I mean cmon, you’re literally delaying payment for a long time. How does that benefit any business?
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These options are often provided by a third party (such as Affirm, Paypal, etc).
The business sells a product and is paid effectively immediately, and probably will capture a few extra customers who couldn’t afford an upfront payment.
Making a sale is (almost) always better than not a making sale. So, a deal where the buyer does not pay the entire amount up front, but does still pay the entire amount (eventually) is better than the buyer leaving without buying anything.
This, in its modern American style, started with large farm machinery. Farmers could not afford to pay for the equipment initially, since they did not have enough money sitting around. However, getting the machinery would allow them to make more money, which would allow them to afford the equipment. Instead of being stuck in a catch-22 (where they needed the money to buy the equipment to earn the money to buy the equipment), the seller offered a deal where the farmer would pay what they could, and leave with the machinery. Then, after the farmer’s (larger) harvest was brought in and sold, the farmer would pay the rest of the machinery off. If the farmer did not make enough to pay the remainder, he would pay what he could, then pay the remainder the following year.
So, how does the seller afford to do this, when they do not get the money all up front? They take out a loan. As long as the farmer is paying their machinery off quickly enough, and the seller’s profit margin is sufficient, the seller is good.
Remember, the alternative is to not sell the equipment at all. Imagine a John Deere dealership across the street from a Waterloo dealership. A farmer might choose one or the other based on preferences or needs, but he cannot afford either. John Deere then offers financing, but Waterloo does not. The farmer can now get a Deere, but still cannot afford the Waterloo. What is he going to do? After seeing all the business Waterloo is losing to Deere, Waterloo has to either offer financing or go out of business due to lack of sales. So, even if Waterloo barely breaks even with their financing to start with, it is better than bankruptcy. (Financing can also draw in customers that might not have even considered buying a thing. Often, financing is advertised for cars, home appliances, and similar things, in the hopes of grabbing the attention of people who do not *NEED* to replace what they currently have, but might be lured into it with the thought of only paying X amount down, and Y amount monthly.) Also, remember that having the company’s products being used in the real world is a form of advertisement as well. So, Waterloo might get 3 new customers from seeing the initial one using their product. As sales grow, it becomes easier to make money.
All of that does not include that “buy now pay later” often has interest. If you buy a $100 thing, and you pay $10/month, you might end up paying for 11-12 months. So, even though the company does not get the money up front, they actually get $120 for a $100, just by being a little patient. However, even without that extra money from interest, if you only had $50 in your pocket, the business would still be in the situation of either only getting that $50 from you, or offering some sort of financing option to allow you to pay part now and part later.
Obviously, this does not include companies that only exist to lend money, credit cards, etc. This is only talking about using “buy now pay later” as a sales tactic.
Hypothetically, let’s say 5 out of 10 people will hand over cash or credit card, and 6 out 10 are willing to buy now pay later, by offering the option, the business just increased their sales by 20%, hypothetically speaking.
Because it gets you to buy the product! If the incentive to pay later helps you sell more of what you are selling you would take a delayed payment over no sale.
People that would not normally have bought anything can now buy something *and* finance availability tends to drive up *average order value* meaning they also tend to pay more than they would have done had they paid cash.
It allows the business to make sales to people they wouldn’t be able to if they required payment up front, resulting in increased sales. As long as a business has enough cash, or access to credit, to cover expenses (replace inventory, rent, salaries etc) over the length of repayment they will make more money in the end.
Another thing to consider is that they front load the interest payments so even if you default they make the money off the loan, they sell the debt for pennys on the dollar. they still get a sale and their cost isn’t the sell price, so they might break even on the item and still make a profit off the interest.
On a larger scale they end up making more than they lose, otherwise they wouldn’t do it.
There is a lot of data surrounding how much people will spend in your store when you offer them credit. Think about a TV that you can afford, lets say it’s $400, but they offer you installments on a $1200 TV and now they have turned a $400 sale into a $1200 sale ++interest
I use klarna & PayPal 4 installment options at merchbar & academy often. For me, being able to pay in installments incentivizes me to spend more than I would if I had to pay for it all at once
Making a sale is better than to no conversion. Businesses already spent money advertising and infrastructure so making the sale at the end makes it worth to wait for the installments.
E-commerce retailer here.
It allows a lot of people to spread the cost over time which means they can buy today instead of 2-3 months’ time. This gets more sales for us as they can buy on impulse and don’t have to save up, of which they will less likely do as they will spend it on other things.
For us, the cost is about double. Normally we are charged 2% transaction rate by the payment processors. These services charge us 3-5%. It is worth it for that extra few % as we probably would not have gotten that sale without that service. Granted many people do it now because they can. I for one will use Klarna sometimes even though I have 10-100x the cost of the item in the bank account.
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