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Late fees vs. on-time discounts, which drives more effective behaviour?

Category: Blog & News

The Sydney city council has done something very un-council like recently – it’s scrapped fines for late library book returns. To their surprise and delight something beautiful happened as a result - more books were returned.

Fines penalise people for doing the thing you want them to do

The threat of a fine can sometimes be useful if you are trying to get people to do the right thing. In the library’s case, the late fine may have encouraged a percentage of lazy folk to return books by the due date. But there’s a big downside.

A fine penalises customers for (eventually) doing the right thing, which sends a very negative message. Many will choose to go AWOL instead, avoiding the fine by never using the service again.  For the sake of a fine, you’ve lost a customer and they’ve lost access to your services – a lose-lose proposition.

Defunct video chain Blockbuster learnt about fines the hard way when upstart Netflix disrupted the industry back in the 1990’s. Not only did Netflix mail DVDs to members, reducing the effort of going to the store, they had no such thing as a late fee. Suddenly customers were free to view movies how and when they wished.

As Blockbuster discovered, the big problem with fines is that your customer will resent you. You are setting up a paternalistic, blaming, low-trust dynamic between you and your customer. Sadly, most Australian phone providers are still charging customers $10-$15 for late payments as follows:

Late payment fees

Discounts reward people for doing the right thing

An alternative way of encouraging customers to do the right thing is to offer them a ‘pay on time’ discount. Many utilities providers in Australia, such as those below, now do this as a matter of course.

Discounts for on-time discounts

Discounts like this work because customers take ownership of their own negligence. With a fine, a customer will blame you. With a missed discount, the customer can only blame themselves.

Summary of pros and cons

When influencing customer behaviour there are pros and cons for both late fees and discounts.

  • Late fees are a form of punishment – penalising your customer for making payment – and they focus on past behaviour in an effort to influence future behaviour.
  • On-time discounts are a form of negative reinforcement – the larger payment is avoided by paying on time, and the focus is on influencing current behaviour.

Which to choose? It will depend on your industry, your margin and how you want to use your resources but from a behavioural perspective, on-time discounts are hard to beat.




Late fees

Can “waive” fees on a discretionary basis to gain favour

Will motivate customers who hate penalties

Customer resentment

Cost in recouping fees and managing disputed fees

Loss of customers

Blame is with you

On-time discounts

Cash flow

Compels loss averse customers not to ‘sacrifice’ their discount

Customer retention

Blame is with customer

High take-up rate might impact margins (esp. with direct debits)

Cost-effective administration

This article also appeared in Smartcompany.

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