Can Installment Payments Convince Consumers to Keep Pushing Their Online ShoppingCarts?
There are few things in business that everyone can agree on, but in the online e-commerce space one statistic is the same, no matter whom you ask: over two thirds of prospective sales will never be, due to shopping cart abandonment.
Millions of e-words have been expended by thousands of experts recommending ways to cut this unfortunate statistic down, but I’d like to make a suggestion that may be new to many readers – so new, in fact, that very few e-retailers in the United States have even heard of it. Customers love the idea of credit card-based installments – being able to spread their purchases out over time in pre-determined interest-free monthly payments on their existing credit cards – and many would rush to take advantage of the opportunity to pay using this payment option, if offered.
Installments versus Promotions
When you consider that the top reason consistently given by customers on why they decided to give up on a prospective purchase they spend valuable time and energy arranging is that they were “presented with unexpected costs” (shipping, taxes, etc.), the idea of payments becomes very relevant. One solution to cutting down on cart abandonment advocated by experts, for example, is to offer an incentive like free shipping – but our research shows (see infographic below) that 54% of shoppers prefer the option of interest-free credit card-based installments over free shipping. Installments even beat prices deals; our poll of over 1,000 US credit card holders show that 53% of credit card users favored installments over a 10% discount.
So how do installments work? Very simple; say a customer’s total bill at checkout is $400. Instead of charging it to their revolving interest credit card account, the customer simply chooses the installment option, and selects the number of payments they would like to make for that purchase, up to the maximum offered by a site (let’s use ten as an example). Thus, the customer’s account is charged $40 per month. The customer knows in advance how much they are paying, and can more easily budget themselves, taking into account their other expenses. The transaction itself is done using the customer’s credit card – but instead of paying interest on the full $400 if it is not paid off in the first payment cycle, the payment is set at $40 per month, and that is all the customer has to pay through the life of the transaction.
The Appeal of Installments
For the customer, it’s a way to manage finances – but with that new ability to manage their budget, customers attain a new level of confidence, and are willing to buy more and spend more. According to our survey, 40% of high-income credit card users (earning over $100,000 a year) would increase the size of their purchase by at least 10% if offered interest-free installment payments. And among age groups, millennials – now the second largest group of credit card users in the US, accounting for 37% of transactions – were most likely to say that they would increase their purchases if offered the option of installments.
Don’t confuse installments with layaways, a payment method usually associated with lower-income consumers. In an installment transaction, customers get what they ordered right away, as do “classic” credit card customers; the only difference is in how the payment is collected. In our recent survey, it emerged that among credit card users, installments were most popular not with low, but with high-income consumers earning $100-150K+ annually. Some 60% of this group said they would use installments over other promotional incentives if this option was offered.
Proven Track Record
Installments are not a new idea; they are popular in half a dozen countries around the world, and are the primary payment method in many of them, including Argentina and Brazil. In the case of the latter, economists attribute installments to helping the economy weather through recent financial crises, and helping it to grow. “Nearly eighty percent of those surveyed have short-term debt – less than six months,” according to Brazilian economist economist Viviane Seda. “This appears to be favorable [for the economy] as it is something that can be finished quickly, so they can start spending again.”
And although economic conditions in the US are far different than in Brazil (where credit card interest rates often carry a whopping 300%+ APR!), as well as the other countries where installments are popular, it’s still a viable idea for American consumers, as the Splitit survey shows. It’s never too late for e-retailers to learn new tricks, and according to our survey, the ones that learn the installment payment trick will indeed benefit substantially.
Written by Gil Don, the CEO and Co-founder of Splitit.
Gil has extensive experience in sales and management. He is highly skilled in business analysis and negotiating and is customer driven. He serves as the Regional Manager for one of EMC’s product divisions, responsible for driving sales, building customer relationships and establishing additional channel partners. Prior to EMC, Gil was VP Marketing and Sales for leading technology system integrators like Ankor systems and We!
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