Optimal duration, rate and price when online retailers offer installment payment services

Abstract

Purpose Online retailers have become gradually popular to offer consumers installment payment services in the past few years. This paper aims to study how to determine the duration and rate of installment payment services, as well as the price of products to increase online retailers’ profits. Design/methodology/approach By modeling the utility functions, the behavior of consumers for strategic choosing the payment method and payment timing is analyzed. Thus, the market segments are obtained through the comparison of the consumer’s utilities. Combined with the given assumptions, the installment payment strategies for online retailers is investigated. This paper focuses on the impact of installment payment services on consumers’ purchasing behavior and online retailers’ profits by modeling and comparative analysis. No installment payment service as a benchmark, it is demonstrated whether online retailers can obtain more profits by offering installment payment services or what are the applicable conditions for installment payments. Findings If the installment payment service is offered, online retailers can gain more profits and need to adopt appropriate strategies based on different market conditions. During the depression or the peak shopping season, online retailers should take the strategy of free installment rate, and moderately increasing the product price of no installment service. When market demand is stable or during non-peak season, online retailers need to set a higher installment rate and maintain the product price without installment service. Finally, online retailers should determine the maximum duration of installments they can afford based on own risk control cost and allow consumers to freely choose the length of the installment within the duration limit. Originality/value First, the authors deeply analyze consumers’ payment and purchase behavior when the online retailer offers the installment payment service. Then, it is theoretically proved why many online retailers have offered installment payment services to consumers from a profit perspective. Finally, this paper proposes the optimal duration of installments, installment rate and product price in different market environments for online retailers, to provide theoretical basis and managerial insights for the development of installment payment service in online shopping.