Late fees vs on-time discounts: Which drives more effective behaviour?

The Sydney city council has done something very un-council like recently — it’s scrapped fines for late library book returns. And to the library’s 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 1990s. Not only did Netflix mail DVDs to members, reducing the effort of going to the store, it 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.

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 the ones in this example, now do this as a matter of course.

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.

The 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; while
• 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.

	Pros	Cons
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	Cashflow Compels loss averse customers not to ‘sacrifice’ their discount Customer retention Blame is with customer	High take-up rate might impact margins (especially with direct debits) Cost-effective administration