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Not that long ago, if you wanted something you couldn’t immediately afford, there were only two options — take out a loan or use a credit card. Neither of those choices has a ton of luster because 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 our salon, spa and fitness businesses were facing a similar dilemma: The customers were interested in higher ticket items but didn’t want to pay the price all at once. Our solution to this problem was a buy now, pay later (BNPL) model. These models are a loan/card alternative that can simultaneously support customer needs and help companies in virtually all industries maximize revenue.
BNPL, the nutshell version
BNPL is a type of short-term financing. In a typical BNPL plan, the total cost of the item or service someone wants to buy gets split into several payments. The buyer makes a small down payment. Then they make payments at regular intervals, such as biweekly or monthly, until they’ve paid the total cost of the item or service.
Most commonly, retailers will work with a third-party company to make BNPL plans work. The third-party company will pay the seller the full amount of a customer’s purchase, which protects the retailer. The third-party company can charge interest depending on the agreement type, but usually, they charge a 2-8%, one-time transaction fee instead to reduce their own risks.
BNPL allows companies to attract and retain customers while the third-party company also makes money. Consumers like the fact they eliminate interest while still getting immediate access to what they want. BNPL plans account for just 5% of all ecommerce spending. But because the plans can be win-win-win, they are the fastest-growing online payment method, increasing nearly tenfold from 2019 to 2021.
Listening to customers gives a win-win-win solution
The decision to adopt any type of business service or model should take customer feedback into account, and BNPLs are no different. The business owners who use our marketplace told us that their customers wanted to buy more expensive options and wanted to know how they could finance them. Our clients wanted to meet this demand, but they had questions: How could they avoid taking on too much risk? Was there a way to not get bogged down in legal work for each contract?
As we listened to our clients, we knew they had a clear picture of customer demand. We just needed to help them meet it. We realized that BNPL could be a solution: The expectancy based on our industry research was that business owners could sell 30% more if BNPL was an option for their customers (i.e., 13 customers would buy something instead of 10). At the same time, because services were more affordable under BNPL, customers would likely choose to purchase more services at a time (e.g., a haircut and highlights rather than just the haircut). So, overall, ticket prices would potentially increase by 40%.
As we looked at the data, we thought about whether to integrate with another provider to handle the financing. We decided to do it in-house and pay our clients for customer purchases ourselves. We care about our customers and always want to give them the best level of support. We felt in-house financing would deliver that.
Because our salon, spa and fitness business owners listened to their customers, and because we listened to our users, we were able to develop a BNPL plan that benefited everyone. Customers benefited because they didn’t have to pay a higher price upfront. The businesses benefited because they didn’t have to take on unnecessary risk. And we benefited by earning the loyalty of our users, who ended up doing more business, thanks to our financing.
Related: When Your Customers Are Talking, Quiet Your Brand Voice and Listen.
With customization, BNPL can work virtually anywhere
Although Vagaro set up its BNPL plan within the salon, spa and fitness industries, the basic process of listening to customers to develop a customized BNPL model can apply to any sector. Most BNPL models ultimately result in greater convenience for customers, and they tend to increase revenue for whatever business offers the service. Ecommerce sites have seen a 2.1% increase in conversion rates after implementing BNPL options.
Today’s customers have gotten used to making multiple payments for items through credit cards. But they now face harsher economic circumstances, with inflation reaching rates unseen for four decades. Research from McKinsey shows that only a third of people around the world are optimistic about their finances, while more than half are worried about job loss. And while people will selectively splurge, they’re still looking to save money.
In this environment, a survey by Bluedot found that nearly half of millennials and Gen Zers said they’d rely on BNPL for their 2022 holiday shopping — 19% of respondents said they’d do so because they’re low on cash. McKinsey has also found that 60% of consumers plan to use a BNPL model in 2023. So, the conditions are ideal for companies to adopt BNPL as a way to keep existing customers and attract new ones.
BNPL can be a route to longtime loyalty and profits
Treating a customer well means giving them the right set of tools for the right price with great customer service. When you do this, you can secure that customer for life. BNPL models are not the only way to meet customer needs, and they might not work for every company. But they are a legitimate path to earning the long-term relationships businesses want.
As inflation continues to create serious economic problems, customers still have the drive to buy, and they will do so if they can find practical payment solutions that don’t worsen debt. Because BNPL models can add benefits to everyone involved, and because economic circumstances are driving customers to favor financing options, it may be an ideal time to include BNPL in your strategy.
Related: The Future of Online Shopping Is ‘Buy Now, Pay Later’
This article is from Entrepreneur.com
