How Much Should You Charge for "Interest?"

A very common approach to pricing is to request a full upfront payment option as well as a payment plan or installment option. Typically, if a customer chooses the installment option, they end up paying a total of more than the lump sum price.


Example: $1,200 today or two payments of $700.


You may be wondering what the approach is to determining this rate. Here is how I approach it:


Your customers will most likely pay with a credit card if you are offering something with a four-figure price tag or more. This means that if they pay upfront and do not pay off the balance right away, they are paying interest on that balance with their credit card company. The average credit card interest rate right now (Dec 2020) is about 16%. That means if they are buying something for $1,200 and do not pay it off, they are actually spending $1,392.


My goal with changing the pricing is to make it LESS ENTICING to take your payment plan method than it would be if they just paid upfront or used a credit card.


Let's use our example:

Full price: $1,200

Payment plan: Two payments of $700


Option 1: Customer pays in full now with cash (total cost $1,200)

Option 2: Customer pays in full now with credit card (total cost $1,392) - assuming 16% interest and deferred payment

Option 3: Customer pays to installments of $700 (total cost $1,400)


See what I mean?


The payment plan option should be the least attractive to the buyer. Why? Because this puts you at the biggest disadvantage. You lose control of the collection of the money (gives them another chance to not pay you), you have to wait for the second payment and there is an opportunity cost of missing out on having that money sooner to be able to invest it.


You want to encourage buyers to pay you upfront in one payment as much as possible in order to put you in the driver's seat of what to do with that money,


Now, how should payment plan options work?


My advice is to NEVER have a payment due at the end of a service offering. There should be one upfront deposit (the largest installment) followed by 1-2 installments that occur periodically through the middle of the term of service. For example, one payment upfront for six weeks of coaching, followed by two more payments every two weeks of the program or one halfway through. You do not want to have to chase down a final payment after someone stops working with you and you do not want to end up in a legal battle over the final payment because the customer claims to be dissatisfied.


The overall theme is to stay in control as much as possible about how and when you will receive payment in relation to delivering service. You never want to be in a position where you have done more work than you have been paid for.

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