only a daily opportunity cost of delaying.
The result is something that is simpler, smarter, and far more powerful. Want to try it out? You can get started here.
Questions? Shoot me a line at firstname.lastname@example.org