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Tier Pricing and Interchange Plus Pricing – Merchant Services Pricing

My content hasn’t addressed pricing structures in a few years. There’s been a ton of change! Take a deep dive with me as I discuss four different pricing structures. In this episode let’s rethink tier pricing and interchange plus. Then the next couple episodes will be about flat rate pricing and subscription rate pricing. […]

James Shepherd

Apr 10, 2018

My content hasn’t addressed pricing structures in a few years. There’s been a ton of change! Take a deep dive with me as I discuss four different pricing structures. In this episode let’s rethink tier pricing and interchange plus. Then the next couple episodes will be about flat rate pricing and subscription rate pricing. This is information very specific to the merchant services industry.

This episode is merely an introduction. For more in-depth instruction go to instantquotetool.com. If you are not signed up for the 30-day free trial, you should be. It’s $29 a month after that. It’s a steal. You get our quote tool, but you also get great training content. Click on the training link and find the basic video for How to Read a Merchant Statement. That will take you through all the different cost structures and explain each in detail. You will actually see how those look like on a statement.

There is a natural process of becoming commoditized which takes place in industries. This means a product or service becomes widely available. When this happens, there’s no longer a big price savings or profitability. Such is the case with every industry. Consider electricity which once was magical and unknown. Credit card processing is also drifting towards becoming a commodity. Twenty years ago, a laptop was an amazing, new, hard-to-obtain product. Now it is quickly becoming a commodity. The simple reason for this process is that competitors view opportunities. The mindset is, “We could take less profit and grab a ton of business. We can get more volume at a lower price point.”

About ten years ago I joined this industry. At that time about 80% to 85% of small businesses were on tier pricing. Thus, people like me were seizing the opportunity this presented. I encouraged sales people to do an interchange plus comparison, save merchants tons of money, show additional transparency, and steal the business! However, business markets change over time. A year and half ago selling cash discounting was, in my opinion, not a good idea. There wasn’t a good company doing it. It was unstable and a mess. Now, though, I feel that cash discounting is the big opportunity of the year. A good idea five, six, or seven years ago isn’t necessarily a good idea today. There was a huge transition from tier pricing to interchange plus during those past years.

Tier pricing is difficult to understand. It hides the actual costs and mark-up. There is qualified, mid-qualified, and non-qualified rate. To know what interchange is going into each of those buckets is sometimes hazy. Each processor has varying categories. Interchange plus, on the other hand, is very transparent. There is not as much mark-up. But the trade-off is that if the costs go up, they are not absorbed. With tier pricing the processor mindset is, “Well, we are always going to charge you this percentage for these transactions. 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.” There are various risk scenarios in there.

My thoughts concerning which of these two plans is better may be surprising to some. I think the time has come for many of you to return to some tier pricing. Tier pricing is a simpler pitch than interchange plus. Sales reps can say, “Hey, you are currently paying sixty basis points of mark-up. I’ll charge you fifty, so you are going to save .1%. You are on this interchange plus pricing plan. Your processing rates fluctuate on this price structure. So, we like to use three tier pricing. The rates are always the same for all check cards and for credit cards coming in as standard credit cards swiped through the terminal. Then you pay a third rate, non-qualified rate, for everything coming in from reward cards.” Talk to your processor about the specifics of what you can offer and how to present it. Although a ton of savings can’t be offered, the pitch is, “Here is a whole different method called tier pricing. There is more stability in the pricing, even though it will vary slightly. Square does offer a flat rate, but theirs is a high rate. Ours is lower and very stable. There won’t be fifty or a hundred different rates like the interchange plus pricing statement. There are only three rates in tier pricing.” Business owners on interchange plus have probably been watching Square. Point out that Square is more expensive. Offer tier pricing as the middle ground.

Also, this is an opportunity to throw people off a little bit. If someone is on tier pricing, I’d want to flip them to interchange plus. And if somebody is on interchange plus pricing and doing less than $40,000 a month volume, I’d want to flip them to tier pricing. This gives the sales person something unique to discuss with merchants rather than just price, price, price. Don’t be afraid of tier pricing. Talk to your processor; most have tier pricing. Be sure you offer it as an option.

Don’t miss the next episodes about flat rate pricing and subscription rate pricing. To rethink tier pricing versus interchange plus is timely after years of changes in our industry. Offer your clients the best options and close the deals!