Engaging Customer Preference Through Trade Credit: An Investigation of the Impact of Payment Terms on Brand Equity

Abstract

Since organizations rarely collect immediate payment from business-to-business sales, trade credit structures financial and sales relationships between suppliers and customers (Asselbergh 1999). In this context, managing days’ sales outstanding (DSO), or the average number of days a company takes to collect revenue from business customers after a sale, represents a critical financial and marketing issue. If DSO indicates how quickly a company turns sales into cash (Bragg 2005), its extension also favors business opportunities and product quality demonstration when more generous payment terms are granted to customers (Emery and Nayar 1998; Smith 1987). Thus, trade credit can be viewed as a lubricant that facilitates sales through the attraction of customers’ business (Cheng and Pike 2003; Emery and Nayar 1998), or the signal of brand quality through additional time for the customer to test the product (Long et al. 1993). This research examines the extent to which credit terms offered by salespeople influence customers’ average payment delay and their perception of the supplier’s brand equity (i.e., brand attitude, brand trust, brand preference).

We propose and test a model where customer importance, bargaining power, along with relationship length and quality with the salesperson influence customers’ average payment delay. In turn, payment terms is hypothesized to reflect customers’ evaluation of the supplier in terms of brand equity as reflected in brand attitude, brand trust, and brand preference. We also control for the influence of customers’ financial difficulties and invoice correctness on average payment delay.

Findings show that customer importance positively relates to payment delay along with the customer’s bargaining power. Relationship length with the supplier negatively impacts payment delay while relationship quality does not influence delayed payment. Payment delay negatively reflects customers brand attitude, brand trust, and brand preference. Concerning the control variables, invoice correctness does not have a significant influence on payment delay whereas financial difficulties do.

To the best of our knowledge, this research is the first to empirically test the impact of payment terms granted by the sales force on customers’ perception of suppliers’ brand equity. Findings contradict the accounting literature which suggests that payment delay should be seen as an implicit warranty period to enhance positive brand evaluation (Long et al. 1993). In fact, payment delay relates to customers’ perception of low brand equity. Moreover, by revealing a negative relationship between payment delay and customers’ brand attitude, brand trust, and brand preference, this research shows that trade credit may not attract customers’ business and signal brand quality in the long run. Hence, companies’ sales organizations may jeopardize their own incoming cash flows and financial stability with improper usage of trade credit.