Hi, my name is James Shepherd.
In these next few videos, I’m going to be talking to you about pricing structures because
pricing structures really changed a lot in our industry.
Today, we are going to talk about tier pricing versus interchange plus.
This is some really specific merchant services stuff.
I’ve talked about it a lot in the past, but I kind of realized that it’s been a
little while.
It’s been actually years since I really did kind of a deep dive into this stuff.
There has just been a ton of change.
I want to talk about the two most common pricing structures in our industry right now, I guess.
There may be some other ones that have kind of taken the lead, but we’ll talk about
basically four different pricing structures.
We are going to talk about tier pricing and interchange plus today.
Tomorrow, we are going to talk about flat rate pricing and the next day we are going
to talk about subscription rate pricing.
I just want to talk about these different ones.
Today I want to talk about tier pricing and interchange plus, the two most common.
So when I got into the business about 10 years ago, I would say 85%, at least 80% of the
small businesses I walked into were on tier pricing.
Now it seems like that has basically flipped and it seems like it’s about 70% interchange
plus pricing, taking out the flat rate and the subscription rate.
It is really interesting this change has happened.
I just wanted to talk about what to do with tier pricing, what to do with interchange
plus.
The first thing I want to kind of zoom out and talk about a bit is why do industries
become commoditized, which means you know like electricity or things like that where
it is literally like there is no big price savings.
There is not a lot of profitability.
It is just a commodity.
It’s not good when you are in an industry like that.
Credit card processing is drifting towards that, just like every other industry is.
Every other industry is at various stages of drifting towards that.
The reason electricity is a commodity today is very simply because it’s been around
a long time.
It’s not like it’s any magical thing.
If you looked at laptop computers right now, Apple has done a pretty good job with their
MacBook Pro of kind of going way above the competition with price and things like that
with their branding, but I mean really if you get outside of Apple and Mac world, laptop
computers are a commodity today.
When 20 years ago, they were amazing.
They were this incredible thing you really needed to find the perfect laptop.
Now when we look for a laptop, what are we looking for?
Price.
We kind of know what we want.
Obviously, it’s like we have a high performance.
There are some different variables, but I mean really it’s very quickly becoming a
commodity.
It still has another probably 20 years to go before it is a complete commodity of basically
like you go buy a laptop; you buy a laptop and they are all really fast, like way faster
than you possibly need and they all cost you know $270 you know whatever.
Things drift that way.
Why?
The reason is really simple.
It’s because competitors view opportunities.
When a competitor sees an opportunity and it’s like, “Hey, we could take less profit
and we could just grab a ton of business.
We can get more volume at a lower price point.”
So what happened in our industry is everybody was on tier pricing.
Well, tier pricing is a little bit you know hazy.
It’s hard to understand what you are really paying.
What are your costs?
What is your mark-up?
Tier pricing kind of hides all that.
So you have your qualified, mid-qualified, and non-qualified rate and you don’t really
know exactly what interchange is going into those buckets.
Depending on the processor, they are going to have different categories going into it.
So you know, really you can’t see anything like that.
That’s why people like me six and seven years ago were making videos and talking about
“Hey, go interchange plus.
Do interchange plus.
Do interchange plus.”
Why?
Because there was a big opportunity because all these people were on tier pricing so you
could go out there and do an interchange plus comparison, save them a ton of money, show
additional transparency, and you could steal the business.
Right?
That was an opportunity.
The thing about business is that it changes over time.
The market changes and so a good idea five, six, or seven years ago isn’t necessarily
a good idea today.
I think selling cash discounting a year and a half ago was maybe not the best idea because
there wasn’t a good company really doing it.
It was kind of all over the place.
It was kind of a mess.
Now I feel like this is the big opportunity of the year.
Stuff changes.
So what happened is people came in and like, “Hey, we can save you money.
Let’s pull these people over.”
What happened was there was this huge transition over the last like five or six years of all
these people that were on tier pricing that are like, “Boom,” now they are on interchange
plus.
What is interchange plus?
Interchange plus is very transparent.
It says, “Look, you are not going to pay as much mark-up, but the trade off is that
if your costs go up, then your costs go up.
We don’t absorb those costs.”
Whereas with tier pricing, it’s like a little bit more risky for the processor because the
processor looks at it and says, “Well, we are always going to charge you this percentage
for these transactions, and we don’t know exactly what that mix is going to be, so our
costs may go way up.
We are going to have a little bit more mark-up in there.”
Just like flat rate pricing, which we will talk about tomorrow.
You know you have all these different risk scenarios in there.
What are my thoughts on this?
Which one of these two plans is better?
Well, I’d to price some of you when I say I think it is probably time for many of you
to go back to doing some tier pricing.
Now why on earth would I say that it is time to go back to tier pricing.
Well, because tier pricing is actually a simpler pitch than interchange plus.
What happened over the last five years is everybody went from tier pricing to interchange
plus and they flipped everybody over.
Now you need something where you can throw people off a little bit.
Because if they are already on interchange plus and you go in there and you are like,
“Hey, you are currently paying 60 basis points of mark-up.
I’ll charge you 50, so you are going to save .1%.”
They are like, “Okay, what is that about?”
Tier pricing, now you can use the opportunity to go in and say, “Hey, you are on this
interchange plus pricing plan.
One thing you probably noticed is how your credit card processing rates really go up
and down a lot because when you are on interchange plus pricing, sometimes your interchange categories
are different and everything like that.
One thing we like to do is we use three tier pricing.
With three tier pricing, you always pay the same thing for all of your check cards.
You pay the same thing for all of your credit cards that are coming in as standard credit
cards swiped through the terminal, and then you pay a third rate which is your non-qualified
rate and you pay that one for all of the stuff that is coming in from reward cards or whatever.
Again, that would be like four tier pricing.
You have to talk to your processor about the specifics of what you can offer and how to
present it, but the idea here is think about a pitch where you can go in and take somebody
that is on interchange plus pricing.
I don’t see hardly anybody flipping people from interchange plus back over to tier pricing.
It’s actually not a bad idea because you know price is still a concern, but if you
realize like, “Ah, I really can’t save them a ton of money.”
Then what you can do is you can say, “Hey, here is this whole different thing called
tier pricing and it is going to be a lot better because of the more stability in the pricing.
Yea, it is still going to vary a little bit.
You don’t want to go to Square because like with them, yea you are always paying the same
thing, but it is always a really high rate, whereas with us, it’s lower and it’s going
to be very stable.
It’s not going to be like 50 or 100 different rates like your interchange plus pricing statement.
It’s going to be very simple with only three rates.
So kind of talk to people about how like business owners that are on interchange plus pricing
right now, they’ve been watching what is happening.
They see Square with a flat rate and they have interchange plus.
They don’t want to go to Square because they realize it is probably too expensive
and things like that.
So offer them that middle ground of tier pricing and I think you’ll be surprised.
My opinion on tier pricing versus interchange plus is really simple.
If somebody is on tier pricing, I’d want to flip them to interchange plus.
If somebody is on interchange plus pricing and they are a smaller merchant; they are
doing less than say $30,000 a month in volume, $40,000 a month, somewhere less that, I’d
want to flip them to tier pricing.
Why?
Because it is a different pitch and it gives me something else to talk about that is unique,
rather than just price, price, price.
Don’t be afraid to use tier pricing.
Talk to your processor.
Most processors have tier pricing.
Don’t be afraid of it.
I like tier pricing.
It think it is fine.
It’s just that back a long time ago everybody was on tier pricing and we needed to change
the conversation, so we did interchange plus.
Well, now everybody is on interchange plus pricing.
Let’s change the conversation and get them onto tier, right?
Don’t discount that completely.
Look at tier pricing and look at that as an option.
Then in the next video, we are going to talk about flat rate pricing.