In the early days of our videography startup we had a 10% down payment, with the remaining 90% due a 7 days prior to the service date. We then slowly began experimenting with 25% down, then the classic 50/50 split payment, and finally 100% upfront payment at the time of order. Overall, we’ve found full upfront payment to be both the most convenient for customers and the most efficient for our company.
At the time of booking, we haven’t actually performed any work. This logic eventually turns into a one-sided argument for split payments; most conclude that customers should only pay a reservation fee or some arbitrary fraction of the total. Then, upon the completion of work, it “makes sense” to release the full funds. It all sounds good in theory, but in practice this falls apart in a multitude of ways. Below, I’ll outline our experiences with different payment policies along with our thought processes. The result of 100% upfront payment has been lower prices and a better overall experience for customers. First though, a little consumer psychology.
Consumer’s perceived influence over the service provider
Much like ticket sales and airline seats, a videographer must be scheduled in advance. The main difference, however, is that an airline will fly at half capacity or full capacity; thus, a customer knows their decision to buy has no direct result on the airlines flying or not flying. Similarly, consumers understand that if they purchase a ticket to a concert or movie, the show will go on regardless if they attend or not.
It can generally be said that customers understand the economics behind ticket sales and airplane seating. By purchasing, they’re limiting the ability of other customers; or in other words, they are actively preventing someone else from flying or attending the show. Customers sympathize with 100% payment prior to receiving services in these situations, along with the forfeiture of money when they fail to show up to the event or fly. After all, whether or not the customer attends the event or boards the airplane, the seller has reserved those rights / resources for the purchaser.
But somewhere in-between ticket sales for airplanes and ordering a videographer, this understanding of availability is lost. Customers are seemingly OK with forfeiting in the case of one-to-many service providers like airlines, event tickets, etc. However, in the case of one-to-one service providers, e.g., videographers, photographers, physicians, trainers, the customers expects the dedicated service provider to eat the cost of customer’s no-show or cancellation.
Trustworthiness & leverage: Dealing with one-on-one services
There is clearly a disconnect between how consumers treat one-to-many services and one-to-one service providers. We know from the airline industry that customers can be made sympathetic to availability economics; however, there is something specific to one-to-one service providers that makes consumers more weary of upfront payment.
The most common rebuttal is “how we do I know you’ll show up?” or otherwise complete the service. This comment is an insult to businesses who have built solid reputations over many years; especially since (from the business perspective) it’s far more likely that a customer will decide to cancel, simply not pay, jerk them around about end-product specifications, and ransom final payment for additional free services.
Customers commonly suggest a 50/50 split as a fair way to deal with this trust conundrum, falsely believing each party gains equal leverage in the transaction. This didn’t sit right with us because so many other services exist where full upfront payment is perfectly acceptable. We know that a business that “doesn’t show up” (or fails to complete customer projects) cannot exist in a world of free and open communication. Reviews would quickly surface, complaints would be filed with reputation trackers like Yelp, BBB, and even Twitter–quickly destroying the bad business.
Our rebuttal against 50/50 split payment was henceforth centered around trust. In the early days, we struggled with brand recognition and a lack of reviews; this ultimately led us to believe we may be experiencing resistance to full payment because of trust. But after many months of pointing to Fortune 500 companies using us, great testimonials, thousands of Facebook fans, and dozens of 5-star reviews–we still faced a healthy opposition.
In the same time, we have put a fair amount into advertising to boost brand recognition across the Chicago area. While these combined factors have certainly helped us, we just weren’t able to convince everyone. When customers were no longer able to argue over trust, we started hearing more outlandish leap of faith arguments; some would posit 50/50 as a more fair and ethical way of doing business, just out of principle.
There is plenty to be said about fairness in transactions, but we were baffled by all this particularly because our videography is very affordable when compared to competitors. In fact, 50/50 split with a competitor is usually more than 100% upfront payment with us. It seemed like a hopeless battle that would be ongoing with customers, but we kept pushing.
Customers shop for availability > trustworthiness
It’s obvious that customers purchase services for the times they are available and most likely to use those services. The big disconnect in consumer mentality (between one-to-many and one-to-one services) seems to be less an issue about trustworthiness, and more an issue of specific availability at the customer’s preferred date and time.
Many freelancers and small businesses (similar to our initial thinking) attribute customer resistance to full upfront payment as an issue of trust. However, past performance is completely irrelevant to a customer’s future need. Consumers tend to hyper focus on their specific need, and seeing it successfully fulfilled is paramount to their buying decision. We accidentally discovered this by converting by “productizing” our service.
We had recently transitioned Vanilla Video from a service you order, to a product you buy. This generally helped customers understand our value proposition better, since videography tends to be a somewhat abstract concept. Coincidentally, products by their very nature are at-demand of consumer needs. This simple change resulted in dramatic decrease in resistance; this makes sense when you think about one-to-many services that consumers are more readily willing or able to sympathize with.
One-to-many services are typically larger
Part of the wrong attribution to trust is small businesses copying big businesses in a monkey-see, monkey-do way. They see a big business do this, attribute that action as a part of their success, and try to emulate that action in a business a fraction of the size. If consumers are willing to pay airline providers, ticket sellers, and retailers in full prior to receiving the goods or services–they should also be willing or able to pay 100% upfront for small business service too. We just need to “get bigger” or get our customers to trust us more. However, big service providers have a key attribute similar to products.
Big service providers have “near constant” availability
The big service providers are able to leverage 100% upfront payment because they can offer service at nearly anytime due to their size and scale. Consumers know, regardless if they purchase service, the flight / show will go on. Fear of the service becoming nonredeemable is completely eliminated, just as no (or little) time-based anxiety exists for using a product.
Customers are naturally buying goods and services to match their availability and benefit. And there is an extreme time-related anxiety when it comes to one-on-one services. We can see bigger service providers actively mitigating these risks for consumers. Big service providers use money-back guarantees, issue refunds or partial refunds for cancellations, and many will reschedule service at no charge (airlines). Big service providers have found numerous tactics to reduce customer anxieties when it comes to using their service.
Minimize end-to-end redemption time for customer love
Very simply put, if the redemption or availability of your service is ever called into question, customers will insist on split payments to mitigate their risks. We probably all knew that though; the point is: customers face a lot of time-related anxiety. Will I be able to use it? How long will it be usable? When will it be usable? For many businesses, there is frequently a delay in purchase time and time of delivery; minimizing this delay greatly decreases anxiety, and significantly increases a customer’s willingness to make 100% upfront payment.
Of course trust and name-recognition are important factors, however, we’ve generally found less resistance to upfront payment by making our service more product-like, describing it in a fashion that is more “at convenience”, and by offering next-day online delivery. Arguing with customers over reputation and trustworthiness have ultimately proved futile. Linking to reviews, portfolio work, and references are encouraged, but should be lesser points.
Instead, focusing on relieving your customer’s anxiety to win new business:
- Guarantee timeliness of delivery, and open communication
- Offer money back guarantees, refunds, or partial refunds
- Remain friendly, personable, and civilized. Reenforcing professionalism.
Why upfront payment is better for business
I explained previously that one-to-one services are more expensive because the service person can only sell a limited amount of their time. Being so, an enormous factor in pricing for individual service persons ls the frequency of their sales. For example, a provider may have $60,000 in net costs (50% for salaries, 50% for business operating costs); to cover such costs, they would need 20 sales at $3,000 each.
Our simple example makes a few assumptions, but the main (eventually true) assumption is that businesses need to cover their costs to continue in operation. To that end, businesses need to sustain sufficient cash flow, which can be more crucial than larger profits and sales numbers. There are a variety of issues with split payment, but none trump cash flow.
In the above example, what would happen when all 20 customers move to a 50/50 split payment plan. Should the business pay the $30,000 to its employee, or the $30,000 to continue general business operations? What sort of effects does this cash flow result in for taxes, investment, and saving purposes? The long term result of split payments may actually lead to higher pricing to deal with decreased cash flow.
Top 5 reasons why 100% payment is better for business
1. Cash flow – Can’t stress how important strong cash flow is to the survival of any business. By allowing split payments you’re immediately thinning the blood.
2. Wasted resources - Generally, split payments creates a lot of wasted labor in billing and accounting. Emails, calls, statements and letters add a good deal of unnecessary overhead that could in-turn lead to even higher pricing. In contrast it is much more straightforward to take payment, and then perform the service. Billing discussions could result in a lot of back-and-forth, eventually intermingling or interfering with project-related discussions.
3. Prevent customer leverage & abuse - Customers will hold payment for as long as possible. Some projects may go through revisions simply to avoid the next payment. Furthermore, it’s not uncommon for invoices to sit <29 days before being paid.
4. Availability & Risk – Businesses are in some form or another limited by availability. By only accepting 100% upfront payment, you’re immediately alleviating credit risks. Changes in the buyer’s financials are very real, and could result in non-payment / cancelled projects.
5. Cheaper - It plain old costs more to accept more payments. Whether it’s by cash, check, credit or bartering; more transactions equals more accounting. This could lead to more trips to the bank, higher processing fees, and more things opportunity for errors.
Why upfront payment is better for customers
The long and short of it is, split payments are an unofficial credit plan extended to customers for free. Customers are very aware of this, and it could actually lead them to purchase goods or services that are outside of their budget.
Top 5 reasons why 100% payment is better for consumers
1. More thorough decision – When everything is invoiced up front the beginning, the customer should outline their goals more thoroughly, leading to less uncertainty. This leads to a better end result that fits within the customer’s goals.
2. Convenience - One payment is easier than handling multiple payments. It’s just easier to keep up with and account for, and requires less on the customer’s part.
3. Projects complete faster - Businesses have a greater incentive to throw their full support behind the project. It’s better for everyone to get the project done and out the door; customers are served faster, and businesses can move onto other sales.
4. Optimizing resources – Paying upfront is the equivalent to “Going Green” in the business world. Companies can optimize their workforce and dedicated a larger percentage of their resources to projects instead of double billing & accounting.
5. Better Service – Most businesses are honest, very concerned with their reputation, and aim to win long-term customer support. When businesses mess up, will will likely refund without hesitation and move into retention mode. A customer’s money today is valuable, but that customer over a lifetime is worth many times more. When a customer only pays a percentage of the total bill, the business has less incentive to treat them like royalty. And, under some theories, the business didn’t mess up “as bad” simply because the customer only paid a percentage of the total bill.
Full payment means: We firmly believe you’ll be satisfied
Earlier I mentioned some customers resisting full upfront payment as a matter of principle, with some stating it wasn’t ethical or fair. Ignoring all the benefits stated above, and refusing to get into any discussion on what is or isn’t fair, we wholeheartedly believe full payment is the best form of payment. It’s not about being right, wrong, or what’s cheapest / easiest.
Full payment is about telling our customers that we are serious about the service we provide, and that we intend to fully deliver a fantastic experience. Anything short of full payment is a representation from the customers or business that says to the other party: Hey, I’m not THAT serious, or Just in case things go wrong, let’s do 50/50 payment.
That’s not how things work here; we firmly tell our customers they will love our service, and that we will deliver on their expectations. Split payments doesn’t fit with that philosophy.