Price Adjustments: Early Payment Incentives

For many years, marketers operating primarily in the business market offered incentives to encourage their customers to pay early. Typically, business customers are given a certain period of time, normally 30 or 60 days, before payment is due. To persuade faster payment that enables the seller to obtain the money quicker, marketers have offered early payment discounts often referred to as cash terms. This discount is expressed in a form that indicates how much discount is being offered and in what time frame. For example, the cash terms 2/10 net 30 indicates that if the buyer makes payment within 10 days of the date of the bill then they can take a 2 percent discount off some or all of the items on the invoice, otherwise the full amount is due in 30 days.

While this incentive remains widely used, its effectiveness in getting customers to pay early has greatly diminished. Instead, many customers, especially large volume buyers, simply remove the discount from the bill’s total and then pay within the required “net” time frame (or later!). For this reason many companies are discontinuing offering this discount.