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The Green Sheet Online Edition

June 08, 2009 • Issue 09:06:01

Margin compression: It's in your hands

By Jeff Fortney
Clearent LLC

Margin compression is a frequent topic of conversation today. Complaints are loud and boisterous, especially after a card brand price adjustment. The concerns could boil down to one simple comment: How am I supposed to sign new merchants? Yet, have we ever considered that there are other causes of margin compression that are under our control? Could the root causes of compression really be us?

You can effectively eliminate margin pressure by performing a "sales audit." This audit is both internal and external, and can be done quickly. But the results of the audit, and the actions necessary to correct deficits, may require serious effort and commitment to change on your part.

Internal aspects

Your sales audit begins by examining several aspects of your pricing structure. You also must decide how you intend to make money in this business.

Income from processing is driven by your contract. Programs offered today all fit within a simple scale. On one end is the bonus-only program, in which the sales rep receives a flat fee per deal.

The other end of the scale is the residual-only program. No bonus is paid, but income is ongoing from merchant processing expenses. Although it is often said that residuals are king, there is a place for bonus programs, depending on your long-term goals.

The bonus program fits people who think of themselves solely as salespeople - similar to individuals selling office equipment. There are no long-term expectations in this model; income is generated only as long as sales of new merchant accounts occur.

The residual program fits people looking to build long-term assets that generate revenue even if no new merchants are signed in a given month. These individuals could be compared to insurance salespeople, who receive ongoing income from renewals.

You must decide what type of salesperson you are and what your goals are. Then examine your current processing partnership. Does it align with your goals? For example, if residuals are your ultimate goal, does your partnership encourage residual growth by rewarding you for the growth? Is there any risk your processor can stop your residual payments?

Assume nothing; analyze your contract and your pricing schedule. If you cannot find an answer, ask for written clarification. If that isn't provided, you may want to protect yourself by finding another partner.

Variations of each type of program exist. These have a cost assessed on the bonus or the residual to offset the hybrid aspect of the program. If your short-term needs require upfront cash, consider a hybrid program, or consider other sources of upfront revenue such as equipment sales and leasing. Factor in the costs to your ultimate goal before making any decision.

After examining your partnership, examine your attitude toward selling. Ask these questions:

  • Do I have a minimum price for doing business with anyone, and what is it?
  • Am I prepared to walk away from any deal for which I will not receive the minimum return I require?

Margin compression cannot be battled until you are willing to walk away from a deal.

External aspects

Next, analyze your external approach. This may require a change in your sales methods and a change in your attitude. A simple rule applies when combating margin compression: Never lead with cost savings or lower prices.

Everyone wants to save money. But people buy for their own reasons, not yours. When you consistently make cost savings the lead, you ignore less obvious motivators driving merchants' purchases and ultimately lose accounts.

Merchants are constantly bombarded by salespeople in our business. What would happen if you didn't ask for a statement in the first three sentences, but instead asked questions regarding a particular merchant's life and needs?

Or what if a merchant asked what your best rate is, and you said you don't know. This alone may positively influence the merchant's willingness to talk.

Be prepared to walk away even before you start conversing with a prospect. This will change your expectations and create a different atmosphere during the sales call. Your body language will change, and you will not appear desperate.

Consider two factors when discussing price:

  • Is cost savings mandatory to sign the merchant?
  • Will that required savings result in a return below your established minimum?

If the answer is yes to both, thank the merchant for his or her time, and walk away. One caveat: If the emphasis is on cost savings only, you may not have probed enough to determine a prospect's true needs. Don't deal with the cost savings issue if you are not absolutely sure it's the only reason a merchant will sign with you.

Remember, if a deal is based on price only, the merchant may move to the next agent who offers savings. Consider this likelihood before pricing an account, and address it accordingly.

Margin compression is truly not the fault of the card companies, your competition or even merchants. It is in your control. Complete your sales audit, and take appropriate steps. You will find worries over margin compression will no longer impact your success. end of article

Jeff Fortney is Director of Business Development with Clearent LLC. He has more than 12 years' experience in the payments industry. Contact him at jeff@clearent.com or 972-618-7340.

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