by Ben Dwyer Many small business owners think of credit card processing fees as another of many operational expenses; it’s a cost of doing business in today’s world.
But the fees you pay when your customer makes a purchase by card should factor into your overall pricing strategy. Otherwise, you’re bringing in less money from each sale.
In this article, I’ll talk about possible strategies to help offset costs without alienating customers.
Costs of Accepting Credit Cards
You probably already know that every time you accept a credit (or debit) card, you pay fees to a credit card processing company for facilitating that transaction. This blog is full of articles on the fees that go into credit card processing, specifically interchange, assessments, and processor markup. I won’t go into the full details again, but if you want more info, check out this article on interchange fees.
For the purposes of your pricing strategy, the details of interchange and assessments aren’t as important as your effective rate. Your effective rate is the amount you pay in processing fees divided by the total amount of the transactions processed. This number is the most accurate representation of the total costs you pay since it includes all fees.
Let’s say that you used CardFellow’s credit card processing marketplace to secure a competitive processing solution and your effective rate ends up at 2%. That means that for every $100 sale, you’ll pay $2.00 in processing fees, keeping the other $98.00. It may not seem like much, but over multiple transactions, it adds up fast. If you don’t account for the fees when setting your pricing, you’re eating into your profits. If you’re already operating with thin margins due to the cost of goods and overhead, you don’t want to give up even more money.
Per-Transaction Fees
An important aspect of your credit card processing fees, especially for those with small average transactions, is the per-transaction fee. This is a fee, expressed in cents, that you pay for each transaction you take. This fee doesn’t change with the size of the transaction. For example, a processor’s markup may be 0.20% + 10 cents per transaction. While the percentage portion of the fee will vary with the size of the transaction, you’ll always pay the 10 cents whether the transaction total is $1.00 or $100.00. I’ll come back to why this is important in a minute.
Pricing Strategies
Fortunately, it’s possible to account for the cost of credit card processing. You can do it directly, by increasing the cost of your goods or services when setting prices, or indirectly through options like cash discounts or surcharges and minimums on credit card transactions.
Increasing Costs
Prices you charge should reflect the actual costs of doing business, which includes credit card processing. You’re allowed to set (or raise) prices to ensure you’re accounting for all of your costs. Of course, you’ll want to keep an eye on the prices your competition charges and make sure you aren’t setting yourself too high or out of customer’s reach. But more often than not, businesses find that it’s possible to build credit card processing fees into their costs.
This is especially true for service-based businesses and companies that charge on a per-project basis rather than for individual items. Since you won’t necessarily list each line item, you can account for processing fees as part of your overall quote.
Cash Discounts
Cash discounts are one method that some businesses turn to when they want to avoid or minimize processing fees. It works by pricing all goods and services as if customers will pay by card, but then offering a discount from that price if a customer chooses to pay with cash. This gives the customer incentive (a discount) to pay with cash, and saves you from paying processing fees. But if they can’t or don’t want to use cash, you’re already covered by pricing your goods and services to account for card fees.
Cash discounts are legal in all 50 states when implemented properly – that is, by pricing all items as credit prices and offering a lower cost than the posted price to consumers who choose to pay with cash. This is different than a surcharge, described below.
Surcharges
Similar to cash discounts but in the other direction, a surcharge is when you charge a customer more money than the posted price to use a credit card for their purchase. (Unlike a cash discount, which as described above, means giving a discount from the posted price to a customer for using cash.)
While cash discounts are legal everywhere when properly implemented, surcharges are prohibited in some states. If you’re considering surcharging, be sure to consult a local attorney to make sure you’re following any applicable laws.
You can also read cash discounts vs. surcharges for more information.
Minimums on Credit Card Transactions
Some businesses choose to implement a minimum purchase on credit card transactions. It’s legal to do so, provided the minimum purchase is $10 or less and charged only on credit transactions. You cannot require a minimum on debit card transactions, even when “run as credit.”
Earlier in this article, I explained that the cents-based per-transaction fee stays the same regardless of the total amount of the transaction. A $0.20 transaction fee on $100 is a drop in the bucket, but on a $5.00 transaction, it’s a much bigger percentage. Small transactions are more likely to cost you money if you aren’t careful, as per-transaction fees take a proportionately larger bite of the transaction amount.
Imposing a minimum transaction amount ensures that you’re not accepting cards (and paying those processing fees) on very small transactions, which can negatively impact your margins.
Reduce Your Processing Fees
In addition to pricing goods and services accordingly, you’ll want to start by making sure your processing fees are as low as they can be in the first place. Quote comparison marketplaces like CardFellow let you see real, fully-disclosed quotes from leading processors with no sales calls and no obligation.
If you’d rather compare quotes manually, you’ll want to familiarize yourself with the wholesale costs of credit card processing, pricing models available, and best options for businesses of your size and in your industry.
These days, credit card processing fees are a necessary cost of doing business for most people, but that doesn’t mean you simply have to absorb the cost. You can add those fees into your pricing or implement strategies to help minimize the impact. Before you go down that road, be sure you’re paying as little as possible for credit card processing. Try CardFellow’s free credit card comparison site today!
