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The Green Sheet Online Edition

August 12, 2013 • Issue 13:08:01

Street SmartsSM

Who moved my margins?

By Dale S. Laszig
Castles Technology Co. Ltd.

I recently asked in GS Online's MLS Forum, "What's keeping you up at night?" While margin compression was the leading worry among respondents, the ensuing debate revealed a diversity of opinions on how best to deal with the situation.

Shrinking margins make it necessary for many merchant level salespeople (MLSs) to increase or even double their app count just to stay at desired income levels. In this type of environment, it's not always feasible to chase every lead that comes our way.

Prequalifying accounts means asking the tough questions: Is this business worth pursuing? Can we win it? The answers dictate whether it's best to walk away from a deal or fight to the finish.

Many agents have chosen to stay and fight. This article provides a sampling of strategies from leading MLSs who have found innovative ways to remain profitable during uncertain and challenging times.

Do the math

Crunching the numbers is an essential part of qualifying a lead. CreditCardMn wrote, "Do some quick math with me, and I will be generous with my assumptions. ... Merchant does $20,000/mo. in volume. You sign him at a .40 percent net margin, so your 70 percent split gets you $56/mo. residual. ISO makes $24.

"New terminal is $156 + $300 bonus to you = $456. $456/$24 = 19x acquisition cost. In other words, the ISO is giving up their first 19 months of revenue to acquire the merchant. Good business model when portfolios sold for 40x, not so good when portfolios sell for 15x. Extra credit: What does that acquisition cost look like at lower volumes? Lower margins?"

Another way to alleviate low margins is by courting high-transaction merchants to make the numbers balance out. "Target industries where merchants have high transaction counts," Bluestar posted. "Even if the margin is low, the large number of transactions can still create very high-value accounts."

Sell value, not price

How do customers view you? If you're perceived as a vendor and there is little to differentiate your services from other competitive offerings, what's left to discuss with a prospective buyer? The conversation will be all about price.

Gmartin wrote, "Order takers [who] don't even value their own product have taught merchants that what we provide is a commodity that has no value. If you want to combat margin compression, don't be a part of the problem. Refuse to go that low, and be willing to walk away. You may be surprised at how many will respect that and decide to sign with you."

For Bluestar, selling value requires out-of-the-box thinking. "Find something else of value to lead with," he said. "This doesn't have to be the traditional gift, loyalty, POS, etc. Think out of the box and come in with something merchants don't associate with merchant services.

Once you get them sold on that product, it is easy to offer a discount on that product in exchange for matching rates on merchant services or providing a very small savings."

It helps to have a high degree of confidence in your value proposition, Gmartin noted. "Provide value, and believe in that value," he wrote. "Whether it's local service, zero hold times, fast deposits, same- or next-day replacements of terminals, POS systems, or whatever, believe that your value is worth what you are charging.

If you don't believe in yourself, the merchants definitely won't. If you are willing to lower your fees without a bottom line, then you are not valuing yourself and your product, and you can't expect that a merchant will."

Reward referrals

TPSS//Tiger incorporates a mix of value-added apps and rewards for referrals to stand out in a crowded playing field. "More competition means less margins, as everyone wants that slice of pie," he stated. "You have to find value-added products to add to make the merchant sticky to you. Also, try to create more rewards for referrals from existing merchants."

Bluestar added, "Find referral sources. Ninety percent of the business we write comes from referral sources, which makes most of our activity inbound. Referral sources come in a lot of shapes and sizes, and there are a lot of ways to get good ones.

"We source people that sell other products to our target market and provide them tools to help them close more deals. This incentivizes them to bring us in on every deal, and most situations are much less competitive, so we can maintain strong account margins."

Know when to walk away

Maybe we can agree to disagree when it comes to the somewhat contentious topic of when, if ever, to walk away from a prospect.

"Don't be afraid to walk away from a merchant who is all about price only," Clearent wrote. "Find their pain, address the pain, and charge them the same they are paying today. ... You aren't going to sign every merchant, so why not make sure [you're] signing the right merchant?

"If they are chasing price, they are likely to run to the next guy who walks in that is lower. Loyalty won't happen if all you sell is price."

Alternatively, walking away can sometimes mean sacrificing the time you've invested in a statement analysis, as well as leaving low-hanging fruit for a competitor. CreditCardMn wrote, "Am I going to walk away from a $25 a month deal that offers a $300 upfront bonus? No. It is still $600 in my pocket (first year) for a few hours' work.

"And at that point, most of the work is already done - i.e., marketing, qualifying, travel time, etc. [W]hat will it take to close the deal, another 20 minutes? Can I reverse the margin compression by walking away from the deal? [No.] Someone else will sign them."

Ecom recommended walking away from the business altogether, stating, "Sell your portfolio before there is nothing left; then find a career that rewards you for your effort. Not bankcard, it is over."

Cultivate relationships

When we take the time to learn about our merchants and help them understand us, we can begin to build relationships based on trust and mutual respect.

Let's not take all the blame for margin compression. Merchants who don't understand the nature and value of our services are equally responsible for these conditions, according to Diego.

"Merchants are the ones compressing the margins not the MLSs," he wrote. "Spend some time in your attrition department, and tell me why most merchants leave. Surprisingly, you will quickly discover that merchants mostly care about their money, not the gift card program someone has offered them.

"One thing I know for sure is if you spend enough time out of sales you start to believe that these things are happening because of weakness in the sales reps abilities. That is far from the truth. I promise it's the merchants who have had enough of a billing system that none of them can understand."

Keep the faith

Gmartin believes our best days are still ahead of us. "You may sign a few less than in years previous, and your margins may be lower, but [they] don't have to be so low that you can't build a decent portfolio where you can survive and thrive," he wrote. "You just have to deliver more than just a low rate. If all you have is that supposedly low rate, then expect to lose to the next low-rate company that comes by."

While margin compression may be a fact of life in our business, it's worth noting that many MLSs continue to write new business and build profitable portfolios. Our strategies may vary, but our work ethic and commitment to excellence remain as strong as ever. That's how we roll. end of article

Dale S. Laszig is a writer and payments industry executive specializing in business development and sales performance improvement. She manages channel sales at Castles Technology and sales effectiveness programs through IMPAX Corp. and C3ET Credit Card Consortia for Education & Training Inc. She can be reached at 973-930-0331 or dale_laszig@castechusa.com.

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