As a business owner, finances are always a top priority. Whether it is flowing in or out, you track every dollar.
Keeping an eye on the bottom line is what allows you to maintain your business and keep your books in the black. While maximum profits might not be at the top of your list, every business owner must maintain a balance between competitive pricing and realistic profits.
This balance can be helped out through the customer convenience of easy credit card access.
Credit cards afford every customer the option for an alternate form of payment. Plus, in this digital age, customers expect the convenience of buy-now-pay-later shopping, and the vendor who does not offer a credit card option is at a disadvantage.
Understanding the options that different credit card companies offer can make a sizable difference in your profit margin.
As a business owner, you don’t want to limit your sales by not having every tool at your disposal.
That means credit card payments are a must. That also means you have to account for transaction fees in your budget.
When it comes to the company you choose to work with, there are options. However, each company will tend to operate in a similar fashion and offer you some type of pricing plan that includes transaction fees.
There are three types of transaction fees (or pricing plans). They are interchange-plus pricing, tier pricing, and flat-rate pricing.
Interchange-plus pricing offers a flat markup for each transaction, making running budgets somewhat easier to calculate.
If you are looking for the most transparency in your pricing model, interchange-plus is the way to go.
The rates are set twice a year. This allows a six-month period where you can set your price point accordingly.
The plus part of the agreement is a set amount per transaction. For instance, $0.10 on top of the agreed-upon percentage.
Tiered pricing will offer you different rates based on how the credit card transaction was completed - swiping, keyed-in, card-not-present, etc.
You may face slightly different rates with this model, but after a look at how your customers use their credit cards, you might find that this is the most profitable option.
You may be forced to sacrifice on some types of transactions to make a greater overall profit.
Each tier offers different rates and different options for optimal customization of your business.
The third option is flat-rate pricing, which is similar to tiered pricing, but offers the business owners a more controlled variable.
When looking at the options, flat rate might have the most appeal in that you have a limit to what you are going to be paying out per transaction.
However, when weighing the different options, keep in mind that a flat rate will tend to have a higher cost to cover the risk credit card companies are taking.
This option might work for you if you need to more accurately project your expenses. There are fewer variables you need to account for when crunching numbers. However, after careful examination, you may be leaving money on the table.
With a flat fee or percentage, the credit card company runs the risk of making pennies on each transaction, which leaves them exposed. To counter this, they hedge their bets by offering you a higher price point under the guise of convenience.
Make sure you weigh all your options and find the credit card processor that is most compatible with your business.« Back to Glossary Index
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