Should I give a discount when people pay with credit card


I have a software product (price around 700 USD). Some customers use PayPal, which is very low-touch and easy for us. Others want to do the whole procedure: RFQ / price quote / PO / invoice / wire transfer. Larger companies sometimes delay the payment for up to three months! Obviously PayPal is easy, POs are more troublesome.

I have noticed that some companies accept only credit cards (like 37signals).

My questions: should I give a discount to incentivese people to use PayPal? What are the pro/cons of doing so? Do you have examples of other on-line companies that do this?
Could I get away with offering only PayPal (credit card) orders for the base product and offering PO processing for a premium version?

Payments Credit Cards

asked Feb 17 '11 at 01:04
297 points

2 Answers


Why not offer standard trade terms to your larger clients?

The industry standard for physical goods is 2/10 net 30 (read: two ten net thirty).

The way this works is that the buyer receives a 2% discount if the payment is made within ten days, but if the buyer declines to pay within 10 days, all of the payment must be made within 30 days.

The reason buyers almost always make payment within 10 days relates to the annualized interest rate of failing to do so. If the interest rate for (essentially) an extra 20 days of waiting is ~2%, then the annualized rate is huge (for a 360 day year...)!

CFOs of purchasing companies pay hard attention to that.

More on this from Wikipedia: And in comparison to the amount that CCs charge, this is a reasonable discount to offer if payment will be made with a check or bank transfer.

answered Feb 17 '11 at 01:41
298 points
  • +1 for carrot and stick approach - combine this with charging extra for a P.O. to discourage its use. (Some companies can't/won't use credit cards, and some staff members may be worried about getting reimbursed, so you probably do need to offer both.) – Mike 13 years ago
  • +1 Yep, 2/10 net 30 is very common. With those terms, it's also common to add that if payment is not received in 30 days, there's an additional 5% surcharge per month, and you will refuse payments which don't include the surcharge. If people want to use you as a bank to lend them money, you need to be a very, very expensive bank. If a customer objects to those terms, it's a sign they're likely to be late pay. – Bob Murphy 13 years ago
  • @Anonymous: (1) If you have to borrow against that receivable to keep your business open, you'll be paying 3-4% a month, or if you sell the receivable to a factor, you'll lose 10-25% of the face value. So I hardly think charging 5% per month is extreme. (2) Late payment penalties are... penalties! B2B late payment penalties should seem punitive - they're meant to encourage people to pay you on time, and wake them up if they weren't paying attention. (3) Why should a business be able to trick you to lending them money at non-extreme rates? If they need money, they should go see a bank. – Bob Murphy 13 years ago
  • Agree with Bob. Remember you have to protect yourself when you extend credit. Banks can offer better terms because they have a distributed loan portfolio. Even if you are super cash-rich (which is likely not the case on a Start-up forum!), you need to compensate for your narrow loan portfolio. – Tbaums 13 years ago
  • @tbaums You say "for physical goods". Is this also common for software licenses? I don't want to complicate pricing unnecessarily. – Philippe 13 years ago
  • @Philippe - If I'm honest, I've never heard of any software payment delay at all! The reason physical goods tend to have financing terms like 2/10 n/30 is because the purchaser of the goods will then resell them or use them as an input in a new product. That customer might not be able to pay for the good now, but once he sells to the ultimate customer, he can pay you back. Any company that wants financing terms is big enough to pay $700 right up front! – Tbaums 13 years ago


While the cost of a PayPal transaction may appear to be low to your firm, you are also taking a risk on each PayPal transaction. The PayPal transaction might cost 1.5% - 2% of the total transaction in fees, but you also risk losing the entire $700 in a charge back. You need to consider that in your calculations!

In addition, many businesses do not have PayPal accounts, or have a negative image of PayPal, and thus will not use it to purchase. Many businesses only purchase things by Purchase Order. If you sell to businesses you typically have to accept Purchase Orders.

Note however, that it is you who set the terms for Purchase Order acceptance. Never let the purchasing department bully you. You are loaning them money and you set the terms of that loan. We have never lost a sale by telling the people sending out the POs that their terms were unacceptable.

Rule 1: Your terms should be net 30. Never accept any PO with terms longer than that.

Rule 2: Charge money to accept a PO. It costs you money to bill them, so make them pay for the privilege. (We charge an additional $10 for every PO, on top of normal shipping.)

Rule 3: Your web site needs to clearly state your PO terms and mention that changes to these terms can occur at any time. Our site specifies that if the PO is unpaid after 45 days, their software license will be terminated, the software will be deactivated, and re-activation costs an additional $150.00. We report all license terminations to the Software Business Alliance piracy site, and D&B.

Rule 4: Charge a major penalty for late payment. (We charge $25 per $100 of PO value for late payment and the penalty increases with each late notice.)

Rule 5: Never let purchase orders go untended- check all your unpaid po's at least once a week. Use standard form letters to send out a late notice at 30 days (with penalty fee), and a termination notice at 45 days (with more fees).

Rule 6: At 60 days, turn the whole thing over to a collection agency. You lose 18% - 25% but it rarely if ever comes to this point if you follow the rules above AND once you turn it over, your work is done. The collection agency duns the firm until they get the money or they go to court. When they go to court they always win. (And you pay no extra fees if it goes to court.)

Rule 7: Never accept partial payment for a PO. If you charged them a late fee and they finally paid just the original amount at 45 days- send the check back. Tell them to FedEx a check for the full amount, or lose the software.

If these rules seem to Draconian, remember they don't apply to anyone who pays on time. (Except for charging them for using a PO, which is normal ).

Always remember, you are not dealing with the person using your software. You are dealing with a department whose whole purpose is to delay payment to those firms that let them get away with it. You are not a bank, offering unsecured loans.

Finally, your web site should be set up to supply offical price quotes for you product. That eliminates that problem.

answered Feb 17 '11 at 04:21
Gary E
12,510 points
  • +1 But I think this might be going a little too far. Charging a fee for a P.O. is common, and companies stretching payment out to a little more than what it says on the contract is too. Of course, if you are not anticipating repeat business or referrals and the software is totally irreplaceable you can try and rigorously enforce the terms of the P.O... – Mike 13 years ago
  • This is a common mistake for beginners. The people in purchasing have **nothing** to do with the decision to buy your software. When the decision is made to buy your software, that decision is passed down to the purchasing department. They have **no** power to change the software source. Purchasing is asking you to **loan** them money. You set the terms for that loan. We get tons of repeat business, and there are very few purchasing departments that complain. There are **no** end users that complain. – Gary E 13 years ago
  • After cash flow problems had forced me to pawn my truck, and to fend off multiple daily calls from collection agencies, I became all for draconian rules on late payments, and refusing to sell to customers who are routinely late pay. If somebody can't or doesn't want to pay you on time, they shouldn't buy from you. – Bob Murphy 13 years ago
  • Why do you think PayPal is more dangerous for chargebacks than offering credit card payments? – Andy Dent 13 years ago
  • "There are *no* end users that complain." Not only that, but as someone who made contact, made the purchase happen, and who is on the list of people being hassled while purchasing isn't paying, deadlines like this give me a stick to hit purchasing with so they pay out, and I can go back to doing my job. – Shannon Severance 13 years ago

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