Cash Discounting Residuals – The Most Important Variable

Hi, my name is James Shepherd. In this video, I’m going to be talking to
you about cash discounting residuals – the most important variable. There is one area where I think cash discounting
has really kind of confused a lot of merchant services reps, that are used to doing interchange
plus pricing. That is understanding the effect of the average
ticket size on cash discounting. I think the first thing we have to do is we
have to reclassify cash discounting for the purposes of this conversation as flat rate
pricing. Because that is really what it is. As far as, you know, you don’t really care
about the discount they are giving when you pay cash. What you care about is the service fee that
is collected when they don’t. Really all you are doing is you are pricing
merchants on flat rate pricing. I mean that is really what it comes down to,
right? It’s flat rate pricing. Flat rate pricing is very different from interchange
plus pricing. It can be a lot more profitable, but it can
also be less profitable. You have to understand how this works. When you are doing interchange plus pricing
for instance, what you are doing is you are passing the cost of interchange and the bank
fees and the dues and assessments and all that through to the merchant. Then you are adding on a 50 basis points of
mark-up or whatever, so your profit is always the same. Whether it’s a $5 transaction or it’s
a $30 transaction, or it is $1,000 transaction, it doesn’t matter. Your profit as a percentage of volume is always
the same, but here is where you run into problems. When you switch over to flat rate pricing,
there is an interesting thing that happens. With flat rate pricing, there is a sweet spot. It is usually between $25 to $70 average ticket
size. So if you have a merchant that has an average
ticket size of $27, $59, $43, in that kind of sweet spot range, then usually that’s
where your costs are going to be lowest. The reason is really simple. The reason is because a lot of people are
using check cards, signature debit, and those signature debit cards have a regulated interchange
cost. That regulated interchange cost is all about
the per item fee. It’s 22 cents plus 5 basis points. So a 22 cent kind of fixed cost plus your
processor fees and whatever else you are at 30, 32 cents. So that 30 to 32 cents is really kind of meaningless
on a transaction that is even $30. That’s only like 1%. It is very low interchange cost. So if you are pricing somebody at collecting
a service fee of 3%, you probably have a good 180 basis points of mark-up or so. That’s a pretty big deal, right? You are making a lot of money. But the thing you need to understand is that
there are two edges. Whenever you have a problem, you always got
to think about the edges. The two edges are what about the really low
average ticket size merchant. If somebody has an average ticket size of
$10, well now all of a sudden that 32 cents becomes 3.2%. That’s a really big problem because if your
service fee is 3%, but the cost of servicing that transaction is 3.2%, your residuals are
negative 20 basis points. You are losing money. You have to understand that if you are doing
flat rate pricing and you are getting below that $25 average ticket range, you have to
understand that your profits get lower and lower and lower with the size of the transaction. A $5 transaction that has a 32 cent cost,
that’s 6.4% cost. So if you are collecting 4%, 3.99%, you are
still way under water with that deal. On the lower ones, you’ve got to be thinking
about do I want to use a per item fee, or do I want to make sure I’m matching out
the percentage and going to get to 3.99%, getting it as high as I can and thinking through
which strategy you want to use because you may want instead of doing a 3.99% kind of
flat rate service fee pricing, you may instead want to do 59 cents a transaction, or something
like that when they are really low, but you’ve got to think through it. You’ve got to look at these average ticket
and really draw it out and see what it’s going to be. Okay. That’s first of all. The other edge is actually the larger one
too. One thing that will surprise you is if you
have a merchant that does say an average of $150 transaction or so, many times a business
like that, maybe it is a jewelry store or something along those lines. They are taking a ton of reward cards, corporate
reward cards. Some of you are doing cash discounting on
B to B businesses and things like that. You are not thinking about the implications. There are a lot of cards out there. These corporate reward cards that have a 2.5%
interchange cost. If you have a 2.5% interchange cost, what’s
going to happen is you are going to have a huge cost and if you are only charging them
a 3% service fee or whatever, you are not going to make any money. You need to understand what’s the average
ticket size of the merchant and also what is the mix of cards that they are taking and
make sure that you understand if you are doing really low ticket, you want to make sure you
are doing a per item. If you are doing really high ticket, you probably
want to get your percentage up a little bit, so it covers those corporate rewards and other
rewards cards that are going to have a higher cost. My name is James Shepherd. Hopefully this video will help you to maximize
your cash discounting residuals.

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