Grace Periods: An Untapped Source of Revenue

Should a membership organization give grace periods? I think the answer is a qualified “yes”.

If you have a grace period policy, you are sending the signal to members that it is ok to pay late, and it is human nature for people to take advantage of it. The problem is that if you have a grace period, you have a problem that affects so many parts of your organization.

  • Do you carry two dates for every member – one for the membership expiration date and one for the end of the grace period?
  • Is there a lot of manual effort in your membership system to work around these dates?
  • Do you track statistics on which members took advantage of the grace period?
  • What is the financial impact (cost of funds) of delaying the income?
  • What is the impact on the accounting staff’s time to manage the accounting transactions if you track deferred revenue?

Frustrations for Allowing a Grace Period

Think about these costs for a minute and the frustration your staff feels, as they are flooded with calls to extend the grace period. Often I hear the moans of the membership department when I bring the subject up because they live in fear that closing the grace period will trigger ambivalent members to drop their membership. Roughly 1 in 4 U.S. adults don’t always pay their bills on time. There is an alternative that seems obvious, but it is rarely used among membership associations. Charge a late payment fee. Banks do it. Utilities do it. The IRS does it!

Why Allow a Grace Period?

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A late payment option gives your members the comfort to know that they have some flexibility and many people are willing to pay the fee because they know it is their fault. If you price it correctly, the late payment fee will help recover the cost of your services, and possibly become a new source of revenue. If you have 30,000 members, and 25% pay late, that is 7,500 people. If you charge $3 per month late, then you have $22,500 – per month! If your membership price is variable, you could charge a percentage like 1.5% per month, which is a better return on your money than most banks will give you.

Conclusion

Here is where the qualification comes in: you should have a membership system that is capable of managing the late fees, and you need an easy way for your customer service staff to forgive them.

Let us look at your membership data and we can provide some analysis and recommendations on how to implement your late fee program. 

Nelson Johnson