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The Green SheetGreen Sheet

The Green Sheet Online Edition

June 13, 2011 • Issue 11:06:01

Acquiring merchants - at what cost?

By Jeffrey I. Shavitz
Charge Card Systems Inc.

What does it cost to acquire merchant accounts? It's a simple, yet powerful question. I'm amazed at how many merchant level salespeople (MLSs) have no idea how to answer it. Is the cost of acquisition $25, $100, $1,000 per merchant? It's crucial for MLSs to answer this question, as it determines the financial feasibility of their businesses, prospecting plans, sales and marketing agendas, and their ability to hire subagents and maintain compensation programs with ISOs.

Ask the right questions

How much can MLSs afford to spend on customer acquisition given budget constraints? Have they run profit and loss statements on a monthly and yearly basis to understand these economics?

Given the economic downturn of recent years, many MLSs have lost residual streams. Although good business pairings require relationships that are mutually beneficial for both parties, views on what is beneficial need to evolve as circumstances change. MLSs always want the best splits, but it may be virtually impossible for ISOs to pay out 90/10 splits, include free terminals and upfront bonus money, and not have economic hardship.

When payment professionals learn how much it costs to acquire merchant accounts they realize when they are not adding incremental value for their companies because it takes too many months to break even on a deal, regardless of equity value. I would even argue that on small deals at interchange-plus pricing, MLSs may never break even.

Determine the LTV

MLSs need to know what they can afford to spend to acquire new customers. The answer lies in understanding each customer's lifetime value (LTV). The LTV can be expressed in an equation:

    LTV = frequency of purchase x duration of loyalty x gross profit.

Frequency in our industry equates to each merchant's monthly processing volume. Do MLSs focus on mom-and-pop local retailers with volumes under $10,000 per month or larger accounts in vertical markets that average over $50,000 per month?

Duration of loyalty refers to how long customers stay with processors. Unfortunately, attrition is increasing. Knowing this number is critical in determining LTV. Some MLSs are adding 15 new accounts per month while losing the same number; other MLSs have implemented plans to limit merchant attrition.

Finally, what are an MLS's gross profits or residuals on given merchants? We, as for-profit companies, deserve and need to make money to provide our services. We do that by using our time properly and making sure we are compensated for our efforts.

Once MLSs know how much it costs to acquire an account by calculating the LTV, they will not only determine what can be spent on sales and marketing, but also what other ways businesses can operate in a financially sound manner. The Green Sheet, Inc.

Jeffrey Shavitz is one of the founders of Charge Card Systems Inc. He is also an active member of The Green Sheet Advisory Board and the First Data ISO Advisory Board. He can be reached at jshavitz@chargecardsystems.com or 800-878-4100. For additional information on CCS, please visit www.chargecardsystems.com/gsadvisoryboard or the company's corporate website at www.chargecardsystems.com.

Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.

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