There is actually an easy way to choose. Determine the break even point – flat rate vs. traditional merchant account processing to decide. There are a few variables, but they can all be taken into consideration before you make a move. You can model this out to decide what is right for your business.
We are proponents of the lowest overall cost of processing, and there are a lot of factors that go into this. In fact, we tend to look at alternative payment options that can benefit you and the customer alike. Things like e-Checks and Text2Pay that can address the variables and minimize cost, while being fast and secure payment methods.
Flat Rate Merchant Account
Typically, if you have a lower annual sales volume, you may benefit from a flat rate merchant account. You avoid a monthly fee but you will pay a higher percentage rate on all transactions, regardless of the amount. Under $10 to over $1,000 it will all be the same.
Start up and seasonal businesses often look into this, or other non-traditional processing methods to mitigate cost. All business owners want to keep the overhead as low as possible, and eliminating monthly fees when you are not actively selling products or services can be attractive.
Yet, the important thing to consider is the overall cost.
Not each transaction, or monthly expense. If you look at your entire year – now is a good time to do that – you should be able to see a total expense. Then, keeping in mind growth factors and marketing or advertising plans for the coming year, trends year to date, you can decide.
If you need to learn more, reach out to one of our team; you can also talk to your accounting or financial professional advisor for guidance. (You just may want to give them a short break after tax season.)
Traditional Merchant Account
On the other hand, if you have a fluctuating or growing sales volume, and you know you are projecting higher volume, then look further. A traditional, variable rate processing – which is based on the type of card the customer uses – is less expensive.
Your overall cost is what is important and should be the focus, rather than the rate.
Yes, when a customer uses a debit card, processed like credit the cost is typically lower to you as the business owner. But, those airline and rewards cards carry a higher percentage rate to the merchant. Overall, it is a very small variable, but it is there. You are likely not able to predict this unless you have a fixed number of customers and they repeat their purchases on a recurring billing model. You might then see the trends and be able to predict the (exact) costs.
Know Your Numbers
While we know it is important to understand the break even point, you can’t even start to do this until you look to the facts. Review your prior year revenues, focus on what sales trends are growing – and which ones are declining – if any. Calculate your overall actual cost of all payment processing methods.
If you have a sales team, talk with them about the importance of focusing on those methods that are best for both the customer and the business. You want them to close the deal, but they may need to understand the options that are available to the customer. Budget billing, e-Checks, text to pay as well as the process they use to pay (in person, on the phone, tap to pay etc.) can all impact the overall expense.
In many cases, these differences are negligible and not worth addressing with the customer. Make it as easy as possible for them, and focus instead on a seamless experience.
Guidelines and Calculators
Do you know if you have hit your break even point? If the answer is no, or not sure, then it is time to find out. Book a call today to learn more and make the decision to move forward with the best option.
Want more information to be able to take this to the next level? American Express offers this support for small businesses to determine their break even point on cost of goods, overhead and profit margin. You will need to have access to, or estimates for, your product sales, margin and overhead figures. Then, plug it into one of the simple formulas shared here to find your targets. While the AmEx article may not address the overall topic covered here, our team can help focus on the merchant services aspect of this analysis.