hen it comes to purchasing products and services, educated buyers always win. This is true whether you're an ISO or merchant level salesperson (MLS) purchasing for merchant customers, or you're a merchant. The key is to understand the difference between the acquisition price and the total cost of ownership.

With consumables such as rolls and ribbons, you can buy an inexpensive variety more often or spend a little more up front and receive a longer-lasting product as well as reduce acquisition costs.

As a buyer, in this case, you can nominally make three purchases rather than five. Thus, the cost per transaction is lower (which is the whole idea). At Cardware International, we changed ribbon manufacturers 10 years ago. We now pay 10% more and have documented a 40% greater yield.

We also have seen instances in which shipping costs erode any benefit that could have been gleaned by shopping for price. You could shop around and buy equipment from Source A that costs $500, or you could buy it from Source B for $490 but spend $25 on shipping. We have seen numerous instances in which shipping adds as much as 20% to the product's cost.

Sometimes buyers become intent on arbitrary goals, such as "saving $5 per device." They stick to these no matter what, believing that they negotiated a great deal. But they didn't consider the total cost. The volume of devices purchased over a 12-month period may add up to a savings of $500, but the manager responsible for those purchases invested dozens of hours in this savings quest.

What is the value of time versus savings (or perceived savings)? Answering that question is inevitably an eye-opener.

In terms of help-desk services, value is measured in the quality of the information (such as the level of expertise provided) and the speed at which it's provided. We know a processor with very low, per-call pricing. One experience with that processor's service and it's easy to understand why it charges so little. "Try this and call me back" is the response for trouble-shooting. There is no ownership of the issue or a commitment to see the problem through to resolution.

Businesses that choose to work with that processor (and its help desk) will experience a greater number of calls regarding the same problem. Customers will have to spend more time working to resolve their issues than they would had the processor invested a little more money and employed someone more knowledgeable.

Often, help desks that (supposedly) perform diagnostics are quick to suggest an equipment swap-out. That's generally a poor and inefficient alternative. Not only does it inconvenience merchants, but it's also costly and usually does not help matters.

A broad study we commissioned in 2002 showed that 50% of POS equipment returned under "quick fix" circumstances had absolutely nothing wrong with it; the products "passed all tests" (PAT).

A $10 phone call with an experienced professional, who takes ownership of an issue and resolves it quickly, is much more valuable than making three to six $4 calls that result in shipping away functioning POS equipment for no legitimate reason.

A look at pricing

Our management consulting firm, Strategic Management Partners, recently published our third annual pricing benchmark study of the industry. A large number of clients contributed information on the fees processors charge. We then consolidated the data by portfolio size, so individuals can examine various merchant processing line items and compare their costs with those of peers.

This year, we studied who's paying more ... and less. We found that ISOs pay less and banks pay more. Seventy percent of the time, banks had a per-transaction cost higher than the ISOs in the same size categories. The reason, we believe, is that ISOs are generally privately owned, so their Chief Executive Officers pay operating costs out of their own pocket.

Most financial institution managers have good intentions, but the costs do not come out of their pockets. So, ISOs tend to use a request-for-proposal (RFP) approach and "go out for bid," while banks tend to renew their current contract with their processor.

ISOs are also more aggressive in negotiating processing agreements. Financial institutions tend to sign longer term processing agreements for the sake of stability, and in doing so, they further undermine their ability to get the best processing pricing.

The nature of practical economics is that buyers tend to purchase based on price, often neglecting other factors. But take a moment to think about it. If we all purchased solely based on price, we'd all have bought Yugos.

Buyers need to differentiate between the best price and the best deal, and these are by no means the same thing. Enter educated buyers, who seek the best value at the most economical (though not necessarily the lowest) price.

'Over-commoditization' and merchant frustration

As ISOs and MLSs, it's common today to focus on merchant acquisition rather than on merchant retention, with a few of you generating most of your revenue from the churn. As a result, merchants are accustomed to poor service, and their expectations are low.

In addition, the total value equation of the merchant portfolio (and service cost versus revenue stream) is lost. Poor service along with hidden expenses has damaged everyone in the industry, and merchants are frustrated and resentful. How much so? Many are actually considering going back to accepting only cash and checks.

Cardware's customer service staff hears this frustration regularly and not from an isolated few. Odd as it may seem in an era with seemingly infinite payment options, the value equation of merchant card acceptance is turning upside-down.

Whether merchants follow through is anyone's guess, but the drumbeat is louder than ever. It's no longer regarded as a radical idea.

From a pricing perspective, acquirers focus on their "auth" price and their settlement price. Ask any 10 acquirers what they pay, and nine will recite these two numbers accurately. The problem is that while auth and settlement prices are the primary cost drivers, the total cost per transaction (TCPT) matters. And it's always a different number.

Take the bottom number on the monthly statement and divide it by total number of transactions. That's the TCPT. (It's also, generally, twice the number of just the "auth plus settlement.") One hundred percent of the time, this is a big surprise to clients. But the real cost is the total cost not the "headline" cost.

It's payback time. Processors now do to acquirers what acquirers have done to merchants for years. Processors will be billed for chargebacks, statements and management reports, not to mention monthly minimums and who knows what else. But no one does this simple math. The "purchase price" is always just half the story.

One factor fueling this problem is "over-commoditization": the idea that there is no real value in doing anything well because there's no reward. Merchants move from one processing company to another because there's a perceived value in doing so. Unfortunately, many merchants are repeatedly oversold by a succession of salespeople promising savings and value that are never fully realized.

For example, the offer they make to merchants is: Get A, B and C, and save $400 per year. What is unspoken is that it will cost $600 in man-hours to convert, retrain and work out snags, and there will always be those mysterious, undisclosed or misunderstood fees.

Salespeople make promises, merchants agree to them, and that's where it stops. There's no fulfillment because there's no sales support. What results is little (or incorrect) information and attempts to fill in the blanks to deliver what merchants need.

What assumptions were made regarding the merchant's equipment? What POS features apply? Does the receipt header show the correct name and address? What reports will be generated? Will they be separated by card types? Does the application being sold have the same features as the application it's replacing?

Salespeople should make sales and then refer merchants to a qualified sales support person. The alternative, which is cleaning up problems after the fact, is costly for all involved.

Recently, retention has become a hot issue because the industry has matured. Merchants are increasingly reluctant to switch processors. The emphasis should be on selling additional value-added services to existing merchant accounts.

This isn't the same industry it was even a few years ago. It has undergone a paradigm shift in sales compensation to one based on substantiated results (i.e., pay when the merchant activates).

From an ISO's or MLS's standpoint, there's a need to understand what they're providing (or outsourcing) plus a willingness to invest in retaining profitable accounts. Economically, it is better to invest in business retention than to continually cannibalize others' accounts. This results in no real growth.

The total cost of ownership is in the salesperson's hands. The industry is maturing; it is no longer a "get rich quick" business. Merchants can find a better price every day from someone else. If you provide solid, credible service, it will take a yawning price difference for merchants to consider a move, particularly in this environment, where service is so critically lacking.

With commoditization of processing, service becomes the differentiating factor. Equipment has its bells and whistles, every company has the same products and ultimately offers the same pricing to merchants, yet nothing substantive sets the salesperson apart from peers, except service. Taking an aggressive RFP approach will put processors in a position in which they have to earn the right to continue as the supplier. At the very least this will provide the ammunition to go back to the current provider and seek clarification for any price difference.

Biff Matthews is founder and President of Thirteen Inc, the parent company of Cardware International. He is one of the 12 founding members of the Electronic Transactions Association (ETA) and has served on its board and various committees. Kurt Strawhecker is a founding Partner of Strategic Management Partners, which specializes in the payments systems sector. Clients include merchant acquirers, processors, card Associations, ISOs and service providers. Strawhecker has also served in several senior management positions at First Data Corp. He is a former member of ETA's board of directors.