By Jeff Fortney
A few years ago, I spelled out nine "profit rules" to provide an ethical approach to pricing merchants, as well as to help ISOs and merchant level salespeople (MLSs) protect themselves from over accommodating merchants, most of whom listen to radio station WIIFM—What's in it for me? Too many MLSs were giving away processing and then asking themselves afterward, "What did I just do?"
I find that, given today's challenges, the rules are even more relevant than they were when I created them. In this series, I will discuss each rule and how it fits ISOs and agents today. This article covers rules one, two and three.
When adjusting one cost downward placing it below the floor rate normally quoted, an opposite adjustment must be made to other rates to compensate.
Today, several merchants are leveraging the situation to negotiate better rates. In many cases, they have new average ticket sizes and smaller volumes. (Note: I am not talking about the merchants who aren’t processing at all.)
This rule is straightforward. Say you've set your floor at $0.10 for an authorization. The merchant pushes you to reduce that rate to $0.08. If the merchant is keyed into this auth fee, you have to factor in the 2 cents elsewhere.
If the average ticket is $75, that 2 cents accounts for approximately 2 basis points. If your floor is 20 bps and 10 cents auth, you would adapt to 22 bps and 8 cents. It should generate the same revenue, and the merchant perceives a win.
But remember, a floor is a floor. Don't start any conversation without setting your floor. This rule helps you to remember why you set that floor.
Reductions in one area should not reduce your profits in other areas.
This rule seems obvious, but it's often forgotten. You can be empathetic during these extraordinary times, but you also have to remember you are in business. If a merchant is looking for a reduction in costs, consider reducing their minimum, especially when the minimum has had little to no effect in previous months. This will help you retain your merchant long term. Also, look for other areas to drop their costs. If they haven't completed PCI compliance, see that they do it now. It would eliminate a cost that has no impact on you.
Pricing perception is 9/10 reality. Listing a fee in the correct field can increase your revenue without giving the merchant an impression of a higher fee.
All people (including merchants and agents) see and hear subjectively. They listen for buzzwords, which often raise red flags during conversations. When selling merchant services, we are all told to avoid those buzzwords to try not to raise those red flags. Pricing is one area where merchants think they can either drive the price down or ask for lower costs. And, unless they prepare for these conversations, many MLSs will tend to fall back and drop fees.
However, a good price is a perception. What we see and hear again is based on our subjectivity—our perception. We know that we need to maximize our return, and to do so, we can't immediately drop our price at the first concern a merchant brings up. One way to create favorable perceptions is to insure costs are assessed in correct fields, and structured based on the merchant.
The clearest example is the transactional cost. You can assess at a transaction level, or at an authorization level.This would seem to be the same, correct? Actually, no. The average retail merchant runs 110 authorizations for every 100 transactions. The average fine dining restaurant runs 150 authorizations for every 100 transactions.
In this scenario, if a retail merchant has a price of 10 cents a transaction, the cost on 100 transactions is $10. If the merchant has a price of 10 cents an authorization, the cost would be $11. The merchant perceives 10 cents. Yet, you make an added $1.00 at the same price.
If a restaurant merchant has a price of 10 cents a transaction, the cost on 100 transactions is $10. If the merchant instead has a price of 9 cents of authorization, the cost would be $13.50. The merchant perceives 9 cents, yet you make an extra $3.50.
Another example is the small-ticket merchant. Consider that the merchant has an average ticket of $15. Your floor price in general is 20 bps and 10 cents, and you decide to quote this to your merchant. Your competition quotes no basis points and 15 cents. The merchant sees a pass through plus a flat 15 cents, which (from looking at the two offers) appears lower. Do you walk away?
Doing the math, you'll see you should have offered the flat plus 15 cents. Your floor of 20/10 generates 13 cents per ticket. The perceived lower price of a flat 15 cents is actually 2 cents per ticket higher than your floor.
You can also create a perception by choosing your words. When comparing your offering of 25 bps and 10 cents to a merchant's existing pricing of 30 bps and 10 cents, choose these words: "I see you are priced at 30 basis points and 10 cents. I suggest we price you at 0.25 percent over interchange and 10 cents. That is a quarter of one percent.
Which sounds higher: 30 basis points or 0.25 percent? What does the merchant subjectively hear and perceive as lower? It's easy to understand the importance of perception and the need to understand each merchant's unique situation. The key to this rule is twofold:
Be sure to spend time studying and applying rule 3; it has potential to improve your sales practice immensely. Also, do not address an issue if the issue hasn't been raised, and don't offer a better deal until a merchant asks for a better deal.
Remember, these rules provide basic guidance to help protect your side of the partnership—and, in many cases, encourage you to say no. As always, I stand ready to answer your questions. I have the perception that it could help ...
Jeff Fortney is vice president ISO relations for Signature Payments. A long-time payments industry executive and mentor, Jeff is focused on strengthening and developing partnerships and evaluating new business opportunities. He can be reached at 214-458-1379.
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