Home AIOU Solved Projects Credit Risk Definition Role of Ratings and Examples

Credit Risk Definition Role of Ratings and Examples

ACKNOWLEDGEMENTS

This postulation is devoted to Allah, my Creator and my Master, and envoy, Mohammed (May Allah favor and give him), who showed us the motivation behind life. My country Pakistan, the hottest womb; Allama Iqbal Open University, Islamabad; my second wonderful home; My awesome guardians, who never quit giving of themselves in incalculable ways, My dearest friend, who drives me through the valley of dimness with the light of trust and support, My cherished siblings and sisters; especially my dearest sibling, who remains by me when things look disheartening, My beloved Parents: whom I can’t compel myself to quit loving. All the general population in my life who touch my heart, I commit to this research.

ABSTRACT

Credit Risk Definition Role of Ratings and Examples A balance sheet (also known as the statement of financial position) provides the value of a firm’s assets, liabilities, and equity on a particular date. Cash and credit risk is an asset that appears on the statement of financial position of a business and includes currency (coins and banknotes) held by a business (in hand and in bank accounts) and credit risk. These reserves may be held as vault cash, in a noninterest-bearing account with a district Federal Reserve Bank (FHLB), or as deposits with correspondents. Cash on hand consists primarily of coins and currency in vaults, in the institution’s automated teller machines (ATMs), and maintained by tellers to meet customers’ requests. Cash on hand generally represents a small percentage of a depository institution’s total of cash and cash equivalent items. The presentation of deposits in other depository institutions in the balance sheet varies among financial institutions. Non-interest-bearing deposits that meet the definition of cash equivalent are typically combined with credit risk. Interest-bearing deposits in other institutions are presented separately in the balance sheet after cash and credit risk, or combined with other short-term investments or other investments, regardless of whether all or some portion of such deposits meet the definition of a cash equivalent.

Introduction

Credit Risk Definition Role of Ratings and Examples Credit risk is the possibility of a loss resulting from a borrower’s failure to repay a loan or meet contractual obligations. Traditionally, it refers to the risk that a lender may not receive the owed principal and interest, which results in an interruption of cash flows and increased costs for collection. These cash strategies tend to play to the emotional side of our brain rather than our rational brain. No cash is ever really high cost or low cost without having something to compare the cost to – it’s all about perceived customer value.

Despite this, many articles on the web state that such methods only work to decrease the perceived cost of products to attract a wider group of customers and increase sales.

However, cash psychology can also be used to increase the perceived customer value of your products, enabling you to increase your cash and profit margins accordingly.

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Cash skimming strategy

Cash skimming is a strategy often used when a new product is in its initial release. The process behind the strategy is that the product is launched at high cash and then lowered over time to attract a wider pool of customers.

Cash skimming works because the first (and most expensive) cash attracts customers known as early adopters. These are the people who will happily pay steeper cash for a cutting-edge product – whether the cash accurately reflects the value or not.

This Credit risk strategy is effective because you’re playing to the emotions and feelings of early adopters. They must have the latest products or technology first – a symbol of status and belonging.

As the cash decreases over time, the net of prospective customers widens. This allows the company to attract more cash-sensitive customers while still profiting.

Generally speaking, cash skimming is most effective when customers aren’t considered to be cash-sensitive (e.g. in the cosmetics industry) or when they are attracted by innovation (e.g. within the electronics industry).

Advantages of cash skimming

High return on investment

Charging higher cash during a new product launch can help reimburse huge investments made for the research and development of the product.

Segment the market to your advantage

Cash skimming can help you to earn the biggest possible profits from different groups of customers. High cash doesn’t deter early adopters while lowering the cash allows you to target cash-sensitive customer groups.

Early adopters act as product testers

Early adopters are so keen to have the latest product that they may give valuable feedback to allow you to improve your product for wider release. They can also act as brand advocates for your company.

Creates and maintains the brand image

Cash skimming gives the illusion that your product is a high-quality must-have for early adopters, helping to create a prestigious brand image that holds up as competitors enter the market.

Disadvantages of cash skimming

The demand needs to be consistent

Lowering your cash over time is only likely to work if you have a consistent demand for the product you’re selling from more cash-sensitive customer groups. Technology-based products are a great fit for this strategy – just look at Apple.
May not be able to maintain the high cash for a long period

If you’ve poured tons of money into the research and development of your product, it’s unlikely you’ll be able to sustain the high cash for a long time as competitors enter the market or if you do not have enough interested customers on the first launch.

Example of a cash skimming strategy

One good example of a cash skimming strategy in place is from Apple. As a tech product company, Apple has plenty of diehard fans that have to be the first to get their hands on new products first. Remember the Apple store queues hitting the news?

Over time, Apple is able to attract a wider pool of customers by lowering its cash. These customers are interested in technology but are more cash-sensitive or less enthused about needing the latest must-have products the first time around.

Apple has never made maximum sales its end goal – it has always been about focusing on maximum profit in the short term. Before each generation of Apple products is released, it has already stirred the Credit risk pot by creating curiosity and setting expectations. Consider how the iPhone X is currently being marketed.

Because of the buzz that Apple consistently builds, the brand has also increased in perceived customer value over time. This creates a far more high-end image of Apple in the minds of its customers, and it can increase its cash with every generation of products.

Penetration cash strategy

In contrast to cash skimming, a penetration cash strategy refers to starting out with a low cash to “penetrate” the market and promote a large number of sales shortly after the product launch.

Penetration cash strategies are about setting the lowest cash possible for your product in the market. This strategy sets the expectation that the cash is low enough to disrupt the purchasing habits of customers, with the objective being to get a higher market share.

An appropriate time to use the penetration cash strategy is if the product demand is highly cash elastic. In other words, the customer demand for a product needs to be highly responsive to a change in cash.

The psychology behind this cash strategy is that it plays to cash-sensitive customers.

Certain groups of customers will always prefer cash above all else, and so this Credit risk strategy plays to these emotions.

Advantages of penetration cash strategy

Take your competitors by surprise

Penetration cash can result in fast adoption from a wide pool of customers. This can help you achieve high market penetration rates (successful selling in a particular market) and take your competition by surprise, offering no time for them to react

Discourage competitors from entering the same market

As cash penetration strategies are about penetrating the market with the lowest cash possible, you’re more likely to discourage others from entering the same market. Low cash act as a barrier to entry.

Cost control and cost reduction pressures

The low cash creates cost control and removes cost reduction pressures from the word go. This creates greater efficiency, as you are not worried about lowering your cash.

Expand into international markets with more success

You may find that a cash penetration strategy helps you to expand into a new country with more success and allows you to disrupt your local competition. Be mindful if you decide to do this for the short-term to create buzz though, as it can go wrong.

Disadvantages of penetration cash

Long-term cash expectations

As penetration cash strategies work due to using the lowest cash possible, it is difficult to eventually raise cash. Your customers have chosen to buy from your business due to cash – change this and they may change where they buy from.

Creates preconceptions about brand and business

Keep in mind that the low cash is highly likely to create preconceptions about your brand and business and you may have a hard time changing these perceptions should you wish to change the cash.

Customers may not be loyal for very long

Cash penetration concentrates on a cash only. As a result, you will only attract those who are swayed by cash and are not loyal to your brand. The moment a competitor defeats your cash, you may find you lose a significant number of customers.

Low-profit margins may not be sustainable

Unless you have plans to sell thousands of products at low cost, you may find that low-profit margins are not sustainable long enough for a cash penetration strategy to be effective.

Example of penetration cash

One example of a penetration cash strategy in action is from a Danish cider brand called Mokai. The brand used the strategy to enter the East African market after careful analysis and consideration.

Mokai used the penetration cash strategy to take out the competition and sway customers to choose its cider. This worked. Thanks to Credit risk, Mokai was able to increase market share and sales.

However, where the problem started was the volume of new sales did not equate to high profit. The cash was simply too low. When the brand stopped the introductory cash strategy, it also lost its customers.

What can we learn from Mokai?

Try not to use the penetration cash strategies for short-term phases to introduce a product to market if it is not sustainable cash that will lead to sustainable profit margins, or you’ll end up losing out.

Partitioned cash strategy

A partioned cash strategy is one where the extra costs involved (such as shipping and handling fees or fuel surcharges or airline baggage) are kept separate from the cash used on a product page. For most online shopping, this illusion is now accepted as the norm.

The opposite of partitioned cash is all-inclusive cash. This makes it obvious to the online shopper exactly what he or she needs to pay right there and then; unlike partitioned cash, where the shopper will only see the final cash right on the final checkout page.

Partitioned cash strategies create the psychological illusion that the product is more cost-effective than it really is. Again, you’re playing to the cash sensitivity of potential customers.

However, with more customers becoming more cash savvy and public policy changing, this Credit risk strategy may do your brand more harm than good in the long run.

Advantages of partioned cash

Create the illusion of a more affordable product or service
It’s possible to draw in more prospects by playing to their cash sensitivity. While this may not be the right thing to do, it does work. Online holiday booking businesses are living proof of this, but we’d ask you to consider the future.

Disadvantages of partioned cash

You may lose out on sales
Put yourself in the shoes of your customers. Imagine you’d found a great product at affordable cash, and then at the very last minute, all these hidden costs appear out of nowhere. How would you feel? It’s the same for your customers.
You may harm your business and brand
The above annoyance is likely to contribute to negative customer perception of your brand. Negativity influences customer attitude towards your brand. Some customers may even vent their frustration on social media.
Public policy is changing – transparency is on the rise
A 2010 report from the UK Office of Fair Trading concluded partioned cash and drip cash has the greatest potential to mislead customers.
In 2012, the UK introduced new regulations prohibiting businesses from invoking surcharges for payment methods that customers use that exceed the costs of the payment method.

Example of partioned cash

You don’t have to look too far to see partioned cash strategies in place. If you’ve ever tried to search for a low-cost holiday and flight bundle online, you will have probably seen partioned cash strategies in place.

Many travel comparison websites will show the lowest cash for a holiday and flight as you’re searching for a holiday you can afford. But, click through to purchasing and you’ll see several added fees that result in the total cost almost doubling in cash.

For example, when searching for an all-inclusive flight and hotel deal, OnTheBeach goes as far as to separate flight and hotel cash and potential/essential extras right until the final checkout page.

Anchor cash strategy

An anchor cash strategy is when you use cash to give your customers a frame of reference for valuing your product. This allows you to guide your customers into choosing the exact product you want them to choose at the exact cash you want them to buy.

Today, customers all around the world are influenced by different types of anchoring during their decision-making process. It’s one of the most effective Credit risk strategies out there.

Anchoring can be achieved through cash, promotions and placement of your products as well as the product itself. In truth, any element on your page could potentially act as a cash anchor to influence potential customer decision-making.

For example, let’s take two TVs. One is cashd at £600 while another is only slightly bigger and is cashd at £1,000. It’s reasonable to think that the £600 telly is a far better deal, but what if that was the exact product the retailer wanted you to go for in the first place?

You could also use the power of suggestion as a product anchor. Have you ever seen items labelled as “most popular”? This can have a really big psychological impact on a customer’s decision-making process when stuck between products.

Advantages of anchor cash

Decision-making for your customers is simplified
Anchoring your products helps make your customers’ decision-making much easier. At the same time, you’re likely to have a greater influence over whether or not a customer buys from you – even online.
Anchoring can also make customers feel more confident with their purchases. For example, take software being sold at three cash tiers – the cheapest and most expensive as an anchor – most customers will go for the one in the middle.
Increase your sales for specific products
Using anchor cash is a really clever way to market and sell specific products. There are so many different ways you can use the strategy to influence your sales.
You can lead your site visitors to certain products over others by using an anchor to attract attention, and help with decision-making and this is likely to lead to an increase in your total sales.

Disadvantages of anchor cash

Possibility of manipulation
Anchor cash is a form of manipulation and if you use such a strategy in a negative or dishonest way then you risk creating unhappy customers.
As an example, let’s say you had a product that you needed to shift as it wasn’t a popular item with your customers, and you decide to use the anchor of “customer favourite” to try and shift it.
If the product doesn’t then live up to the expectations of the customer when he or she receives it, it may do your brand and business more harm than good. He or she may be more inclined to leave a negative review online.
That said, it can be argued that all Credit risk strategies are a form of manipulation in one way or another.

Example of anchor cash

Common examples of anchor cash strategies can be seen in B2B software companies. Often, software companies will use cash anchoring to influence which software package you end up going for, on a subconscious level or not.

For example, let’s take a look at BigCommerce. In the image above, you can see that there are different cash tiers to target different customers. However, the high cash and low cash act as subconscious cash anchors, to draw you into choosing the middle package.

What’s more, BigCommerce uses an additional anchor of “most popular” and draws the eye in with a contrasting colour palette. This is done to try and influence your decision-making.

Why does this type of anchoring work?

Let’s say you’re hunting for a good eCommerce platform and BigCommerce has been recommended to you. You enter the cash page with a budget of $50 per month in mind.

You see the pro plan cashd at $249 – five times your budget – and you have no intention of following through with this. Then, you see the $79 monthly plan and it seems much more affordable, so you purchase it, even though it’s above what you had in mind.

Your subconscious cash reference is five times your budget and the $29 increase in your budget seems much smaller in comparison. Choosing a cash in the middle can also create feelings of confidence and safety in your customer decision-making processes.

Charm cash strategy

Charm cash is one of the most common cash strategies. Surveys suggest around 60-70% of retail shelf cash end in nine, while online statistics aren’t known.

A charm cash strategy is when you take a rounded cash and market it with an odd number just below the full cash. Charm cash can also be known as .99 cash.

For example, let’s say you have a £50.00 product that you market at £49.99. Although there is just one penny difference, the idea is that the charm cash makes the product appear ten pounds cheaper to customers considering making a purchase.

Charm cash one of the most popular cash strategies out there, with some studies even concluding that it’s so over-used today that it may have become ineffective.

Find out how to reduce business costs and increase profit margins elsewhere in your business.

Advantages of charm cash

It makes the product seem more cost-effective
If a product is marketed as ending with .99, then it makes the item appear as if it were ten pounds cheaper, even though it is only one penny cheaper.
It’s popular
Charm cash is one such Credit risk strategy that has stood the test of time. While this may also be its downfall today, it clearly has a psychological impact on customers and their likelihood of purchasing certain items.

Disadvantages of charm cash

It may not actually be that effective outside the USA
The few studies that have looked at the effectiveness of charm cash strategies have mostly focused on the USA market and these have been carried mostly in fashion retail – it’s not set in stone that this is effective for other markets.
In fact, a UK-based study found that rounded cash may actually be more effective than cash ending in nine.
Everyone does it. You’re less likely to stand out through charm cash
Are you swayed by cash that end in 99p? I’m definitely not anymore. I actually find it refreshing when companies use rounded cash – it feels more honest and transparent. Find out what resonates best with your audience and go with that.

Example of charm cash

You don’t have to look too far to see charm cash strategies in place. In fact, we’d almost stake our morning cuppa on you having seen it in place before. Almost… coffee is essential for the soul!

Plenty of online (and offline) clothing stores use .99 cash to encourage their target customers to make a purchase from their store.

Generally speaking, you’re more likely to find charm cash on cheap every day products (e.g. cleaning products) rather than luxury items – it’s all about the perception you want to create.

Rounded cash strategy

How does the roundedness of cash affect customer perceptions and product evaluations?

Depending on the context of the purchase, rounded cash can increase the likelihood of a customer making a purchase from your online business.

In 2015, Wadwa & Zhang investigated how the roundedness of a cash affects customer perceptions and product evaluations as well as what moderations and mediates this relationship.

They coined the term “rounded cash effect” for their findings. In their fifth and final experiment, they reported a mediation of the effect through a proposed sense of “feeling right” when customers were evaluating the product.

Since rounded numbers are used more regularly in everyday life, it’s thought that rounded numbers increase the reliance on emotional evaluation of the subject. In other words, rounded cash lead customers to rely more on their feelings when evaluating products.

How can you apply this in your business?

According to Wadwa & Zhang, if customers are in an emotional purchase context (buying a product for personal pleasure) then products are more positively evaluated when the cash is rounded; but if buying for a business or school, non-rounded cash may be more well-received.

Advantages of cash rounding

Hedonistic brands and products likely to benefit
As Wadwa & Zhang’s study concluded, emotional context may play an important role when it comes to using appropriate rounding and make a customer purchasing a product for hedonistic reasons feel more positive about their purchase.
May increase trust from customers
Think about the cultural norms of where you are selling. Appropriate rounding may create more trust from your customers where using odd numbers is not the norm.
For example, in the United Kingdom, most cash end with a rounded number or .99. Ending your cash with .43 or .15 is far less popular and may impact buying behaviour if you’re selling products in the UK.

Disadvantages of rounded cash

Minimal evidence it has a significant impact
The effect of appropriate rounding may not be as large as first thought. In 2018, a group of academics replicated Wadwa & Zhang’s original study and did not find the same results.

Example of cash rounding

It’s common to find rounded cash strategies being used more when the product itself is seen as high cost or a more luxurious item. In comparison, charm cash (or odd cash) is normally used when trying to showcase a product as being low cost and affordable.

For instance, look towards high-end luxury fashion brands. Alexander McQueen or Versace are good examples of rounded cash strategies in place. On Net-a-Porter, a high fashion retailer, you’ll find plenty of these examples to reflect the quality of the items.

As Zhang and Wadwha’s study confirmed, rounded numbers are processed by relying on customer feelings rather than cognition. For luxury items, rounded cash may be processed more effectively and efficiently as they’re driven by feelings of “do I want this item?” rather than asking, “is this good value for money?”.

Social proof cash strategy

Most of you are likely to be aware that being able to provide social proof for your business and products is pretty key nowadays. Nevertheless, it’s still vitally important and can have a psychological impact over whether or not new customers buy from you.

A social proof cash strategy is when you utilise any social proof in favour of your products and place this around or in close proximity to your cash. For example, a link to read specific product reviews can be a powerful way to use social proof cash.

You could also look at implementing a customer rating score for each of your products or enable your customer account users to “favourite” items and save them to their wish list (or something similar) and then showcase the number of times a product has been favourited.

If you’ve invested in influencers (e.g. bloggers) you could also quote and link through to their sponsored blog posts on a product page. Be wary of going overboard with this though, as providing too much social proof may have the opposite effect you want.

Why does social proof cash work?

To put it simply, social proof can impact how a potential customer sees your brand and influence their purchasing behaviour. These Credit risk strategies build more trust in your company and, as a result, increase perceived value from potential customers.

The end result of social proof cash strategies is mostly increased trust, increased brand equity and increased sales. However, this does require your social proof to be positive and believable from the eyes of your customers.

Advantages of social proof cash

Increased sales
We all know social proof cash strategies work. Customer reviews have become fundamental to the growth of online businesses – especially ones new to the market.
Increased trust and perception of brand/business
Social proof can increase trust in your website. This increased trust can impact the perceived value of your brand and business in the eyes of your customers and potential customers, leading to more brand equity.

Disadvantages of social proof cash

Negative social proof and decreased sales as a result
Social proof is a great way to influence and build trust with new customers, but what happens when someone leaves a negative review? Or when multiple negative reviews accumulate for a product? Negative social proof can decrease your sales.
The best way to minimize the number of lost sales you may experience is to have a plan of action to respond to negative (and positive) social proof.
Respond empathetically and in an honest way. This shows to any potential customer that your business is hands-on in dealing with any complaints or negative feedback and can help to drive more sales.

Example of social proof cash

Feel Unique is a cosmetics retailer that sells hundreds of different cosmetic brands. A big part of buying makeup online is trust that the product will work – so social proof becomes an integral part of the cash strategy.

Here, you can clearly see that social proof has been used to provide trust to new potential customers deliberating over an INIKA vegan cosmetic product.

It should be noted that this clearly isn’t the only cash strategy in use on product page. From the Credit risk strategies discussed in this article, what other elements can you see in place?

Bundle cash strategy

Bundle cash (sometimes known as bundling) occurs when products or services are grouped and sold together at a more attractive cash then when sold separately.

Bundling provides an opportunity to increase company revenue by extracting “consumer surplus” from heterogeneous customers. This type of cash strategy is used across many different industries as it is thought to be an efficient way of selling more items in one go.

What’s the psychology behind bundle cash strategies and why does it work?

Put simply, bundle cash can present the illusion of a good deal or actually be a better deal for the customer. On a subconscious level, it can encourage a customer to spend more because they believe they are getting more for their money.

Advantages of bundle cash

Sell multiple products at once (and increase unit sales volume)
Cash bundling can boost unit sales volume as it enables you to sell multiple items at once. Selling more at once also means a greater initial return on the cost of acquiring a new customer.
Increase profit margins
Bundling products together under once cash can lower the cost of goods sold, which presents you with the opportunity to increase your profit margins.
Increase efficiency (and reduce marketing and distribution costs)
Cash and product bundling can increase the efficiency of your business as you are selling multiple products at once. This can also reduce your marketing and distribution costs – all products can be marketed and sent in one box together.
At the same time as reducing your costs, cash bundling may offer new marketing opportunities and increased exposure to new potential customers or referral sources.
Customer convenience and greater satisfaction
People buy products to solve problems and fulfil needs. If your customer has multiple needs, then cash and product bundling can increase convenience for your customers and lead to greater customer satisfaction.
In general, most customers perceive a bundle cash to cost less than purchasing each product individually – even if they don’t check – which can lead to an increase in product bundle sales.
May attract a larger range of customers for your business
Cash bundling has the power to attract a wider range of potential customers. As outlined above, bundled cash can help to attract customers seeking convenience. But it doesn’t just stop there.

Bundled cash can also attract shoppers seeking a deal, those seeking a discount and those customers looking for products that complement each other.

Disadvantages of cash bundling

No guarantee customers will preference bundles over individual items
As with any cash strategy, there’s no guarantee that new customers will preference bundled products over buying items separately. You’ll need to do your research and it may be a case of consistent case of trial and error.

Example of cash bundling

Bundled cash is extremely prevalent in the eCommerce industry. This is particularly the case when it comes to selling electrical goods and technology. You’ll also find bundled cash in the cosmetics industry.

For example, PHB Ethical Beauty sells make-up starter kits made up of multiple products sold at a lower cash when bought together to encourage new customers to make the switch to vegan and mineral cosmetics.

Placement and size of cash

The placement and size of cash can have a big impact whether or not a customer follows through and purchases from your online business. There are lots of different studies that demonstrate how the placement of Credit risk can impact decision-making.

For example, let’s say you’re running a sale.

Should you place your discounted cash before or after the original sales cash? Is this likely to have any actual psychological impact?

Surprisingly, yes.

A study by Biswas finds customers perceive a larger discount when the discounted cash is positioned to the right of the original cash. The only prerequisite to consider is that the discount should be moderate in size to support comprehension.

What’s the psychology behind this cash strategy?

Based on numerical cognition, it’s far easier for the human mind to subtract two numbers when the smaller number is positioned on the right. It really is that simple – crazy right?

Another element that may enhance your Credit risk strategy is to visually distinguish your cash from a reference cash by using a different colour or font, which then triggers what’s known as a fluency effect.

Your customers will misattribute the visual distinction (e.g. the change in font colour) to a greater numerical (cash) distinction, which can increase the likelihood of more sales.

As well as this, placing your cash horizontally further away from a reference cash leads to a greater numerical distance being perceived.

Advantages of changing placement and size of cash

Find out what works best for your business
Testing out the placement and size of your cash allows you to eventually find the solution that works best for your business to increase your sales. Be mindful of where you place your cash though – you still want to build trust with customers.
Remember to only test out one change at a time (no matter how minor) as if you change anything else then your results won’t be accurate, and you will have wasted your time.

Disadvantages of changing placement and size of cash

Trial and error – the process takes time
As you may have guessed, this Credit risk strategy is a bit of a time thief. Plus, there’s also the worry that if your cash strategy is already working okay, then you risk decreasing your sales – albeit on a temporary basis.

Example of changing placement and size of cash

As with charm cash and other common cash strategies, it’s likely that you’ll have come into contact with cash strategies focused on placement and size. ASOS is a good example of this Credit risk strategy in action.

Despite ASOS going against the grain in terms of what studies have found (most likely, they will have optimised for what works best for their brand and customers) you can still see how they’ve played with the position, placement and colour of the discounted cash.

Differential cash

A differential cash strategy offers different cash for the same products to different segmented groups of your customers or potential customers. Such a strategy is also frequently referred to as discriminatory cash or multiple cash.

For instance, you may use personalised cash, which is considered to be first degree discrimination; quantity discounts and surcharges as second degree and targeted cash as third degree.

Recently, differential cash has risen in popularity, which may be due to an increase of such articles in Marketing Science between 2006-16. Such a trend may be explained by recent advances in information technology which can provide richer data on users.

But why do businesses adopt differential cash strategies?

Advantages of differential cash

Maximise company revenue
A key advantage to differential cash is being able to optimise company revenue. It’s widely accepted that a business will always want to sell its products or services to any customer for as much as he or she is willing to pay. Who wouldn’t?
Although it can be difficult to implement, businesses that are able to segment their audience and take advantage of the ability to sell products at higher cash are likely to earn more revenue than maintaining a flat cash for all customers.
Cover business costs
Being able to establish differential cash for different customer segments means that customers paying higher cash can help to cover the costs of making the products.
This also enables cash-sensitive customers to purchase products at more marginal cash, widening the reach of your products to multiple customer groups.

Disadvantages of differential cash

Profits on discounted strategies will drop
If you choose to discount your products to a specific segment of your customers, then you won’t receive the full amount that you’d normally charge.
For a permanently lowered cash (for example, offering student rates), this results in continued lowered profits over time.
If you pause the strategy and raise cash, you may lose customers
At the same time, if you’re running a temporary discount and then resume to standard cash, you may lose any new customers that you acquired during the period of the targeted lowered cash.
Keep in mind that this can lead to decreased brand equity and increased negative customer perceptions of your brand and business as a whole.

Example of differential cash

Any fast fashion brand is likely to be a good example of differential cash strategies in place. Most fast fashion resonate with students and offer student discounts – ASOS is just one of many examples.

Another common example is the B2B (business-to-business) and wholesaling industry.

Here, it’s common to offer discounts for bulk purchases to encourage more sales, which is considered to be another form of differential cash.

Premium cash strategy

A premium cash strategy is when a product is sold at an intentionally higher cash.

High-quality goods or luxurious items (such as high fashion, watches or electrical appliances) are typical examples of when such a strategy is likely to be in place.

Companies that charge an intentionally high cash are often seeking to emphasise the high quality and high class of the products they sell. Sometimes prestige cash is more commonly known as premium cash or brand exclusivity cash.

The psychology behind premium cash strategies is that the high cash reflects high quality of the item being sold. Customers perceive expensive items to signal the quality of the product. Of course, the item may actually be very low cost to create – it’s all about perception.

Brand exclusivity cash is an extension of premium cash.

Customer perception of exclusive brand value can help enable effective use of prestige cash. On top of this, there’s also a selection of marketing strategies that can help develop brand exclusivity.

Premium cash strategies can be used to target niche customers that associate the quality of a product by its cash tag. Customers who are most influenced by a premium cash are often considered to care less about the actual quality of the item.

Premium cash can also support feelings of self-worth, status and contribute to a feeling like a customer belongs. Notice how these are all still considered to be benefits of the product despite the fact that they are emotions, feelings and perceptions from the customer.

In the majority of cases, premium cash strategies work in tandem with good marketing. You can’t have one without the other. Such advertising doesn’t focus on differentiation or features – it focuses on the feelings or emotions associated with using the products.

Want some branding tips from Tamebay’s Chris Dawson? Give our eCommerce growth secrets article a read.

Advantages of premium cash

Increase profit margins by a substantial amount
The Credit risk strategy allows you to increase profit margins for your products pretty heavily. As prestige cash concerns itself with charging intentionally high cash, so too do your profit margins increase as result.
Create prestigious brand image
Prestige cash can create a high quality, prestigious brand image for your business and customers.

As your brand reputation grows, so too can you keep raising your cash to reflect the newfound prestigious nature of your brand and maintain exclusivity.

Disadvantages of premium cash

Requires consistency across products
If you want to make use of prestige cash to grow your brand and business, then you’ll need to consider applying this across all products that you sell.
Prestige cash is all about influencing customer perception about your brand and products that you sell. If you can communicate value effectively then you can a build a successful brand, reduce customer churn and keep your customers coming back.

Example of premium cash

Free People is a good example of prestige cash and brand exclusivity. The clothing brand gives the impression it has something to do with ethical production and consumption, but never provides any transparent information for its customers.

The high cash tags give the illusion of high-quality clothing. The brand name itself can create customer perceptions about Free People being a prestigious brand with ethics.

Unfortunately, having personally received items from this brand several times, the quality does not seem to be reflective of the cost, which indicates prestige cash may be in place.

But, if the perceived quality is not equal to its cash, how is Free People still so successful?

For prestige cash to be a success, highly effective marketing strategies are essential to promote the products as must-have items. Free People has this nailed down.

Through its marketing efforts, the brand maintains a prestigious image and has created a loyal army of brand advocates who purchase the clothing for emotional reasons (i.e. a sense of belonging, self-worth and status).

Practical study & Review

Credit risk is a cash/marketing strategy based on the theory that certain cash have a bigger psychological impact on consumers than others. Below are five cash strategies entrepreneurs can adopt:

1. ‘Charm cash’: Reduce the left digits by one.

This strategy, often called “charm cash,” involves using cash that ends in “9” and “99.”

With charm cash, the left digit is reduced from a round number by one cent. We come across this technique every time we make purchases but don’t pay attention. For example, your brain processes $3.00 and $2.99 as different values: To your brain $2.99 is $2.00, which is cheaper than $3.00.

How is this technique effective? It all boils down to how a brand converts numerical values. In 2005, Thomas and Morwitz conducted research they called “the left-digit effect in cash cognition.” They explained that, “Nine-ending cash will be perceived to be smaller than a cash one cent higher if the left-most digit changes to a lower level (e.g., $3.00 to $2.99), but not if the left-most digit remains unchanged (e.g., $3.60 to $3.59).”

In an experiment conducted by the University of Chicago and MIT, women’s clothing was used to test the left-digit effect. First, cash were set for $34, $39 and $44. To the amazement of the researchers, the items sold best at $39 even though that cash was more expensive than other options.

2. ‘Prestige’ cash strategy

Prestige cash is the complete opposite of odd or charm cash. Prestige cash involves making all numerical values into rounded figures, i.e., $99.99 is converted to $100.

You may be wondering why. According to Kuangjie Zhang and Monica Wadhwa in a 2015 study, rounded numbers (e.g., $100) are more fluently processed and encourage reliance on consumers’ feelings, compared to non-rounded numbers (e.g., $99.99), which are less fluently processed, and encourage reliance on cognition.

This means that rounded numbers “feel right” because the purchase is being driven by feelings and the cash is processed quickly.

Zhang and Wadhwa realized that consumers were more inclined to buy a bottle of champagne when it was cashd at $40.00, rather than $39.72 or $40.28.

3. ‘BOGOF’: Buy one, get one free.

This is a cash strategy in which customers pay the full cash for one product or service to get another for free.

The psychological strategy at work here is, simply, greed. Once a customer comes across the offer, logic gets tossed to the wind and the main focus is making a purchase to get the free item.

Now, because this technique has been widely adopted and most people no longer take the bait, you could stir things up a bit by offering one of the following:

Buy one and get 25 percent off your next purchase.
Purchase one and get four bonuses valued at $60, for free.
Buy one, get three for free.

To fully maximize this strategy, get creative with your discount offers.

4: Comparative cash: placing expensive next to standard

Comparative cash may be tagged as the most effective Credit risk strategy. This simply involves offering two similar products simultaneously but making one product’s cash much more attractive than the other.

This is a psychological game of choice for the customer, who has to choose between two products that are similar but have different cash.

This strategy works well with fashion brands, which place side by side tuxedos with similar quality but different cash, to make customers pick the more expensive one, which is the desired purchase.

To the average human, if something is expensive, then it is “quality.”

A perfect illustration of this strategy would be the case study on “The Williams-Sonoma bread maker”.

5: Visually highlight the different cash.

When you offer a sale with a previous cash side by side with a new one, you make more sales because customers feel they are getting a bargain and are not interested in researching the drop in cash.

To make the new cash strategy work effectively, use the psychological trick of changing the font, size and color of the new cash.

Merit / Demerits

Advantages of Credit risk

The following are advantages of using the Credit risk method:

Cash bands. If a customer is accessing information about product cash that are segregated into bands, the use of fractional cash can shift the cash of a product into a lower cash band, where customers may be more likely to make a purchase. For example, if a customer only wants to consider automobiles that cost less than $20,000, cash a vehicle at $19,999 will drop it into the lower cash band and potentially increase its sales.
Non-rational cash. If customers are swayed by the incremental cash reductions advocated under Credit risk (which is a debatable premise) then sales should increase.
Control. It is much more difficult for an employee to create a fraudulent sales transaction and remove cash when product cash are set at fractional levels, since it is more difficult to calculate the amount of cash to steal. Conversely, it is easier to steal funds when cash are set at rounded dollar amounts.
Discount cash. If a company is having a sale on selected goods, it can alter the ending digits of product cash to identify them as being on sale. Thus, any product ending with a “.98” cash will receive a 20% discount at the checkout counter.

Disadvantages of Credit risk

The following are disadvantages of using the Credit risk method:

It can be difficult for cashiers to calculate the total amount owed when fractional cash are used, as well as to make change for such purchases. This is less of a problem when credit cards and other types of electronic payments are used.
Rational cash. If customers are more rational than Credit risk gives them credit for, then they will ignore fractional cash and instead base their purchases on the value of the underlying products.

Evaluation of Credit risk

The overwhelming use of Credit risk makes it clear that, whether or not the underlying concept is flawed, businesses are setting cash in this manner in order to compete with each other. Thus, to use the earlier example, setting a cash a fraction higher than the cash charged by competitors might indeed lead to an incremental drop in unit sales volume, so a company probably has to use Credit risk in order to remain competitive.

Conclusion & Recommendations

Credit risk is the practice of setting cash slightly lower than a whole number. This practice is based on the belief that customers do not round up these cash, and so will treat them as lower cash than they really are. Customers tend to process a cash from the left-most digit to the right, and so will tend to ignore the last few digits of a cash. This effect appears to be accentuated when the fractional portion of a cash is printed in smaller font than the rest of a cash. An example of Credit risk is setting the cash of an automobile at $19,999, rather than $20,000. This type of cash is extremely common for consumer goods. A variation on the concept is to set cash higher, in the belief that customers will attach more importance to a product if the cash is set at a premium level.

ABC International has created an all-electric car for the urban commuter. Upon investigation of competing cash points, ABC finds that there is a cluster of similar vehicles cashd at $19,999. Also, many car buyers use on-line cash shopping services to evaluate vehicles, and those services present choices to car buyers in $10,000 cash bands. Thus, ABC decides to cash the vehicle at $19,999, not only to match the competition, but also to position itself within the $10,001 – $20,000 cash band.

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