The Reverse of Buy Now, Pay Later: Split Payments for Pre-Orders

Sewing machines were prohibitively expensive in the 1890s. That is, until Singer introduced installment plans. Shoppers could pay a "dollar down, dollar a week," which made sewing machines more accessible and boosted sales enough that Singer become one of the first multinational corporations. More than a century later, companies like Klarna, Affirm, and Afterpay let shoppers use Buy Now Pay Later everywhere from Gucci to Grubhub.

On the surface, the value proposition for BNPL makes a lot of sense. Increasing consumer spending power via credit (aka an IOU) is a strategy that’s as old as time. Why wouldn’t a shopper want the option to pay less (or nothing) upfront and still get to enjoy their purchase in the meantime?

‍With interest rates as low as they were for as long as they were, BNPL companies have exploded in popularity over the past few years. Money is no longer as cheap to borrow, which means this it BNPL value proposition may need a re-think.

How much longer will BNPLs be able to offer a large portion of their consumers 0 or low% interest loans on everyday eCommerce purchases, and still chart a path that is high-margin profitable?

Buy on pre-order now, pay later?

Either the interest terms offered to consumers will need to change, or the BNPLs will need to rely on a higher percentage of consumers running late on their payments — or a combination. Either way, it makes us nervous. Gen Z is a key demographic who use BNPL, with at least 25% not understanding their purchase is actually debt. Further pushing a structure with known debt misconceptions amongst young people does not seem ideal.

Another option would be to raise prices with the brand via an increased transaction fee on BNPL purchases. From what we hear on the ground, a mix of market saturation and BNPL being seen as a “nice to have” means there isn’t enough price elasticity for BNPLs to work with.

Meanwhile at Purple Dot, we had been considering for a while on whether to integrate a BNPL provider as a pre-order payment option. It was a top feature request from brands, although rarely a dealbreaker. Those are always the trickiest to prioritize amongst a small team. With our pre-commerce platform, brands can charge shoppers 100% upfront for pre-orders in a fully FTC-compliant way. And thanks to solid conversion, this charge upfront pre-order model is a huge win for brands. Not only does it convert highly committed shoppers with lower returns rates, but brands can access sales earlier, too.

What became clear is that it was a hunch from brands that some shoppers may be uncomfortable (or unable) to pay 100% upfront for a pre-order that they may need to wait a few weeks to receive. And why should they? Shouldn’t shoppers be able to Buy Now and then Pay Later for pre-orders? Would that increase conversion? Oh, but wait! As a brand, I still want my pre-order funds upfront… so maybe that doesn’t work.

This feature discovery from first principles was eye-opening — and so worthwhile.

Why split payments are the better choice

We didn't think BNPL made sense for pre-orders, regardless of the moral issue on whether or not shoppers understand that they are taking on debt. Sure, we could possibly delay the first BNPL payment to when the pre-order actually ships. Then the brand can’t benefit from any funds upfront, which is a key pre-order value prop for our brands. So, that didn’t seem like a great option either. It seemed messy.

But the core problem brands wanted to solve still resonated: Can we increase shopper trust and conversion with pre-orders by not charging 100% upfront? And can I still access pre-order funds early for my business?

Then it clicked. We don’t need a BNPL to deliver that capability.

We just need the ability to split the pre-order payment for shoppers at checkout, where shoppers pay a percentage upfront at checkout, and the rest is auto-charged on ship.

That's why we launched split payments in Purple Dot.

Brands on our Platform solution can let shoppers split their payment for pre-orders. They have options to charge 10% upfront and 90% on ship, or a true split of 50% upfront and 50% on ship. Regardless of the structure that brands choose, brands can still access paid pre-order funds early, as always, in a fully FTC-compliant way.

With split payments, the pre-order is still paid in full before it ships. That means there's no debt for the shopper as with BNPL. However, the shopper can still benefit from spreading the payment over time, which is ultimately what our brands wanted to enable. And, by still charging a percentage upfront for the pre-order, brands get that confident shopper commitment and can still access pre-order sales to fuel their business.

Shoppers love the flexibility. Split payments have contributed to Knockaround achieving a 60% sell-through before their sunglasses arrived at the warehouse.

Want to offer Pre-orders with split payments to your shoppers? Get in touch today.