Is the Cash Discount Program Right for My Business?

Cash Discount ProgramCash discounting is becoming increasingly popular among merchants throughout the United States. In fact, the number of businesses who are using a cash discount program has doubled over this past year alone. Cash discounting became legal in 2010 through the passage of the Dodd-Frank Wall Street Reform Act, and subsequent court rulings have affirmed the right of businesses to offer a discount to customers who pay with cash.

How Does Cash Discounting Work?

A cash discount program is similar to a surcharge program in that businesses charge an additional fee to customers who pay by card. A typical service fee for paying by card would be 4%. This means that, on a $10.00 purchase for example, the customer would pay $10.40.

There are two main things that a merchant who wants to implement a cash discount program must do to stay compliant with Visa and MasterCard regulations:

– Post visible signage that clearly explains the program; and

– Use a preprogrammed terminal that processes credit card transactions properly.

This signage needs to be present in a place where customers can easily see it. And the terminal must process the transactions correctly, because merchants are not allowed to make an additional profit on a credit card transaction, which might accidentally happen if they tried to implement a cash discount program on their own.

What are the Advantages of a Cash Discounting?

Of course, the number one advantage for merchants who implement a cash discount program is the ability to keep 100% of all transactions, whether they be in cash or credit card. This could mean a very significant savings, depending on your monthly processing volume. And the more you process each month, the better off you will be under the program.

Here is an example of how much you can save through cash discounting. Let’s say you have a restaurant that processes $100,000 in credit card transactions each month. On traditional interchange pricing, you are probably paying an average of 2% to 3% in overall processing fees. It could be higher if you have a clientele that likes to use high mileage rewards cards to pay for their meals, or it could be lower if most of your card paying customers use debit cards.

Conservatively, let’s say you pay 2% overall on the $100,000 in monthly processing volume. This would still mean $2,000 coming out of your profits each month just to cover the cost of your card transactions. With a cash discount program, you would keep all of that money and pay a fixed monthly fee, usually somewhere between $50 and $100 per month for your processing company to run the program and provide support. So, in this example, cash discounting would save you at least $1900 per month.

What would you do with an extra $1900 per month in profit? Use it to expand your business?  Maybe expand your restaurant? Open a new location? Or maybe spend it on some targeted marketing to help grow your customer base.

There are much better ways that you, as a business owner, can spend this money. And this is why merchants (and their interest groups) fought so hard for so many years to obtain the legal right to implement a cash discount program.

In addition to the cost savings, another major advantage of cash discounting is that it is much easier to implement than a similar program such as surcharging. In the states where surcharging is legal (which now include 45 states along with the District of Columbia), there are still many compliance hoops that you must jump through to properly implement the program.

With cash discounting, all you need is the signage and a properly programmed terminal.  There is no need to change any of your prices, because the signage will state that all prices displayed are for cash payments, and a service fee is added for debit and credit card transactions.

On a related note, psychologically, customers are much more likely to accept a cash discount program than a surcharge program. Consumers never like to pay more for the same product or service, but everyone loves to get a discount. Most consumers also know that businesses have to pay an extra fee to process credit card transactions, and when they see that the merchant is only passing along those fees to those who use cards rather than raising prices on everyone, they tend to see that as a fairer pricing structure.

What are the Drawbacks of a Cash Discount Program?

The number one potential drawback of cash discounting is of course the fear that merchants who implement the program will lose customers. This is a very valid concern, and it is really the only reason every business in America who has heard of the cash discount program has not already implemented it. In an increasingly competitive marketplace, no business wants to do anything that might cost them customers, and that is understandable.

The question is, does a cash discount program really scare away customers? The answer to that question is different for every business. The good news is, cash discounting has been around for several year now, and so far, nearly all of the merchants who have implemented this program have not seen a decline in business.

By and large, customer reactions to cash discount programs have been similar to how they would normally react when a business implements a small price increase. During the first couple weeks, one or two customers might complain. But after a month or so, everyone adjusts, and those who are concerned about the nominal service fee simply start paying in cash.

One thing you would want to look at when considering whether or not the cash discount program is right for your business is your average ticket cost. Going back to the restaurant example, customers are not likely to complain too much if they have to pay an extra $.80 on a $20 meal, or even an extra $4.00 on a $100 meal. This is about the same as an ATM fee, and consumers have grown accustomed to convenience fees like these in our increasingly digital age.

On the other end of the spectrum, let’s say you are a building contractor and your customers pay you $10,000 or more for a typical job. In this scenario, they might be a little more anxious about paying a service fee when it adds up to an extra $400. It might still make sense to do a cash discount, but the higher ticket price is something you will definitely need to think about.

Cash Discounting as a Marketing Tool

As mentioned previously, offering a discount rather than implementing a surcharge can turn your cash discount program into a positive for customers. You can even use the fact that you are offering a discount for paying in cash in your marketing to help bring in new customers.

The cash discount can also be combined with other positive elements, such as loyalty programs and partnerships with local charities, to help market your brand and foster goodwill within your community.

For example, at National Franchise Business Solutions, we work with a preferred processor that donates a portion of the proceeds from each credit card transaction to a charity that is dedicated to providing nutritional meals for poor and disadvantage kids in the local community. Merchants who process through us are able to highlight this fact, giving customers another good reason to support their business.

Is the Cash Discount Program Right for my Business?

Each business owner will have to weigh the advantages and disadvantages of cash discounting for themselves and decide if this program is right for their business. We make things easier for merchants by allowing them to try out the program without any risk. With us, there are never any contracts to sign or long-term commitments to make. Just give the program a try and see if what we are saying it isn’t true.

We believe that, once you realize the amount of money you can save on the cash discount program, and once you see that the program does not scare away your customers (and can actually help you gain more customers), you will never want to go back to traditional pricing again. But if, for any reason, to the program is not working out for you, we will happily switch you back to traditional processing and still guarantee that we will save you money over what you are paying now.

If you want to find out more about cash discounting and whether or not it might be a good fit for your business, give us a call at 651-202-8636 or email us at franchisecity1(at)gmail.com.

Franchising vs. Starting a Business from Scratch

Starting any business requires a tremendous amount of decision-making. One common dilemma Starting a Businesspeople face is whether to go with the franchising route or to start a business from scratch. It is a serious consideration, since your decision could ultimately lead to the success or failure of your new business.

The answer to this question depends largely on your business goals; whether you’re offering a product or service, and overall commitment and investment you’re willing to make. There are pros and cons to both options, which is why it’s important to weigh your options carefully before making a decision.

When to Choose Franchising

Franchising is a turnkey business, which removes all the guess work and trial-and-errors from setting up and running your brand-new business. In general, a franchise is best for people with:

  • Extra money beyond initial investment – When you find a franchise, you’re going to pay the initial franchise fee upfront. Then once operation begins, you’ll still have to set aside payment for ongoing franchise royalties.
  • No business background – Most franchisors assist franchisees with everything from finding a location, training the staff, providing suppliers, setting up the store, and even marketing your products. For those without a business background, this is a huge help.
  • No control issues – Franchising doesn’t offer franchisees much control over the business model, product offering and branding. If you want any aspect of the business changed, you’d have to seek approval from the franchisor.

If you choose this route, you must be ready for risks attached to franchising. For example, bad press from another branch, even if it is worlds away from your franchise location, could affect sales of your business negatively.

When to Choose a Startup

Building a business from scratch involves a plethora of steps, from market research to product sourcing or manufacturing, marketing and branding, training employees, inventory, and a whole lot more. The main advantage of going this route is that you’ll receive 100% of sales and have total control every step of the way. This method is ideal for people who are:

  • Risk-takers – Franchising requires a franchisee to take a risk once when signing the franchise contract, and then have to work on the entire business all the way through. When you’re starting a business from scratch, you’ll be faced with a lot of decisions wherein you’d have to consider the risks and benefits of every option. And because you’ll have plenty of trial-and-errors operating a business without a proven system, it could be costly in terms of finances, time and effort.
  • Hands-on – The majority of businesses that start from scratch and have reached success are led by owners who are hands-on. You’ll need to be front and center every step of the way.
  • Easy to adapt – Change is inevitable at the start of every business. You’ll have to change what doesn’t work and adapt quickly to avoid losses.

The risks of this route are plenty, but building a business with total control can be challenging, yet fulfilling.

Whichever route you take, it is important to perform market research and see if the franchise or business idea would work within your geographic location and target audience. It’s also best to seek advice from professionals who could guide you with the important aspects of starting a business.

At National Franchise Business Solutions, we take an object and even-handed approach to helping entrepreneurs get into a business they will be successful with. We work with over 600 franchise brands across a wide range of industries, and through a multi-step process, we are able to help you identify the business model that best fits your passion, skills, and budget. And if you find that franchising is not right for you and you would rather start a business from scratch or retain the security of working for someone else, that’s perfectly fine too. We’re here to help you in any way we can so you can find the business or career that best fits your passion, skills, and budget.

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