Table of contents
- What is Dynamic Discounting?
- How does Dynamic Discounting Work?
- The 11 Benefits of Dynamic Discounting for AR
- What Industries Benefit the Most from Dynamic Models?
- The Future of Dynamic Discounting
- More A+ Strategies for AR Teams
Key takeaways
- Dynamic discounting offers a lower payment in exchange for early payment, with a sliding discount scale based on when the invoice is fulfilled. The earlier the payment, the lower the discount.
- Unlike traditional pricing structures, dynamic discounting offers a variable discounted amount and can be a win-win for both buyers and suppliers.
- AR teams and accounting professionals can use dynamic pricing to reduce DSO, improve cash flow, boost financial health, and build stronger customer relationships without adding to their workload.
Dynamic discounting offers CFOs and AR teams a groundbreaking tactic to facilitate healthier cash flow without adding extra work or costs. This real-time pricing structure promotes timely or early payments with customers. And it’s been proven to raise revenues.
For example, a report from the National Bureau of Economic Research found that U.S. airlines using a dynamic pricing model increased revenue by up to 5%. Another report on household electricity usage and dynamic pricing found that not only did this improve efficiency and reduce costs, but it also helped low-income customers save money. In other words, this tool can become a win-win strategy for both finance teams and the end customer.
It’s important to be clear about the definition of dynamic discounting. This approach isn't just about early payment discounts or a sliding payment scale for supply chain finance; it represents a paradigm shift in B2B transactions.
To get a better understanding of how and why dynamic discounting works, let’s get granular.
What is Dynamic Discounting?
Dynamic discounting differs from traditional static discount models by offering suppliers the flexibility to vary discounts based on the number of days before payment. If the invoice due date is a net 30, a customer paying on day 15 will receive a higher discount than one paying on day 20.
This strategic approach incentivizes early payments and aligns payment terms with operational needs, enhancing liquidity management and reducing dependency on costly credit lines. For CFOs, dynamic discounting presents a compelling opportunity to optimize working capital allocation and mitigate financial risks, while AR teams benefit from streamlined invoice processing and improved cash flow visibility.
At its core, dynamic discounting is a financial mechanism used in B2B transactions. Unlike traditional static discounts that offer a fixed percentage if paid within a specified timeframe, dynamic discounting adjusts the discount based on the timing of payment. Suppliers can offer varying discounts depending on how early buyers settle their invoices. For example, an invoice might stipulate a 2% discount if paid within ten days, decreasing incrementally as the payment date extends closer to the due date.
How Does Dynamic Discounting Work?
The process begins with suppliers configuring their invoices with dynamic discount terms using specialized software solutions. These terms outline the discount percentages available for early payment within different time frames. Buyers then can review these discounts and decide whether to capitalize on the savings by settling invoices ahead of schedule.
How Dynamic Discounting Works Helps Price Negotiation
Negotiation with dynamic discounting is simple: The earlier an invoice is paid, the better the discount. Customers are also keen to save money. Since dynamic discounting offers a sliding scale of discounts based on the payment timing, customers can capture lower rates within their capacity to pay. Furthermore, customers may choose to prioritize your payments to open up cash flow for their other payments.
There are a few key reasons why this approach is so effective.
Flexible Terms
Every customer is different, and attempting to create bespoke payment options manually becomes cumbersome, confusing, and costly. Dynamic discounting automates the process without sacrificing flexibility for both the AR team and the customer.
Variable Discounts
Discounts are most often based on payment timing, and this can cater to a wide range of clients to ensure timely payments. While not every customer can pay invoices immediately, some can manage to prioritize payment on day 10 or 20 rather than waiting 30 or more days to fill the invoice. This variability encourages early payment from a larger number of customers, no matter their cash flow limitations.
Direct Transactions
Dynamic discounting is often baked into your invoicing software. This means that customers can pay you directly, ideally through bank transfer or ACH, although you can also offer credit card options as well. However, you can offer “zero fee” or "convenience fee” initiatives to further encourage payments through low-cost channels.
Buyer-financed Options
In some cases, you may add buyer-financed options for customers. Buy Now, Pay Later (BNPL) is one popular example, but offering credit to customers that normally pay on time or early can help build long-term trust. That said, offering these buyer-financed options is often higher risk, and is best used sparingly.
The 11 Benefits of Dynamic Discounting for AR
Dynamic discounting for accounts receivable (AR) offers several significant benefits to businesses:
1. Improved Cash Flow
Businesses can use early payment discounts to incentivize prompt payment, improving cash flow and financial flexibility.
2. Reduced DSO
Dynamic discounting reduces DSO by incentivizing early customer payments and improving working capital management.
3. Enhanced Customer Relationships
Dynamic discounting strengthens customer relationships by showing collaboration and offering beneficial payment terms, resulting in loyalty, repeat business, and positive referrals.
4. Streamlined AR Management
Automating dynamic discounting streamlines AR management, freeing up time for strategic initiatives.
5. Competitive Advantage
Dynamic discounting offers a competitive edge by attracting new customers, retaining existing ones, and increasing market share.
6. Improved Forecasting and Planning
Dynamic discounting provides insights into customer payment behavior, allowing businesses to make accurate forecasts and plan financial strategies, optimizing inventory, production, and operations.
7. Enhanced Risk Management
Dynamic discounting can mitigate credit risk by incentivizing early payment, reducing bad debt, and strengthening financial stability.
8. Scalability
Dynamic discounting solutions scale with businesses, allowing them to adapt to market changes and sustain benefits.
9. Compliance and Legal Considerations
Dynamic discounting programs can comply with laws and regulations, ensuring ethical and responsible business practices.
10. Effortless Prompt Payment Discounts for Early-Paying Customers
Customers are encouraged to pay early, if not immediately with the instant discount. At the same time, the process is simple for both the customer and the AR team—dynamic discounting requires little time to maintain.
11. Increased Liquidity
Finally, with a healthier cash flow, lower DSO, and boosted efficiency, the company benefits from increased liquidity. This, in turn, allows the organization to pursue growth opportunities.
What Industries Benefit the Most from Dynamic Models?
A lower DSO generally indicates a more efficient and effective accounts receivable process, which can have significant advantages in certain industries:
- Retail and E-commerce. Cash flow is essential to manage inventory, order fulfillment, and operational expenses. A lower DSO allows companies to convert sales into cash quickly, helping them maintain liquidity and invest in growth opportunities.
- Manufacturing. Often deals with large orders and supply chains. A lower DSO helps them manage working capital efficiently and reduces the risk of cash flow shortages, enabling them to meet production and delivery requirements.
- Technology and Software. Companies in the technology sector often face competitive and fast-paced markets. A lower DSO helps them maintain a steady cash flow to fund research and development, stay ahead of the competition, and invest in innovation.
- Healthcare. Healthcare providers deal with multiple payers, including insurance companies and government entities. A lower DSO is crucial in managing cash flow, meeting operational costs, and maintaining the quality of patient care.
- Transportation and Logistics. Businesses in this sector often have high operating expenses related to fuel, maintenance, and fleet management. A lower DSO enables them to manage cash flow and ensure the smooth operation of their services.
- Service-Based Industries. Companies offering professional services, such as consulting, marketing, and legal, rely heavily on timely client payments. A lower DSO helps them maintain a steady cash flow to cover payroll and other operating costs.
- Construction. Construction projects often involve substantial upfront costs for materials and labor. A lower DSO helps construction companies manage cash flow and ensure timely payments to suppliers and subcontractors.While a lower DSO is generally beneficial, we understand that the sizes of AP partners drastically affect payment practices and challenges. Dynamic Discounting within Paystand will be most beneficial for medium—and large-sized AR teams that work with mid-sized AP teams.
The Future of Dynamic Discounting
As global markets evolve and economic uncertainties persist, adapting quickly and strategically managing financial resources becomes increasingly critical. Dynamic discounting enhances financial flexibility and positions businesses to respond proactively to market fluctuations, regulatory changes, and competitive pressures. By embracing innovative payment strategies facilitated by Paystand, CFOs and AR leaders can confidently navigate challenges and seize growth opportunities.
At Paystand, we recognize that seamless financial transactions are integral to sustainable business growth. Our dynamic discounting solutions are designed to empower CFOs and AR teams with the tools needed to streamline payment processes, enhance supplier relationships, and achieve unparalleled operational efficiency. By integrating cutting-edge technology with intuitive design, Paystand enables businesses to automate discount calculations, synchronize data across ERP systems like NetSuite, and leverage real-time analytics for informed decision-making.
More A+ Strategies for AR Teams
Dynamic pricing is only part of the puzzle when it comes to developing a revenue-focused accounting strategy. Another important piece is to discourage high-cost payment processing options.
Discover how to use convenience fees and incentives to reduce costs without discouraging early payments in our Fees & Incentives Strategy quick guide.
