|
flevyblog
The Flevy Blog covers Business Strategies, Business Theories, & Business Stories.
|
Editor's Note: Take a look at our featured best practice, E-Commerce Value Chain (33-slide PowerPoint presentation). An Industry Value Chain is a visual representation of the series of steps an organization in a specific industry takes to deliver a product or service to the market. It captures the main business functions and processes that are involved in delivering the end product or service, illustrating how [read more]
* * * *
In 2020, e-commerce sales worldwide are expected to reach $4.921 trillion in 2021, whereas, in the United States, 80% of internet users have shopped online at least once. When you combine both of those numbers, it becomes clear that making the process of online shopping easier should be the top priority for businesses selling their products on the internet.
It can be done by ensuring that the customer service is of the highest quality, that the prices are competitive, or that clients can choose from among multiple payment options. If you want to allow credit card payments, you’ll have to do business with payment processing companies.
Unfortunately, it means that every time your customers buy your products, a payment processing company will receive a share of the profit. Although it is usually only several percent, if you are selling thousands of products each month, then the sum will quickly add up. The business owners unhappy with this state of affairs often try to find a company offering free payment processing. Is it possible, or is it only a myth?
If your online business is hurting because of the high payment processing fees, you might be considering whether it wouldn’t be better to limit the payment choices for your customers. Even though you could save quite a lot of money on the fees, it wouldn’t be worth it, as you would lose a substantial number of clients.
Even if you are offering excellent services, and your customers know that they can trust you, if they can’t pay you, they’ll simply switch to another online store. Doing so would be very simple, as quick googling will provide them with dozens of companies offering similar services to yours.
The short answer to this question is: yes, it is, but it works a little differently than you probably expect. We must keep in mind that payment processing companies aren’t charities, and as such, they still receive the payment fees. However, regulations specify that some companies can shift the burden of the fees onto the client. How does it work?
Let’s say that you are selling product X, which costs $300, and a credit card merchant fee is 4%. If your customers pay using cash, you will receive 100%, so $300, whereas if they do so using a credit card, you would receive only $288. Now, with the free payment processing option, clients that will buy the same product using their credit card will have to pay $300 + a convenience fee of $12, so $312. As you can see, the merchant fee doesn’t disappear, it’s just that your business won’t lose some of the profits to the payment processing company.
Well, then why wouldn’t every business owner use this type of service? Well, that’s simple – they can’t. We recommend checking out local laws about the convenience fees, but let us warn you that typically, companies that belong to a rather limited number of sectors can implement the free payment processing, which certainly isn’t free for the customers.
For this practice to be legal, the clients have to be informed about the convenience fee before they agree to pay for the products and services. Payment processing companies have different requirements for businesses that are interested in free payment processing. Your business might have to charge a flat rate instead of a fraction of the sale, or it could only be viable for this type of offer if it belongs to a particular industry.
On the other hand, if you are a customer and want to avoid having to pay the convenience fee, you could choose an alternative method of payment, such as cash. It might not always be possible, but if you are, for example, going to your doctor, you should definitely ask whether there’s a cash discount.
If you are running a business, then you probably know how difficult it is to keep your profit margin at a decent level while offering competitive prices to your customers. You might have heard that free payment processing could be the solution to your problems. Although it is true that such a service does exist, only some types of businesses are viable to avoid paying the merchant fees. Depending on a payment processing company, there might also be additional requirements.
Remember that the fees don’t disappear – they are paid by the clients instead. Unfortunately, it means that the higher cost could potentially discourage your customers from choosing your company.
You can download in-depth presentations on E-commerce and 100s of management topics from the FlevyPro Library. FlevyPro is trusted and utilized by 1000s of management consultants and corporate executives.
For even more best practices available on Flevy, have a look at our top 100 lists:
These best practices are of the same as those leveraged by top-tier management consulting firms, like McKinsey, BCG, Bain, and Accenture. Improve the growth and efficiency of your organization by utilizing these best practice frameworks, templates, and tools. Most were developed by seasoned executives and consultants with over 20+ years of experience.
