By letting customers pay over time, businesses can provide an additional payment option, which increases conversion rates by 7.4% and revenue by 12%, on average.

Below, we discuss how a payment plan works, the different types of businesses that use them, and the benefits and risks to consider when offering them.

What’s in this article?

• What is a payment plan?
  
• How does a payment plan work?
  
• What types of payment plans do businesses offer?
  
• What are the benefits of payment plans for customers and businesses?
  
• When should a business offer a payment plan?
  
• What risks and limitations come with offering payment plans?
  
• How are payment plans different from subscriptions or recurring billing?
  
• How Stripe Payments can help
  

What is a payment plan?

A payment plan is an agreement that lets a customer pay for a product or service over time instead of in one lump sum. The total price is agreed upon up-front and then divided into smaller payments that are collected on a set schedule.

The goal is to reduce the customer’s up-front financial burden without changing the overall cost. Payment plans are commonly granted directly by businesses or through buy-now-pay-later (BNPL) providers such as Klarna, Affirm, and Afterpay.

How does a payment plan work?

A payment plan turns a single price into a predictable series of payments, with clear rules from the start. While details vary, plans typically follow the same basic mechanics.

Here’s how a payment plan works:

• The total cost is fixed up-front: The full price is agreed on before the first payment, so customers always know what they’re committing to.

• The payment schedule is established: Payments are divided into installments with a defined cadence, such as weekly, monthly, or tied to a specific date. Due dates should be transparently communicated.

• An up-front payment might apply: Some plans require a deposit at checkout, which reduces the balance immediately and helps confirm customer commitment.

• Payments are collected automatically or invoiced: Installments might be charged automatically using stored payment details or collected via invoices, depending on the business model.

• Interest and fees are disclosed in advance: Plans might be interest-free or include interest or service fees. All costs are defined up-front and built into installment amounts.

• Balances decrease with each payment: As payments are made, the remaining balance updates, which gives both the business and the customer visibility into progress.

• Missed payments follow predefined rules: Failed or late payments trigger outcomes outlined in the agreement, such as retries, late fees, service pauses, or escalation.

• The plan ends once paid off: After the final installment clears, the agreement closes automatically unless the customer enters a new plan.

What types of payment plans do businesses offer?

Payment plans come in different forms. The right structure depends on factors such as price point, delivery timing, and risk tolerance.

The different types of payment plans for businesses include:

• Equal installment plans: The total is split into a fixed number of equal payments, which makes the plan easy to understand and budget for.

• Short-term installment plans: Payments are spread over weeks or a few months, and are often interest-free to reduce dropoff at checkout.

• Longer-term installment plans: Payments are spread over many months or years and might include interest or financing fees to account for delayed cash flow and risk.

• Deferred payment plans: Customers receive the product or service immediately but begin to pay later.

• Deposit-based payment plans: A portion is paid up-front, with the remainder collected over time to help cover up-front costs.

• Milestone-based payment plans: Payments are tied to delivery stages rather than calendar dates. This is common in services, custom work, and business-to-business (B2B) contracts.

• Layaway-style plans: Customers pay over time before receiving the product, which is delivered only after the balance is paid in full.

• In-house financing: The business manages billing, collections, and risk internally, so it retains control and absorbs nonpayment risk.

• Third party-managed plans: A financing provider pays the business up-front and collects from the customer, which shifts risk in exchange for fees.

These types are not mutually exclusive. One plan can combine different models, such as the in-house financing of a short-term installment plan.

What are the benefits of payment plans for customers and businesses?

Payment plans work best when they ease purchase hesitation while maintaining price clarity. When done well, they create value on both sides.

Here are the benefits:

• Lower up-front cost for customers: Customers perceive smaller installments as more manageable than a single large payment, even when the total price remains the same.

• Easier budgeting: Fixed payments help customers plan their resources, especially when they align with pay cycles.

• Higher conversion rates: When customers see a manageable payment, they’re more likely to complete a purchase rather than delay or abandon it.

• Increased average order value: Research shows that payment plans can boost spending as customers opt for higher-tier options or add-ons when costs are spread over time.

• Expanded customer reach: Payment plans make higher-priced options accessible to budget-conscious buyers or cash-constrained businesses.

• Stronger customer satisfaction: Flexible payment options signal empathy and can improve the overall buying experience.

• Improved retention: A straightforward payment experience builds trust and increases the likelihood of repeat purchases, especially for high-value items.

• Less pressure to discount: Payment plans can unlock affordability without reducing prices or perceived value.

When should a business offer a payment plan?

Payment plans are most effective when they remove a specific barrier to purchase. They’re also particularly powerful for resolving cash-flow mismatches between buyer and seller.

Consider using a payment plan in the following scenarios:

• When up-front pricing causes hesitation: If customers stall or abandon purchases due to sticker shock, installments can turn indecision into action.

• For high-value products or services: Larger purchases with long-term value naturally lend themselves to spreading payments out over time.

• When customers have uneven finances: Freelancers, small businesses, or international customers might benefit from flexible payment timing.

• When competitors already provide installments: In categories where payment plans are expected, not granting one can hurt conversion.

• When launching new or premium offerings: Installments lower the commitment barrier for first-time or cautious buyers.

• When long-term relationships matter: A fair, transparent payment experience can strengthen confidence and loyalty.

• When the business can support delayed revenue: Cash reserves, margins, and operations must be able to handle revenue that arrives over time.

What risks and limitations come with offering payment plans?

Payment plans reshape your funds and business plans. Before your business adopts them, you should weigh the trade-offs.

Here’s what to consider:

• Slower access to cash: Revenue arrives over time, so businesses need sufficient working capital.

• Higher risk of missed payments: Longer plans increase the chance of late payments or default.

• Operational overhead: Installments require ongoing tracking, retries, and customer communication.

• Accounting complexity: Managing receivables, revenue recognition, and bad debt becomes more involved.

• Margin pressure: A lack of financing fees or interest can reduce profitability.

• Regulatory requirements: Some regions treat payment plans as consumer credit, which requires clear disclosures and stricter handling of customer data.

• Customer overextension: Easy access to installments can lead to financial strain, disputes, or churn.

• Poor fit for low-cost items: With inexpensive and fast-moving goods, the added difficulty of payment plans can outweigh the benefits.

How are payment plans different from subscriptions or recurring billing?

Payment plans and subscriptions both involve repeated payments, but they serve very different purposes. Confusing the two can lead to pricing mistakes, accounting issues, and customer misunderstandings.

Here’s how they differ:

• Payment plans have a clear endpoint: Customers pay down a fixed total, and the obligation ends once the balance reaches zero.

• Subscriptions are ongoing: Payments continue until the customer cancels or the contract ends, with no predefined total cost.

• Payment plans finance a single purchase: Each installment reduces the remaining balance tied to a specific product or service.

• Subscriptions pay for continued access: Each payment covers a new period of service or delivery.

• Payment plan pricing is locked up-front: Installment amounts usually don’t change, while subscription pricing might vary over time or vary by usage.

• Revenue recognition differs: Payment plans often recognize revenue based on delivery or collection of cash, while subscriptions recognize revenue as the service is provided.

• Customer behavior differs: Payment plans focus on completion and payoff, whereas subscriptions focus on retention and ongoing engagement.

How Stripe Payments can help

Stripe Payments provides a unified, global payments solution that helps any business accept digital wallet payments online, in person, and around the world.

Stripe Payments can help you:

• Optimize your checkout experience: Create a frictionless customer experience and save thousands of engineering hours with prebuilt payment UIs, access to 100+ payment methods, including more than a dozen digital wallet payment methods, and Link, a wallet built by Stripe.

• Expand to new markets faster: Reach customers worldwide and reduce the complexity and cost of multicurrency management with cross-border payment options, available in 195 countries across 135+ currencies.

• Unify payments in person and online: Easily track and reconcile digital wallet payments across online and in-person channels.

• Improve payments performance: Increase revenue with a range of customizable, easy-to-configure payment tools, including no-code fraud protection and advanced capabilities to improve authorization rates.

• Move faster with a flexible, reliable platform for growth: Build on a platform designed to scale with you, with 99.999% historical uptime and industry-leading reliability.

Learn more about how Stripe Payments can power your online and in-person payments, or get started today.