Merchant account pricing can be confusing in that there are quite a few moving parts that determine the overall cost month to month. This post is intended to explain how merchant account pricing is set up and give your business specific direction when considering alternate pricing plans.
There are three pricing models used to establish merchant account pricing.
- Interchange Plus – Transparent pricing in which you are assigned an exact markup over interchange
- ERR (Enhanced Rate Recovery) – One advertised rate with disguised downgrades
- Tiered Pricing – Multiple tiered prices depending on how credit cards are accepted
Regardless of the pricing model there are two components that make up the majority of your merchant account cost. The percentage of the sale and the per-transaction cost.
Most merchant service providers will have a preferred pricing model which is used to quote merchant account pricing. It is up to the business requesting an account to specify which pricing they prefer. The most cost effective pricing is Interchange Plus.
Specific direction when considering alternate pricing plans
Rule 1 – request interchange plus pricing. If the provider you are speaking with tells you that your business does not qualify for Interchange Plus pricing, look for another provider.
Rule 2 - Understand how your business’s transaction size and frequency affect your merchant account costs. First, determine your average sale amount. Take the total amount of sales for the previous month and divide them by the total transactions. Second determine the total number of transaction you are likely to conduct month or month.
With these two figures you can do a simple calculation to determine where you need to focus when negotiating your rates. If you have a higher average sale amount and lower transactional volume you need to negotiate a lower percentage of sale. If you have a lower average sale amount and I high transactional volume you need to negotiate a lower per transaction price.
For example - If your pricing is 1.59% and $0.25 per transaction:
- A $1.00 transaction will cost $0.27 or 26.59%
- A $100.00 transaction will cost $1.84 or 1.84%
Would you like more guidance on how to negotiate your merchant service pricing? Download our guide on questions to ask when looking for a merchant account.