The Purchase Price is Just Half the Story

Why You Need to Also Look at the Cost Per Transaction –
and the Total Cost of Ownership

By: Biff Matthews, President, Cardware International
& Kurt Strawhecker, Founding Partner, Strategic Management Partners

The educated buyer always wins when it comes to the purchase of products and
services, the educated buyer always wins.  This is true whether you’re purchasing
for your clients - merchants – or you’re the end point user – the merchant. The key
is to understand the difference between the price of the acquisition and the total
cost of ownership.  To illustrate:

With consumables like rolls and ribbons, you can buy an inexpensive variety more
often, or spend a little more up-front, get a longer-lasting product, and reduce
acquisition costs.  The buyer, in this case, can nominally make    three purchases,
rather than five.  Thus, the cost-per-transaction is lower, which, after all, is the
whole idea. We (Cardware) changed ribbon manufacturers ten years ago. 
We now pay 10% more – and have documented a 40% greater yield. 

We have also seen instances in which the cost of shipping erodes any benefit that
could have been gleaned by price shopping. So, you could shop-around and buy
equipment that costs $500 from source A, for $490 from source B – but with
$25 in shipping. We have seen numerous instances where shipping adds as
much as 20% to product cost! 

Sometimes, buyers become intent on arbitrary goals, such as “saving $5 per device,”
and stick to it, no matter what, believing they negotiated a great deal without considering
its total cost.  The volume of devices purchased over a 12-month period may add up to
saving just $500, but the manager responsible for that purchase has invested dozens
of hours in this quest.

What is the value of time vs. savings (or perceived savings) realized?  
Answering that question is inevitably eye-opening.

For help desk services, the value is in the quality and speed of the information, and in
expertise.  There’s a processor we know whose per-call pricing is very low.  One experience
with that company’s service and you understand why.  A typical response to trouble-
shooting is  “try this and call me back.”  There is no ownership of the issue,
nor commitment to see the problem through to resolution. 

Predictably, the company that selects that processor as their help desk experiences
a greater number of calls regarding the same problem, and the time spent by the
customer is higher than it would have been had the company chosen to invest a little
more, and employ someone knowledgeable to diagnose and resolve customer problems. 

Often, help desks that (supposedly) do diagnostics are quick to suggest an equipment
swap-out.  That’s generally an equally poor and inefficient alternative. Not only does it
inconvenience the merchant, but it’s costly, and usually does not help anything. Why? 

A broad study we commissioned in 2002 showed fully 50% of the equipment returned
under those “quick fix” circumstances has absolutely nothing wrong with it –
it “passes all tests” – P-A-T.

No service company is perfect - and that includes ours.  (Cardware had a 12% PAT
rating at the time of the study.)  The core idea is:  what are you paying for, and how
is it being delivered?  What kind of statistics will your service provider share with you,
and how does that compare with other help desk alternatives?  

A $10 phone call with an experienced professional who takes ownership of your issue
and resolves it quickly is a better value than making, over hours or days, three to six
$4 calls that result in you shipping good equipment far away, for no legitimate reason.

Also, the cueing time for help desk assistance is a hidden waste of resources that
no one calculates - and everyone should.    

Our management consulting firm - Strategic Management Partners, just published
our third annual pricing benchmark study of the industry.  A large number of clients
contribute information on the fees charged by processors; we then consolidate the
data by portfolio size, so individuals can examine various merchant processing line
items and compare their costs with those of their peers. 

This year, we studied who’s paying more  - and less?  We found that  ISOs pay less
and banks pay more. 70% of the time, banks had a per-transaction cost higher than
the ISOs in the same size categories.  The reason, we believe, is ISOs are generally
privately owned – so the CEO is paying operating costs out of his own pocket. 
The typical financial institution manager has good intentions, but the costs are
not coming out of his pocket.  So, the ISOs tend to use an RFP approach and go
out for bid, while banks tend to renew their current contract with the 
processor they have.

ISOs are also more aggressive in negotiating processing agreements.  Financial
institutions, we found, tend to sign longer term processing agreements for the
sake of stability, and in doing so, further undermine their ability to get the
best processing pricing.

It is the nature of practical economics that buyers tend to purchase based on price,
often neglecting other factors.  But take a moment to think about it.  f we all purchased
solely on price, we’d be driving Yugos.  How efficient that might be is a question answered
by various blogs devoted to the topic. (Among the postings:  How to you make a Yugo
go faster?  A tow truck.  What do you call the shock absorbers inside a Yugo?  
Passengers. How can you get a Yugo to go 60 mpg?  Push it over a cliff.)  Buyers
need to differentiate between the best price and the best deal, which are by no
means the same thing.  Enter the educated buyer, who seeks the best value at
the most economical (thought not necessarily the lowest) price.   

It’s common today to focus on merchant acquisition, rather than merchant retention,
with a few companies generating most of their revenue from the churn.  As a result,
merchants are accustomed to poor service, and expectations are low.

What’s lost is the Total Value Equation of the merchant portfolio, and the service
cost vs. revenue stream.  Poor service, along with hidden expenses, have damaged
everyone in the industry, and merchants have become frustrated and resentful. 
How much so?  Many are actually considering going back to cash and checks.  
Our customer service staff hears it regularly, and not from an isolated few.  Odd as
it may seem in an era with seemingly infinite payment options, the value equation
of card acceptance for the merchant is turning upside-down.  Whether merchants
follow-through is anyone’s guess, but the drumbeat is louder than ever, and it’s
no longer regarded as a radical idea.   

From a pricing perspective, acquirers focus on their “auth” price, and their settlement
price.  And if you ask any 10 acquirers what they pay, nine will recite these two
numbers accurately.  The problem is, that while auth and settlement prices are the
primary cost drivers, it’s the total cost per transaction –the “TCPT” – that matters. 
And that’s always a different number.  Take the bottom number on the monthly
statement, divide it by total number of transactions and that’s the TPCT.  That’s also
generally twice the number of just the “auth + settlement.”  100% of the time, this
is a big surprise to clients.  But the real cost is the total cost – not the” headline” cost! 

What’s happened is . . . it’s payback time!   Processors are now doing to acquirers
what acquirers have done to merchants for years.  Processors are going to get billed
for charge-backs, statements, and management reports, not to mention monthly
minimums and who knows what else.  But no one does this simple math. 
The “purchase price” is always just half the story.

One factor fueling this problem is over-commoditization – the idea that there’s no
real value in doing anything well, because there’s no reward.  Merchants move from
one processing company to another because there’s a perceived value in doing so.
Unfortunately, many merchants are repeatedly over-sold by a succession of
salespeople promising savings and value that are never fully realized. 

For example, their offer is:  get A, B and C, and save $400 per year.  Unspoken is
that it will cost $600 in people-hours to convert, retrain and work-out the snags –
and there will always be those mysterious, undisclosed or misunderstood fees. 

Salespeople make promises, merchants agree, and that’s where it stops. 
There’s no fulfillment, because there is no sales support.  As a result, we get
little (or incorrect) information, and attempt to fill in the blanks to deliver what the
merchant needs.  What assumptions were made regarding the equipment the
merchant has?  What POS features apply?  Does the receipt header show the
correct name and address? What reports will be generated, and will they be
separated by card types?  Does the application being sold have the same features
as the application it’s replacing?   What exists between merchant expectations
created by the salesperson and the delivery on those expectations is not a gap,
but an abyss. 

What we believe should happen is the salesperson makes the sale, then refers
the merchant to a qualified sales support person.  The alternative - cleaning up
the problems after the fact -   is very costly for all involved.

Recently, retention has become a hot issue because the industry has matured
and there’s increased reluctance on the part of merchants to switch processors,
for all of the reasons mentioned.  The emphasis, we believe, should be in selling
additional added-value services to existing merchant accounts. 

This isn’t the same industry as it was even a few years ago, It has undergone a
paradigm shift in sales compensation to one based on substantiated results, i.e.
pay when the merchant activates.

From the company's standpoint, there’s a need to understand what they’re
providing (or outsourcing) plus a willingness to invest in the retention of profitable
accounts.  It is better economically to invest in business retention than to continually
cannibalize the accounts of others, resulting in no real growth.

The total cost of ownership is in the hands of the selling company.  The industry is
maturing,  and is no longer a “get rich quick” business.  The merchant can find a
better price every day from someone else.  But if you provide solid, credible service,
a yawning price difference will be needed for a merchant to consider a move,
particularly in this environment, where service is so critically lacking.

With commoditization of processing, service becomes the differentiating factor. 
Equipment has its bells and whistles – or not – every company has the same
products, and ultimately the same pricing to the merchant, yet nothing
substantive sets the selling company apart from its peers  - except service. 

Processors should earn the right to continue as the supplier, by taking an
aggressive “RFP” approach.  At the very least this will provide the ammunition to
go back to the current provider and seek clarification for any price difference. 

Biff Matthews is Founder and President of Thirteen Inc, the parent company
of CardWare international. Married with four grown children; Graduate Marshall
University, BBA Business; Personnel Manager, Goldsmith’s Dept Store, Memphis TN;
Merchant Sales Manager, Ohio National Bank, Columbus, OH.  One of 12 founding
members of the ETA, serving on its board, advisory board and various committees.

Kurt Strawhecker was a Founding Partner of Strategic Management Partners in 2002,
which specializes in the payments systems sector.  Clients include Merchant Acquirers,
Processors, Card Associations, ISO’s and Service Providers.  Strawhecker has also served
in several senior management positions at First Data Corporation.  Strawhecker is a former
member of the Board of Directors of the Electronics Transaction Association.

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