Flat Rate or Tiered Pricing – Selling Merchant Services

In this episode today, I want to discuss tier and flat rate pricing.  Often in my training, I use the example of a hat shop to explain pricing.  To help define the pricing options, imagine a shop like “Lids” which only sells ball caps.  There are options for the method of pricing the caps.  The merchant could offer a flat rate, meaning all the caps might sell for $15.  Obviously, the merchant pays many different purchase prices for the caps.  Thus, the profit would be higher on caps which were purchased for $2 than on “Super Bowl champion” caps which may have cost $16.  Although there is a loss on one cap, the merchant knows there is profit on the overall average.  That is flat-rate pricing.

Another option is putting caps on different shelves.  One shelf might be the clearance rack where caps are $5.  The middle shelf might be $20 caps.  Then the “premium” shelf could be $30 ones.   Thus, the merchant places the caps on the appropriate shelf according to purchase price. This is tier pricing.

The final option represents interchange plus or cost plus pricing in our industry.  In this example, the merchant’s purchase price of each cap is marked up 20%.  If the merchant paid $10, the charge would be $12.  If purchased for $20, the charge would be $24.

There is an underlying cost structure in our industry which applies to everyone – every ISO and every processor.   Everybody has a cost structure called interchange.  There are over 400 different interchange rates.  These are based on the type of card and the way it is processed by a business.  Is it swiped through the terminal?  Is it online?  Is it over the phone?  Does it have reward points, cash back, or frequent flyer miles?  All those variables come into play.  There will be many different rates:  1.7% plus $0.10 for one card – .05% and $0.22 for another card, etc.   The priority consideration for those making a profitable book of business is that the fees are covering costs.

I would estimate that 75% of small businesses with whom I interacted ten years ago were on tier pricing.  Tier pricing has qualified, mid-qualified, and non-qualified cards.  Sales people would show merchants their qualified rate, mid-qualified rate, and non-qualified rate.  That pricing structure was interesting; I sold it for a while.  The way to sell it is to point out the lowest rate.  A rep could say, “Our qualified rate, which is going to be most of your cards, is only going to be 1.2%.  That’s going to be regular check and debit cards.  Then we have qualified check card rate and qualified credit card rate.”

If you need more information about tier pricing, just go to our website – ccsalespro.com.  Jump into our 6-Week Jump-Start Program.  Or the Pro Club has all our training.  You’ll find some training on how to read a processing statement that goes through tier pricing and shows you what it looks like.

Currently, flat-rate pricing has been gaining much more momentum.  Flat-rate pricing was popularized by Square.  Square recognized that merchants were really tired of the varying rates.  They gave them one flat rate of 2.75%.  However, in the last year or so, Square has significantly complicated its pricing structure. I think that is a big mistake on their part, but I understand why they are doing it.  They did their losing strategy of 2.75% for a long time, but now they need money!  Therefore, they have added complication which merchants hate.  They’re trying to retain people with their technology.

The concept of flat-rate pricing is still a very good idea.  When you find a merchant on tier pricing, that opens an opportunity to help by offering savings.  That is the methodology in our industry, after all.  Last week I saw a statement where a $50,000 per month merchant had a mark-up of about $900.  That is ridiculous!  The sales agent could offer to move that merchant to interchange plus.  Interchange plus is transparent and usually has less than one percent mark-up.

Another option for that situation is to make a pitch about simplification.  The sales person could say, “Look, I’m sure you’ve seen commercials for Square and these other companies who claim to have true flat-rate pricing.  However, if you look at their website, you see it is actually not true flat-rate.  Rather, they only work with certain business types.  What I’m going to do for you is create a flat-rate program at a specific rate by looking at your statement.  Then you’ll always know what you owe.  It is always going to be X percentage of your total volume.”

You must talk with your ISO or processor to get a true flat-rate deal.  They must exclude that merchant from their monthly and annual fees.  That’s important to make it true flat-rate.  If you can get it, merchants really do like that.  Realize those five or ten-dollar monthly fees will come out of your residual.  To pull it off is tricky.  Often you can make the sale without even cutting the price much.

I want to give you the pitch for this scenario.  Suppose you have a merchant with interchange plus and a pretty good rate.  You could say,

“In looking at your statement, I see you have pretty good pricing.  Let me make this presentation to you. Then tell me what you think about this value proposition.  Right now, you are the one taking all the risk for the different types of cards you run.  I’m sure you’ve noticed that some months you pay two percent, while other months you pay three and a half percent.  You’ve got a lot of variation because of different card types coming through.  Some months you get more rewards cards than others, right?  So, what if I take on that risk?  Of course, that would cost a little bit of money.  We must make sure there’s enough margin to make it work.  Right?  But instead of you going from two to three and a half percent, what if I put you at 2.7%?  You always know it is 2.7%.  Basically, you never have to worry about credit card processing ever again.  I have no monthly fees, no per-item fees, nothing.  It’s just 2.7%.”  [That percent is out of thin air.  The actual amount depends on merchant type and other variables.]

That’s a good pitch.  It means there will be months where you’ll lose money.  But there are some months you’ll make money.  Now, of course, in reality merchants are already marked up a good bit.  You want to sell them so that even in a month where they have many rewards cards, you are still going to make maybe 20 basis points.  But you’ll make maybe 20 to 80 basis points, depending on the spread of the merchant.  That can be very powerful; merchants love simplification.  If you need any proof of that, look at Square.  You know that’s their whole marketing proposition.  That’s what they do, right?  They were very successful getting merchants on board with that.

So, my advice to you today is this.  Although I think there is still some value in taking people from interchange plus to tier pricing, I think tier pricing has run its course.  Why not just jump over tier pricing and go straight to flat-rate?  With tools like instantquotetool.com, an algorithm can accurately predict the cost.  There is not a huge amount of risk to just do the flat rate.  Instantquotetool.com eliminates the risk of losing money.  The tool has all the information to show you the cost.  I think the time has come to just skip over tier pricing.  Do interchange plus for your larger merchants or flat rate for your smaller ones.  You’ll find with that simplicity and agreeing to take on the risk, you’ll get a lot more people to buy.  And you’ll maintain higher margins, too, if you do it the right way.

Thanks for reading and listening!