This particular topic is one of the most misunderstood issues in modern business practices. The inevitable question from purchasers is "What's your best cash price?"
Fifty years ago, some businesses used to run a "book". In very simple terms, that would typically have been your local grocer and he would literally have a book that he would write up daily purchases in with a page for each of his customers. Any family member could pop in to his shop and buy bread, milk and assorted groceries. These would then be scribbled into his book and the father or mother of the family would then be expected to settle up the total at the end of each week or month as agreed. I suppose if one thinks about it, that would have been the first unofficial credit card, albeit it in an unsophisticated manner. There was no interest charged and there were no contracts. It was offered on an honorary basis.
The OK Bazaars phenomenon
From that early concept, flowed a slightly more sophisticated version of credit, developed primarily by furniture stores like OK Bazaars and Russell's Furnishers. Their products could be found with two prices on display. One was a cash price; the other a terms price. Running a debtors book was time consuming and expensive and store owners typically encouraged consumers to rather buy for cash and their marketing strategy was to 'prove' to customers that there was indeed a substantial savings if the goods were purchased for cash. In reality, the terms price was simply the cash price inflated to make it appear as such. This was the first South African national drive towards the creation of the "Cash is King" myth.
Era of the credit card and micro lenders
The most natural follow through from that concept, so prevalent in the sixties and right up until today, was the establishment of finance companies and the explosion of credit card sales, not to mention the plethora of micro-lenders who would typically charge very high interest rates and have some brutal methods of debt collection.
The four step process of making less money by selling for cash
Looking at the problems facing car dealers in terms of the "What's your best cash price?" scenario, most consumers have no idea, that a cash sale is generally bad news for a car dealer. Here are the reasons why:
1. Cash is the most expensive financial tender to transact in.
The dealer gets cash for his vehicle, regardless of whether the client arranges finance or pays him in bank notes, EFT, cheque or any other means. His pricing structure has been based on a percentage markup and generally does not include a discount for cash.
2. Cash presents zero benefit to the dealer.
The customer traditionally expects a discount for cash, but there is absolutely no benefit to the dealer as was the case with store owners from the 60's who carried their own debtors book. If the client buys on terms, the dealer gets paid in full regardless. So here is the first point at which the dealer loses out. Any discount offered is a direct loss and reduces the profitability in most cases to below industry norms.
3. The banks don't want the cash either
It is common knowledge that the banking sector is discouraging the use of hard cash. They want us to use electronic banking, ATM's and EFT's. To help us move in that direction, they have made the depositing of hard cash expensive. So typically, it will cost a dealer who takes R 100,000 in hard cash, approximately R1000 to put the cash into his account. Again the client is not even aware of this cost, and the dealer loses out again.
4. Cash & crime " True partners"
With crime levels being what they are in South Africa, carrying large amounts of cash between the business and the bank is fraught with danger and can be life threatening. Again, the dealer is put at risk as he has to employ additional security to minimize the risk. (ie. Cash in transit specialists). This additional cost is borne by the dealer.
"Fact or Fiction " a Mythbusters story
So, now anyone can see that the "Cash is King" theory is a long stretch from reality. In our business we actively discourage customers from paying in hard cash for all these reasons. Payment by bank transfer (EFT - Electronic Funds Transfer) is the cheapest and safest method of payment.
So next time you casually mention : " What's your best cash price?" don't be surprised if the dealer doesn't appear to be overly enthusiastic. In reality he is seeing a lot of his profit disappearing down the "cash is king" myth drain and that could be a big mythtake!
Consumer perceptions lagging behind
It is going to take a long time for consumers to fully understand why businesses are luke-warm about cash sales. Times have changed and perceptions need to catch up. I am willing to predict that over the next five to ten years, there will be a general move away from cash as a bargaining tool and like the banks, many businesses will implement disincentives to cash purchasers. I am aware of certain car dealerships that have a standing house rule of "no hard cash to be taken"
This is the tip of the iceberg. An avalanche will follow in the years ahead.
Watch this prediction!