HERE'S YOUR GUIDE
If you’re confident that your team is delivering the payment functionality that your customers need, pricing could be the reason your integration is under performing. Here a few things to consider when you evaluate this aspect of your integration:
Customer Pricing Structure:
The first aspect that you’ll want to evaluate is the payment structure that is offered to customers. Does your payment processor give you the flexibility to bundle pricing with other premium features, offer flat rates, deliver interchange-plus or offer “meet or beat” pricing? If not, you may want to partner with another processor that will allow you to adjust your pricing structures from a volume and feature perspective. Having this level of flexibility will give you the ability to test and implement programs that will maximize your returns.
Processor Mark Ups:
The second aspect of pricing you’ll want to keep an eye on are extraneous merchant fees like large upfront account set up costs, unexplained monthly fees, the cost for incidentals (like chargeback fees), frequent rate hikes, and any other PCI-related maintenance fees. Some processors don’t share these fees or rate increases with the software partner and if left unchecked, these costs can eat into your customers’ earnings causing them to seek out alternative options. What’s worse: depending on the structure of your partnership contract, your processor could actually be raising your customers’ rates in a manner that’s not even shareable with you.
Residuals Versus Rev-Share:
In addition to customer pricing, your team should have a firm grasp of what makes up your earnings. Residuals and revenue sharing phrases are often talked about interchangeably, but they are not the same.
Revenue sharing refers to the distribution of revenue (typically a percentage) that is generated by payment services and is split among key stakeholders or contributors. Overtime, revenue sharing percentages have normalized across the industry for the most part. Although, there are still outliers. To validate your offer, you can research what typical revenue share percentages are based on the type of partner model you’re operating (i.e. Referral, ISA/ISO, PayFac, etc.).
A residual refers to the total dollar amount that software providers can earn. Said differently, this is the size of the check that hits your bank account. Your team can increase your residual pool by ensuring that customer pricing is balanced, payment attachment rates are high and attrition is low. Only after those three key metrics are maximized does Revenue Share come into play, as it’s merely a percentage of a pie that could vary dramatically in size. For instance, it’s entirely possible that one ISV could have a Revenue Share that’s twice the percentage of another ISV, but actually make less than half of the residuals based on the margin that their program creates (see example below). It’s critical to understand that the Revenue Share percentage is simply the last piece of the equation that drives what you really care about: your residual.
Enhanced Pricing Programs:
In recent years, enhanced pricing programs such as surcharging, cash discounting, non-cash adjustments, and convenience fees have been growing popularity with merchants and ISVs alike. Adoption of these pricing programs has increased because when these programs are implemented correctly, they can offer merchants and ISVs a way to offset credit card costs by sharing processing fees with customers in a legal and compliant manner. This strategy is a “win-win” for both the ISV and their customers, as the customers are minimizing their monthly merchant processing costs while the ISV enjoys exponentially enhanced margins. These programs eliminate the natural friction between the ISV’s processing partner and their customer, which traditionally exists as the customer desires to negotiate the best cost possible and subsequently reduces the available margin to monetize. When the customer is passing their processing fees on to the end consumer, that friction is eliminated, driving higher margin into the ISV’s residuals.