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Not too long ago, if you wanted something you couldn’t afford right away, there were only two options: take out a loan or use a credit card. None of these choices have much gloss as they require you to pay interest. Ultimately, customers who didn’t want to use a credit card would usually have to pass on the product or service.
At Vagaro, we realized that our salon, spa and fitness businesses were facing a similar dilemma: the customers were interested in more expensive tickets, but didn’t want to pay the price all at once. Our solution to this problem was a BNPL (buy now, pay later) model. These models are an alternative to a loan/card that can simultaneously support customer needs and help businesses in virtually all industries maximize revenue.
Related: Moving to ‘Buy-Now-Pay-Later’ Models: Ecommerce Giants Bolster Financial Offerings to Operate in the ‘New Normal’
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BNPL, the nutshell version
BNPL is a form of short-term financing. In a typical BNPL plan, the total cost of the item or service someone wants to buy is broken down into several payments. The buyer makes a small down payment. They then pay at regular intervals, such as biweekly or monthly, until they have paid the total cost of the item or service.
Typically, retailers partner with a third party to make BNPL plans work. The third-party company pays the seller the full amount of a customer’s purchase, which protects the retailer. The third-party company may charge interest depending on the type of deal, but they usually charge a one-time transaction fee of 2-8% instead to reduce their deductibles.
BNPL allows companies to attract and retain customers while also making money for the outside company. Consumers like the fact that they take away interest and still get instant access to what they want. BNPL plans account for only 5% of all e-commerce spending. But because the plans can be win-win-win, they are the fastest growing online payment method, almost tenfold from 2019 to 2021.
Listening to customers gives a win-win-win solution
Customer feedback should be taken into account when deciding whether to use any type of business service or model, and BNPLs are no different. The entrepreneurs who use our marketplace told us that their customers wanted to buy more expensive options and wanted to know how to finance them. Our customers wanted to meet this demand, but had questions: how could they avoid taking too much risk? Was there a way not to get bogged down in legal work for every contract?
When we listened to our customers, we knew they had a clear understanding of customer demand. We just had to help them comply. We realized that BNPL could be a solution: the expectation based on our industry research was that business owners could increase their sales by 30% if BNPL was an option for their customers (ie 13 customers would buy something instead of 10). At the same time, because services were cheaper under BNPL, customers would likely choose to purchase more services at once (e.g. a haircut and highlights rather than just the haircut). In general, ticket prices would therefore potentially increase by 40%.
As we looked at the data, we thought about integrating with another provider to handle the financing. We decided to do it in-house and pay our customers ourselves for customer purchases. We care about our customers and always want to provide them with the best support. We thought internal funding would deliver that.
Because our salon, spa and fitness owners listened to their customers and we listened to our users, we were able to develop a BNPL plan that benefited everyone. Customers benefited because they did not have to pay a higher price up front. The companies benefited because they did not have to take unnecessary risks. And we’ve benefited by earning the loyalty of our users, who ended up doing more business thanks to our funding.
Related: When your customers talk, mute your brand voice and listen.
Customization allows BNPL to work virtually anywhere
While Vagaro established its BNPL plan within the salon, spa and fitness industry, the basic process of listening to customers to develop a custom BNPL model can apply to any industry. Most BNPL models ultimately result in greater convenience for customers, and they tend to increase revenue for whatever company is offering the service. Ecommerce sites have a 2.1% increase in conversion rates after implementation of BNPL options.
Today’s customers have become accustomed to making multiple payments for items via credit cards. But they are now facing more difficult economic conditions inflation reaching rates unseen for four decades. Research of McKinsey shows that only a third of people around the world are optimistic about their finances, while more than half are concerned about job loss. And even though people spend money selectively, they are still looking to save money.
In this environment, an investigation by blue dot found that nearly half of Millennials and Gen Z said they would rely on BNPL for their 2022 Christmas shopping – 19% of respondents said they would because they are low on cash. McKinsey found that too 60% of consumers plan to use a BNPL model in 2023. The conditions are thus ideal for companies to use BNPL as a way to retain existing customers and attract new customers.
BNPL can be a route to long-term loyalty and profit
Treating a customer well means giving them the right set of tools at the right price with great customer service. When you do this, you can secure that customer for life. BNPL models aren’t the only way to meet customer needs, and they may not work for every company. But they are a legitimate way to earn the long-term relationships companies want.
As inflation continues to cause serious economic problems, customers still have the urge to buy, and they will if they can find practical payment solutions that don’t exacerbate debt. Because BNPL models can benefit everyone involved, and because economic conditions drive clients to prefer financing options, it may be an ideal time to incorporate BNPL into your strategy.
Related: The Future of Online Shopping Is ‘Buy Now, Pay Later’
Janice has been with businesskinda for 5 years, writing copy for client websites, blog posts, EDMs and other mediums to engage readers and encourage action. By collaborating with clients, our SEO manager and the wider businesskinda team, Janice seeks to understand an audience before creating memorable, persuasive copy.