Power Up Your AR with Dynamic Discounting

In today's fast-paced business environment, cash flow is king. At Paystand, we understand this and offer a revolutionary tool called Dynamic Discounting. This tool empowers accounts receivables teams to optimize their cash cycles by incentivizing early payments. More than just a service, it's a game-changer for AR teams.

Introducing Dynamic Discounting

Dynamic Discounting is an innovative application explicitly designed for seller accounts receivable (AR) teams. It is innovative in two ways.

• It is the first automatic solution that enables AR teams to offer buyer accounts payable (AP) teams dynamic early payment discounts.
• It is the first solution of its kind powered by smart contracts. Yes, we will go into detail on what this means and why it matters.

The "dynamic" part of Dynamic Discounting comes from its ability to provide a variable discount rate based on how early the payment is made. Of course, without any manual work. This gives AR teams early access to cash, reduces days sales outstanding (DSO), and strengthens their relationships with customers, all while offering a risk-free return to the payers.

Why Dynamic Discounting is Important

In today's uncertain economic climate, early access to cash can be the difference between success and failure for many businesses. Dynamic Discounting is a tool that helps businesses reduce their DSO — the time it takes from invoicing a customer to receiving the payment.

By offering automatic discounts for early payment, AR teams can incentivize faster payments and improve their cash flow.

Unlike other companies focusing on AP teams, Paystand's Dynamic Discounting product is designed for AR merchants. This tool not only helps reduce DSO and increase the chances of on-time payments but also facilitates better customer relationships.

How Does It Work?

With Dynamic Discounting, your AR team has the power to set the maximum discount rate you're willing to offer your customers based on your firm's typical net terms.

The discount rate can decrease in one of two ways. It can go down linearly throughout the invoice duration or be configured in decreasing steps.

Dynamic Discounting in Action

Users are able to choose between linear and step discounting per individual experience. Let's take a look at a couple of examples.

For instance, if you set a maximum discount of 4% and default net terms of 60 days, your customer will be offered a 4% discount on the day the invoice is generated. After 15 days, the discount drops to 3%; after 30 days, it's 2%, and so forth until day 60.

This was an example of linear discounting. We can see how the discount steadily drops as time goes by.

However, how would this look under the same situation with the step discounting method? Payers will receive a 4% discount from day 1 until day 15. On day 15, payers will now receive a 3% discount until day 30, and so on.

This discounting method is cleaner than linear discounting as discount percentages will not have decimals.

The Technology Behind Smart Contracts

As mentioned before, Paystand’s Dynamic Discounting product is powered by smart contracts.

💡 Why this matters:

These smart contracts are self-executing, with the terms and conditions directly written by users as they specify discounts percentages, types, and net terms.

These run on Paystand’s blockchain network and automatically execute predefined actions when the payment conditions are met. These contracts eliminate the need for intermediaries and ensure that agreements are transparent, secure, and tamper-resistant.

Given that our dynamic discounting is powered by smart contracts, it means that the discount calculation and application process is handled automatically by the smart contract without the need for manual intervention. Here's how it works in the back:

1. Agreement Creation: AP and AR teams agree to use a dynamic discount mechanism for early payments. The terms of the discount are encoded in a smart contract, specifying the discount rate, the time frame for the discount, and other relevant details.
2. Invoice Generation: When the seller generates an invoice for the buyer, the smart contract is notified, and it records the invoice details, including the due date and the initial calculated discount rate based on the dynamic discount formula.
3. Countdown and Discount Adjustment: As the due date approaches, the smart contract continuously monitors the time remaining until the due date. It then adjusts the discount rate based on the dynamic discount formula. The closer the payment is made to the due date, the smaller the discount offered.
4. Payment Execution: When the buyer makes the payment before the due date, the smart contract automatically applies the appropriate discount based on the time remaining at the moment of payment.

By using smart contracts, the process becomes automated, transparent, and tamper-proof, reducing the administrative burden and ensuring that both parties can trust the accuracy and fairness of the dynamic discount mechanism.

Additionally, since the smart contract runs on a blockchain, all actions and transactions related to the discount are recorded on the distributed ledger, providing an immutable audit trail.

Dynamic Discounting Step by Step

Let’s take a look at how Dynamic Discounting works for our current users.

1. Paystand Dashboard has a dedicated Dynamic Discounting tab.

2. AR team sets a Default Maximum Discount and Default Net Terms (in days).

3. A specific email template will be created in Netsuite to pay against an invoice and sent to selected customers.

   

4. The dynamic discount is reflected in the checkout experience so the payer understands what they are paying & why this amount is lower.

Users will have the option to create multiple linear or stepped discount templates depending on their needs and the needs of their payers. However, a linear or stepped form must be chosen and both can’t be selected for a single checkout.

Flexibility, Control, and Customization

Dynamic Discounting offers flexibility and control to AR teams. If you prefer not to offer it to a specific customer, you can simply use a different email template. However, there are more features that will greatly optimize your Dyanamic Discounting experience:

• Limitless Discounting: there is no limit to the amount of discount that can be offered.
• On and Off Turning: it is possible to turn the feature on and off using other email templates.
• Discounts with Fees: dynamic discounting will apply even if you set a fee/incentive for using a specific payment type. These are calculated based on the final amount on the invoice (once dynamic discounting is applied). For example:
  
  • Invoice: $1,000 USD

  • 10% DD for early pay

  • Total due: $900 USD

  • 1% fee

  • Final Total Due: $909 USD

• Bookkeeping: The ERP reflects discounts with one discount line adding all discounts applied.

Advantages for Our Users and Their Payers

On one hand, AR teams form better relationships with AP teams by offering them incentives for their payments. On the other hand, AP teams don't have to split their cash discounts with a third party as is currently the norm.

Psychological Principles Behind Our Discounting

Urgency

“FOMO” or Fear of Missing Out may sound like a colloquial saying with younger generations. However, it is based on the psychological principles of urgency and scarcity, in which human nature does not want to miss out on a great opportunity.

💡 Why this matters: Flash or fleeting sales create a sense of urgency. Payers know your discounting deal will only be available for a limited time, which means they need to take action right away instead of waiting. If they don’t, they’ll have to pay full price later.

Avoid the Hard Math

The ease with which payers can quickly calculate your discounts is crucial for motivating them to take action and pay earlier.

Here’s what research shows:

• People don’t like doing math or having to perform complex calculations. Yes, this applies to accountants as well.
• Discounts that are easily calculated are seen as bigger, which is why rounded discount percentages in stepped discounting could be more beneficial than linear discounting.

💡 Why this matters: Even though discount types essentially convey the same information, people’s perceptions of them make a difference in whether and how fast they accept the deal and pay earlier.

Framing: The Rule of 100

Jonah Berger, author of Contagious: Why Things Catch On, shares his tested “The Rule of 100” theory about how people perceive a percentage discount versus a dollar-off discount promotion. According to his research:

• A percentage discount is more appealing to consumers for items under $100. So 10% off a $50 pair of jeans sounds better to buyers than giving them $5 off, even if they’re the same discount.
• A dollar-off discount works better for items priced over $100. On a $1,000 software program, people were more likely to buy when they received $200 off versus a 20% discount, despite the deal being the same.

Why does the Rule of 100 work like this? A concept called framing.

Based on its presentation, a percentage off a small-ticket item (under $100) seems like a bigger discount than a few bucks. But buyers of big-ticket items (over $100) need to immediately see a large chunk of money come off that higher price.

💡 Why this matters: at the Paystand Checkout, we show the discounted USD amount in a larger font so that payers perceive a greater value in AR teams’ offerings.

Who Benefits the Most

A lower DSO generally indicates a more efficient and effective accounts receivable process, which can have significant advantages in certain industries:

1. 🛍️ 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.
2. ⚙️ 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.
3. 🖥️ 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.
4. 🏥 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.
5. 🚌 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.
6. 🛎️ 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.
7. 🚧 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 those medium and large AR teams dealing with mid-sized AP teams.

What is Coming Next

While the current version of Dynamic Discounting does not support different discount plans for different customers, updates to include this feature are coming soon.

Also coming soon will be the option to make discounts available for a certain number of days and then set a fee for a payment method after said amount.

Finally, Dynamic Discounting will soon be available to be turned off for a specific payment method, such as credit cards.

Why We Do This and Why This Matters

Commercial finance is due for renovation. Our mission is to transform business payments into cashless, fee-less, instant, self-driving, open, and programmable. This is a colossal mission indeed, which is why we showcase our progress one step at a time.

Our step: Give AR teams deeper control of their receivables, all while removing the middleman from discount savings.

However, simply making a discounting tool is not enough to disrupt our current financial ecosystem. This is why, in order to really decentralize finance, we used a few lines of code smart contract code to prove how easily this technology can make waves. Read our technical documentation for smart contracts here.

One small step for Paystand, one giant leap for commercial finance.

Why this matters to you: It was about time discounts were used as incentives to pay instead of conditions to be paid. Become the hero by giving your debtor AP teams a full discount instead of having them use a third-party discount provider.

Join the more than 600,000 teams using the Paystand payments network and start reaping the benefits of offering early pay discounts and faster payment using blockchain-powered smart contracts technology. Welcome to the future of business payments.