How much of a discount should you offer for prepayment?
It needs to be enough to entice your customer, without hurting your bottom line
Jan 13, 2025
One of the best ways to increase your cashflow during the slow winter season is to offer a discount to your customers in exchange for prepayment. But what is the right amount of discount to offer? The short answer is that it depends on your business needs and situation. Here are two different approaches that you can use to find the right discount to offer.
The mathematical approach
Mathematically, the amount of prepayment discount that you offer your customers should be roughly equal to how much it would cost you to borrow the money. This is because when you ask a customer to prepay you, it is similar to asking for a loan which you will pay back later. The only difference is that you will repay the loan with services rather than cash.
Doing the math: if we assume that you can borrow (with your credit card) at around 27%, and that you are asking for prepayment in December for services that will be performed in May (5 months prepayment), then you should offer about a 10% discount.*
The mathematical approach gets us to about a 10% discount.
Split the difference
Another option to consider is splitting the gross profit with the customer. Say that your gross profits (revenue minus the cost of servicing the property, which includes labor, gas, etc.) is about 50%. You might decide to offer your customer half of that profit (25%), in exchange for them paying you early. You shouldn’t go beyond this because you need the other half of your profit to cover your overhead costs (rent, insurance etc.).
While a 25% discount is significant, it could be justified when you consider the cost of furloughing and having to rehire new workers come spring time. Furthermore, when you consider the benefit of locking in customers for the following year, and freeing your time to get additional customers, it could be worth the expense.
A 25% discount is steep, but could be better than furloughing your team.
The right discount to offer in exchange for pre-paying services depends on your business circumstances. We recommend picking something between 10% and 25%, depending on how crucial it is to maintain cashflow during the winter.
* Discount = [100 - Cost of Service ➗ (1 + Credit card APR)^(Months prepayment / 12)] ➗ 100
One of the best ways to increase your cashflow during the slow winter season is to offer a discount to your customers in exchange for prepayment. But what is the right amount of discount to offer? The short answer is that it depends on your business needs and situation. Here are two different approaches that you can use to find the right discount to offer.
The mathematical approach
Mathematically, the amount of prepayment discount that you offer your customers should be roughly equal to how much it would cost you to borrow the money. This is because when you ask a customer to prepay you, it is similar to asking for a loan which you will pay back later. The only difference is that you will repay the loan with services rather than cash.
Doing the math: if we assume that you can borrow (with your credit card) at around 27%, and that you are asking for prepayment in December for services that will be performed in May (5 months prepayment), then you should offer about a 10% discount.*
The mathematical approach gets us to about a 10% discount.
Split the difference
Another option to consider is splitting the gross profit with the customer. Say that your gross profits (revenue minus the cost of servicing the property, which includes labor, gas, etc.) is about 50%. You might decide to offer your customer half of that profit (25%), in exchange for them paying you early. You shouldn’t go beyond this because you need the other half of your profit to cover your overhead costs (rent, insurance etc.).
While a 25% discount is significant, it could be justified when you consider the cost of furloughing and having to rehire new workers come spring time. Furthermore, when you consider the benefit of locking in customers for the following year, and freeing your time to get additional customers, it could be worth the expense.
A 25% discount is steep, but could be better than furloughing your team.
The right discount to offer in exchange for pre-paying services depends on your business circumstances. We recommend picking something between 10% and 25%, depending on how crucial it is to maintain cashflow during the winter.
* Discount = [100 - Cost of Service ➗ (1 + Credit card APR)^(Months prepayment / 12)] ➗ 100