Understanding the Carrot and Stick Approach
The ‘Carrot and Stick’ strategy is a motivational approach that involves either offering a “carrot” (i.e. a reward for good behaviour) or a “stick” (i.e. a negative consequence for poor behaviour).
This strategy originally applied to animals to get them to move by either offering a nice juicy carrot in front of them or (sadly) beating with a stick. If getting the animal to move was the objective, the carrot and the stick are the methods of achieving it.
How is this relevant to us nowadays you ask?
The Carrot and Stick strategy is a popular approach used by many managers, companies and individuals as a psychological way to alter their staff/clients’ behaviour and performance to achieve a certain objective.
Whilst no-one is dangling carrots or beating anyone with sticks (we hope), there are heaps of examples of people dangling metaphorical carrots or sticks to achieve certain outcomes with others. For example, managers continuously offer bonuses or promotions (aka a desirable reward) to their staff in order to encourage their staff to be more enthusiastic and hard working about achieving their objectives. This is the carrot example.
The managers can also, however, take the stick approach. Threats of job loss, pay cuts, no bonuses etc. are just a handful of examples of taking the stick approach, all of which encourage (in this scenario) employees to work harder to ensure they avoid any negative consequences.
How does this apply to invoice payments?
Let’s say you’re the owner of a small company with a few clients. You’ve had the same 5 clients for months if not years now and one or two of them always pay their invoices late no matter how early you send your invoice to them or how much you chase them to pay, impacting both your time, cash flow and (let’s be honest) stress levels.
One way to try to avoid this is to incentivise your client by offering a discount if the client pays the invoice early. Aka, dangling a carrot with an offer of reduced fees.
The other way is to use the stick approach by applying a late fee if your invoice isn’t paid on time, again incentivising your client to pay on time to avoid paying even more.
With Payment Bear, our customers can choose between:
- Discounts (aka carrots): offering fixed or time-based discounts to promote fast payment.
- Late Fees (aka sticks): automatically apply late fees if the invoice isn’t paid on time.
On top of this, Payment Bear’s automation features such as Automated Reminders (scheduled automated reminders to your clients and customers for unpaid invoices) and Recurring Invoices (scheduling invoices that repeat on a set frequency) means that customers don’t need to spend even more time working out various pricing differences from the early or late fees and even better, avoids any potential awkward conversations with their clients about an increase in fees – Payment Bear does this for them!
“31% of businesses admit to spending between 21-30 hours per month chasing customers”
- Natwest
Let’s delve into why offering an early payment discount is effective...
The Benefits of Offering Early Payment Discounts (Carrot)
- Improves Cash Flow
For small businesses and self-employed workers, cash flow issues impact business planning and threaten the ability to pay suppliers, staff and clients and customers can be lost as a result. Having a steady cash flow can prevent this from happening.
“FSB research estimates that 50,000 SMEs go out of business each year referencing cash flow as a cause.”
- Department for Business & Trade
- Building Better Client Relationships
Early payment discounts mean a lower cost of goods/ services for your clients & customers, which means your customer thinks they’re getting a better return for your services. This in turn helps you to build better relationships with your customers whilst simultaneously reducing the risk of being paid late or not being paid at all.
- Reduces Administrative Burden
By incentivising your customers to pay early, you’re less likely to need to chase them to pay their invoice. Utilising automated systems such as Payment Bear’s to track and apply discounts can also significantly reduce your administrative workload. Time is money people!
“27% of UK SMEs are owed between £5,000 and £20,000 in unpaid invoices”
- Natwest
Now let’s go into why late fees are so effective...
The Advantages of Implementing Late Fees (Stick)
- Encouraging Timely Payments
No-one wants to pay more money than they’re supposed to. By applying a late fee, this will encourage your customers & clients to pay on time. Just make sure that your customers & clients are aware of these charges from the start and include these in your contract.
- Compensating for Delays
Another benefit of applying a late fee is the fact it can offset any costs incurred due to late payments such as interest charges from taking a line of credit to cover cash flow gaps to simple administrative costs spent from chasing the late payment.
- Maintaining Professionalism and Fairness
According to a report by Smart Data Foundry in 2022, “for a typical business, almost half of outstanding invoices (by value) are overdue.” Small businesses and self-employed workers are the most impacted by this, having less cash reserves than larger corporations.
It is only fair that larger businesses respect the payment terms and contracts of their staff/agencies/suppliers/partners, which is why, legally in the UK, the interest you can charge if another business is late paying for goods or a service is called ‘statutory interest’ - this is 8% plus the Bank of England base rate for business-to-business (B2B) transactions. (Note; you cannot claim statutory interest if there is a different interest rate in the contract agreed between you and your customer/client).
Let’s share an example of how this might work:
If your business was owed £1,000 and the Bank of England base rate were 0.5%:
- The annual statutory interest on this would be £85 (1,000 x 0.085 = £85)
- Divide £85 by 365 to get the daily interest: 23p a day (85 / 365 = 0.23)
- After 50 days this would be £11.50 (50 x 0.23 = 11.50)
Doing this manually can take up a lot of time and cause confusion. Knowing how much to charge each customer or invoice can add even more workload to yourself or your finance team and knowing how to communicate these increases professionally with your customer could cause tensions. Being clear about the late fee from the start (and ensuring it’s in your contract) is key.
This is why technology such as Payment Bear’s is a game changer. Payment Bear’s automated reminders and recurring invoices ensure that communications with your customers are handled professionally and with complete transparency. Leaving you to focus on what you do best – your work.
“Ultimately, late payment hinders the UK’s productivity, growth and prosperity.”
- Department for Business & Trade
So we’ve been through the carrot and the stick approach, but which one is best? Our opinion? Do both!
Balancing Both Approaches for Optimal Results
There’s no ‘one size fits all’ when it comes to what will work best between you and your customer or client. Try starting by offering both an early and late fee and see what resonates (and gets your invoice paid) the most!
Some customers might not even notice a difference in an early fee being applied but might notice a discrepancy between what they were originally quoted and what they’ve now got to pay which might have bigger repercussions internally but should mean it’s less likely to happen again.
Others might also be struggling for cash and the prospect of paying a bit less money for your services will absolutely encourage them to pay earlier!
How Payment Bear Simplifies the Process
- Seamless Automation
Payment Bear offers three different automation solutions for users to choose from:
Automated Reminders: Schedule automated reminders to your customer for unpaid invoices and allow us to automatically send any late fee increases to those pesky late paying clients.
Recurring Invoices: Schedule invoices that repeat on a set frequency, saving you precious time whilst improving your payment cycle.
Statuses & Tags: We automatically mark any changes to your invoices and immediately update the status of each invoice, providing you with real-time monitoring and reporting of your cash flow.
- Flexibility and Control
Payment Bear offers a huge degree of flexibility, allowing you to set the terms and conditions of your late fee or early discount, as well as set the regularity for reminders and follow ups. Once set up, you can let Payment Bear do the rest of the hard work.
- Support and Guidance
How to Apply a Late Fee to an Invoice:
Payment Bear enables you to apply two types of late fees; fixed administrative fees and an annual rate of interest (which is applied daily). When an invoice passes its term, late fees will be automatically applied. Read our Guide on how to apply late fees to your invoices.
How to Apply a Discount to an Invoice:
When invoicing generally, two types of discounts are commonly applied; Trade Discounts and Cash Discounts. Trade Discounts, often referred to as ‘fixed discounts’, are deductions to the invoice total that apply continually. Cash Discounts, often referred to as ‘fast payment discounts’, expire after a set amount of time, incentivising quick repayments. Both discount types can be applied as a fixed value or a percentage of the invoice amount. Read our guide on how to apply discounts to invoices.
For more information, head to our Guides page designed to help you navigate the world of invoicing.
Takeaway
It's clear there’s a problem with late payments in the UK which is affecting both the economy as a whole and individuals.
Introducing early payment discounts and late fees can help:
- Improve Cash Flow Management
- Maintain positive client relationships
- Increase customer loyalty
- Compensate for lost time
Being flexible to use whichever strategy works best for each of your customers is key to seeing the above benefits.
Adding fees and penalties means more work for you or your finance team, adding a layer of complexity to the process that can lead to errors. Payment Bear’s automated system can manage both strategies efficiently, helping you save time and improve your cash flow.
If you’re new to Payment Bear, feel free to explore the platform to see how you can utilise some of these strategies to improve your invoicing process!
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