It’s a common challenge for service-based businesses to struggle with cash management, late client payments, and a lack of efficiency in generating first-time purchases. Unfortunately, 82% of small businesses fail due to poor cash flow management.

Utilizing invoice discounts is an effective way to manage this challenge, so it doesn’t slow down your business or cause major issues like bankruptcy. Discounts on invoices can provide funds for your cash flow problems and help you generate revenue, incentivize purchases, and increase repeat business. 

If you’re interested in applying discounts to your invoices, keep reading to learn more about types of invoice discounts, benefits to you and your clients, how to determine invoice discounts for your firm, and the best way to apply them correctly.  

What is an invoice discount and how does it work?

An invoice discount is a reduction in the invoice value. It is usually a certain percentage or a dollar amount that‘s removed from the total invoice.

While yes, an invoice discount reduces the total payment you receive, it’s strategic financing. It encourages your customers to pay on or before the due date, minimizing late payments and ensuring a constant, more predictable flow of money in your business.

Offering invoice discount encourages existing clients to keep working with you and serves as an incentive to bring in new clients. So, in the long run, you gain much more than the percentage you give away as discounts in the form of steady income for your business operations.

Types of invoice discounts

The different types of invoice discounts and specific terms you offer will depend on what’s best for your service model and unique business. Sometimes, you might need to combine 2 or 3 different types to get maximum impact on your returns.

These are some of the most common and effective types of invoice discounting work.

Early payment discounts

An early payment discount is when you reduce the invoice balance when it’s paid before the due date. It gives clients an incentive to pay their bills before they’re due and you receive your money faster. This approach can help you minimize late payments, increase customer loyalty, and improve cash flow. To implement this discount type, offer a small percentage discount on the invoice total price if your client submits payment within a specified time frame.

Quantity discounts 

Quantity or volume discounts are when clients purchase a service package or place a large order. For example, if a customer purchases a 12-month marketing consultation plan from your consulting firm, you may want to offer them a 10% discount off the total. Or, if you upsell or cross-sell another service, you may choose to offer a discounted rate on the additional service.

Seasonal discounts

Offering seasonal or limited-time discounts throughout the year can convince indecisive customers to make a purchase and try out your company. Take advantage of celebrations, seasons, and holidays to build awareness of your business and increase conversions. These special, limited-time deals may also motivate existing customers to re-engage and maintain loyalty.

Referral discounts

You can offer a customer a discount if they refer someone to your business, and to the person who was referred. Apply the referral discount to the new customer’s first invoice, or send them the discount amount in another form like an Amazon gift card. For the original customer who referred them, discount a certain percentage off their next service purchase or offer another type of incentive. 

Loyalty discounts

Offering your loyal customers a discount makes them want to continue patronizing your service business. This kind of discount is available only to returning customers who use your services repeatedly. To qualify for a loyalty discount, you may base it on the time period they’ve been your customer or the dollar amount of revenue they’ve brought your business to date. 

Benefits of invoice discounts 

Invoice discounts have benefits for both your firm and your clients, aside from the obvious perk that allows clients to save money. And while your business gets paid less on a discounted invoice, it can be an effective marketing strategy with great ROI. 

Here’s an overview of the benefits your company can experience by offering invoice discounts to both new and existing clients.

Receive payments sooner

You’ll get paid a lot sooner if you offer early payment discounts to customers, which means that you will have access to cash that you can use to meet payroll and take care of other day-to-day business expenses and reduce unpaid invoices significantly.

Prevent late payments 

By offering customers an incentive to pay sooner, you reduce the time spent chasing down customer payments. The longer you wait to get paid, the more things that can happen that may prevent the client from actually paying.

Increase cash flow

By minimizing the time between invoicing customers and receiving payment, you can minimize cash flow gaps and have an easier time maintaining positive cash flow. Enabling more seamless transactions improves customer user experience and builds their confidence in your professionalism and service quality.

Attract new clients

Nothing attracts unfamiliar clients to engage your business like an invoice discount. Did you know that 80% of people are willing to try a new provider if they’re offered a discount? Discounts and special offers are great ways to speed up purchase decisions and increase lead volumes. 

Retain existing clients

Increasing customer retention by just 5% can lead to a 25% to 95% increase in profits. Invoice discounts foster goodwill and help you build better customer relationships. With invoice discounts, you get to receive funds and retain your clients, avoiding the hurdle of late payments. It's a win-win situation that keeps your clients happy. 

Generate referrals

Offer a referral discount to existing clients and the people they refer. This will offer your customers the opportunity to make money or receive a discount on their next service while boosting your business. By rewarding both existing and new clients through referral, you’re increasing your reach for a better ROI.

Drive sales of your new services

Discounts are a great way to advertise and drive sales for any services you recently started offering. Let's say your IT consultancy just started offering a new network testing service, but is struggling to convert leads for this new offering. The easiest and quickest way to spread the word is through new service discounts, which will help you drive both awareness and sales for your newest service. You can also offer it as an upsell or cross-sell opportunity to convince clients buying other services to try this new one at a lower rate.

Edge out competitors

Find out if offering discount payments is standard in your industry. If no other companies are doing it, it can give you an advantage over competitors. If they are, it may help you calculate the type of invoice and the discount amount that’s typical of firms like yours, so they don’t beat your firm in this regard.

Create awareness for your business

People love discounts and your clients are no exception. Offering different kinds of discounts at intervals ensures steady awareness through word-of-mouth recommendations. That is free publicity for your business and a larger market for you to harness.

How to calculate invoice discounts

When determining how much of a discount you should offer, you need to strike a balance between being competitive and being profitable. These are some of the several factors to consider while calculating invoice discounts.

Analyzing customer behavior

Your customer is the central point of the invoice discounts you offer, so you have to do your research and understand what motivates them. It is necessary to understand how highly customers rate your service, why they patronize your service, and how much they are willing to pay for it. This will help you calculate the appropriate discount to offer and maximize profit.

Identifying the industry standard

Discover what kind of payment terms other companies in your field offer. You want to offer something close to the industry standard, which will also help you to build authority as you grow your revenue.

Matching discount terms of your competitors

Figure out the discount terms that competitors in your niche are offering. Stay competitive by setting up something similar or even better if you can without hurting your profits.

Reviewing client payment history

If the majority of your clientele pay on time, or even early, you may not need to provide discounts. Rather, you might consider other ways to offer value and build their commitment to your firm (e.g., service bundles or yearly check-ins), or focus on continually improving the quality of your service.

Understanding your profit margin

Study your profit margin and identify how much you’re willing to offer as a discount without running into a loss. Don’t forget to account for planned discounts in your profitability reporting and budget planning.

Determining discount period

To ensure your business remains afloat, draft a plan for how long each invoice discount will last. Adhering to this plan and monitoring your ROI on all discount offers will ensure you don't cross your budget and exceed your break-even point.

Easily create discount invoices using B12

It’s important that you have a way to easily organize and manage your invoices, customer interactions, online presence, and payments in one place, so you’re always up to date on the financial health of your business. B12 is an excellent solution to apply invoice discounts and much more, to ensure your firm streamlines and scales.

B12 is the all-in-one platform that enables service companies to reach, convert, and retain clients, including a professional website with built-in payments and invoicing. With B12, it's easy to create professional invoices in seconds that match your branding, customize every single item of the invoice total, send automated follow-ups for unpaid invoices, and automatic payment reminders to prevent late payments. 

Add a custom discount amount, sales tax/fees, and tweak invoice details in just a few clicks, then email it to your clients and receive payment without leaving B12.