Cash discounting is a tactic used by retailers to help them cover the cost of credit card processing. This technique incentivizes customers to use cash or check by giving them a small discount when they do. It’s often preferred over other fee recovery methods because it can garner a more positive perception, but what is cash discounting exactly, and how can you implement it?
What Is Cash Discounting?
Cash discounting is an old tactic, perhaps best known for use in gas stations. Almost every gas station displays a “cash price” and a “card price,” but you don’t need to display both. Instead, all of your posted prices are assumed to be the card price and then a discount is applied at the register for those paying in cash.
So, what is cash discounting? Cash discounting helps businesses cover merchant service fees, which are the cost of processing credit card payments. The key is that you advertise a price that factors in the two percent to four percent processing fee and then you deduct that amount at the register for customers paying in cash.
If you do the reverse, displaying a “cash price” and then add a fee for those paying with credit, this is known as a surcharge fee, not a cash discount. There are specific laws and rules regarding how much you can charge, when you can charge and how you must disclose a surcharge. So, make sure you follow the right steps when implementing a cash discount program.
Is a Cash Discount a Good Thing to Implement?
Now that we’ve answered, “What is cash discounting?” it’s important to dig into the pros and cons. Unlike a surcharge fee, which is added to the cost of goods, a cash discount represents a chance to save money off the posted price.
Even though the outcome is the same for your business, the perceived difference between a “two percent discount for cash” and a “two percent fee for cards” can turn negative backlash into something more agreeable. The former is an incentive and the latter seems like a penalty, and that’s precisely why so many retailers choose a cash discount.
Cash discounts also provide more flexibility because they are less regulated than surcharge fees. Plus, you can adjust the posted price of items to make the discount bigger or smaller based on your margins. For instance, if you have a $20 item and you don’t want to take less than for it, you simply need to add a few cents to the posted price to completely offset the cash discount.
Ultimately, customers don’t like paying more no matter what method you implement, but a cash discount is considered flexible, easy to create and has a more positive perception than most other fee recovery methods, so let’s explore the steps for implementing a cash discount.
How To Implement Cash Discounting
Once you know the answer to basic questions, like “What is cash discounting?” the next step is to understand how such a program is implemented effectively.
1. Determine Your Processing Costs
The idea behind a cash discount is to recoup processing costs, so the first step in creating a cash discount program should be determining how much you actually pay in merchant service fees. Generally, this comes out to between two percent and four percent per transaction.
Say that you pay an average of three percent for card purchases, that means you should add three percent to your posted prices. Those paying in cash will have that three percent deducted from their total since the transaction does not incur any processing fees. So, a $9 item becomes $9.27 after you raise the price by three percent, and the cash price at the register reverses back to $9.
2. Get Smart About Price Increases
By far, the biggest downside of implementing a cash discount is that it means raising your posted prices. But, you can help minimize the impact by adjusting price increases in accordance with your margins. For instance, a small-ticket item may get the full three percent increase while an item with a larger profit margin may only go up one percent or two percent, if at all.
For example, if a toy shop’s best-selling item is a $45 stuffed animal and they’ve found that this is the perfect price point, they don’t have to increase the card price but you will still need to honor the three percent cash discount at the register. This flexibility allows stores to adjust pricing at the item level to help them balance their margins while maximizing sales.
3. Post Proper Signage
You should post signs at the entryway and at the point-of-sale letting your customers know that they’ll save X percent if they pay in cash. Some stores also choose to post both a credit price and cash price on their items, but this can have a negative impact in that it allows customers to compare the two with each product and may discourage them from purchasing if they don’t have the cash to spend.
On your signage, you should also clarify that the cash discount does not apply to debit card purchases. State which non-card payment methods you do accept (i.e., cash, check, foreign currency, etc.) and make sure to explain that the discount will apply at checkout.
Reduce Your Processing Costs
Implementing a cash discount can ultimately help your business keep more in its pockets, but is it the right way forward? Before you add any fees or discounts to recoup processing costs, it’s worth looking at the problem from the other end and doing your best to reduce what you pay. LOLA POS can help.
About LOLA POS.
LOLA POS. (LOLA POS) is a merchant advocacy group dedicated to reducing or eliminating the unnecessary fees associated with accepting credit card payments. Since 2004, LOLA POS’s payment processing solutions have been delivering tailored solutions, best-in-class customer service and high-quality service offerings for businesses across multiple industries. Whether it’s high-risk or low-risk, brick-and-mortar or eCommerce, LOLA POS will create the best processing experience for your company.