Harvard Business Review

New Payment Options Can Bolster Revenue


Posted on Harvard Business Review: September 20, 2011 7:02 AM

Wal-Mart recently made business news headlines by unveiling a layaway purchase option for customers. This once-common practice involves retailers placing merchandise aside after a customer makes a down payment (typically 10 to 20% of full price). Additional payments are made over time, and once paid in full, the buyer takes possession. Sellers generally charge a service fee for layaway; Wal-Mart is charging $5. If all payments are not made by the agreed-upon deadline, the merchandise is returned to the showroom and all monies paid refunded less a $10 cancellation fee.

Until recently, layaway was on the “endangered strategies list,” replaced by increased use of credit and gift cards. So why bring back this dinosaur of a payment practice? Our economy. With banks being more cautious, consumer credit lines are withering. Sure, consumers can still independently save for big purchases. However, layaway inspires discipline and provides a more tangible goal. Many of Wal-Mart’s competitors, including Kmart, Sears, Target, and Toys “R” Us, are offering layaway options too.

Media coverage on the revival of layaways has focused on its reflection of our dismal economy, but the real lesson to managers is that a new pricing plan can activate dormant customers. Consumers are often interested in a product or service but refrain from purchasing simply because they don’t like the current pricing strategy. A new pricing plan can convert ongoing interest into purchase. For instance, Amazon is reportedly in talks with publishers to offer a Netflix-type of service for e-books. Customers would pay a fixed fee for unlimited access to an elibrary. This practice would grow demand for ebooks and ereaders.

The resurrection of layaway by Wal-Mart and other retailers is simply an attempt to meet the pricing needs of customers. By the way, notice how this pricing plan does not involve margin-lowering discounts? Instead, it increases profits by charging additional premiums or fees, as well as better serving and attracting new customers. Now that’s win-win.

Most people view pricing as a two-trick strategy: raise or lower prices. The capabilities of pricing are far more robust. The key to generating additional profits and growth is to provide new pricing strategies — such as layaway — that better serve the needs of customers.

My bet is that many customers are interested in your product or service but are sitting on the sidelines because of your pricing strategy. Creating new ways for customers to pay for your products can help activate these dormant customers.

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Rafi_mohammed
Rafi Mohammed, PhD, is the founder of Culture of Profit, a Cambridge (Mass.)-based pricing consultancy. He is the author of The Art of Pricing and The 1% Windfall.

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