It looks like you’ll make a big profit on this one…
Your customer is about to make a huge order.
You’re about to close the deal. But when you start to discuss payment, things go sour.
The sale has been cancelled and you’ve left thousands of dollars on the table.
What went wrong?
As a merchant in the US, you have the right to charge your customers more if they pay by credit card.
The reason being that if a customer pays by credit card, the processing companies normally charge a fee of 2-3% for processing this transaction.
In the example above, you decided to make your customer pay the processing fee…
…And your customer was not happy about that. He felt like you were squeezing him for every penny. The deal quickly went south.
Outraged, the customer walked away from the deal.
As a business owner, you might not think this is fair. If you don’t make your customers pay the fee, you make less on every sale. And it’s the customers’ choice to pay by credit card, so they should foot the bill, right?
Nope. From my experience, you should never make a customer pay the fee.
You’ll annoy your customers
Making your customers foot the bill for that extra 2-3% fee is a huge mistake. Why? They’ll think you see them as a walking dollar sign.
You really don’t want that.
In some cases — especially with expensive purchases — your customers might even walk away. They’ll feel ripped off, and will go to one of your competitors (who don’t charge extra fees).
Even if they still go ahead with the purchase, it’ll more than likely leave a sour taste in their mouth. They’ll be much less likely to come back to you again.
You can kiss that great review goodbye, too.
Your product/service isn’t that different to your competitors’. Your best hope of standing out is providing great customer service. Don’t lose your advantage by pissing off your customers.
Which brings me onto my next point (happy referrals are everything)…
A happy customer is better than the tiny savings
If you don’t have a huge marketing budget, a lot of your business has to come from word of mouth.
And that’s fine. As long as your customers are happy, they’ll recommend you to their friends & colleagues.
But making your customers pay that little bit extra when they use a credit card will quickly put a stop to those recommendations.
Consider the following scenario: A customer spends around $200 every time they visit your store, and they visit ten times over their ‘lifetime’.
So every customer is worth $2,000 in revenue to you.
Let’s also assume that for every 3 customers you get coming into your store, you get one word of mouth referral. So 3 customers are worth $8,000. (Revenue from the first 3 customers + the referred customer.)
And if we assume that all customers pay by credit card, and that the processing fee for every transaction is 2.3%, you’d have to pay $184 of that $8,000 in processing fees. ($8,000 x 0.023 = $184.00.)
So if you make those 4 customers pay the extra processing fees, you’ll save $184 right off the bat. But you could still lose out in the long-term…
Making your customers pay the extra fees will leave a sour taste in their mouth, so they’ll be less likely to recommend you to their friends.
Let’s imagine that making them pay the fees would knock your referral rate down to 1 in 6.
Now, 3 customers are only worth $7,000. (You only get ‘half’ a referral from three customers.)
So even though you’ve saved $184 up-front by making those three customers foot the bill, you’ve lost $1,000 in revenue. You’ve lost out by $816.
Happy customers are your greatest weapon. It isn’t wise to discourage them from spreading the (good) word.
Does that 2 or 3% really matter?
2-3% off of every sale isn’t a lot of money in the grand scheme of things. You’re not Walmart — if you want to cut your expenses, there are bigger fish to fry than processing fees…
Here’s how insignificant the fees really are:
Let’s assume that ⅓ of your customers pay with credit card, and that you clear $300k in sales per annum. Not an unreasonable assumption for a successful, family-run business.
Let’s also assume that the average processing fee for every transaction is 2.3%. ⅓ of $300k is $100k, and 0.024 x $100k = $2,400 per annum in processing fees. That’s roughly $48 dollars per week…
…For $48 dollars per week, you get to accommodate the huge number of Americans who would rather pay by credit card.
Just imagine how many sales you’d lose if you didn’t accept credit card. The $48 per week is easily worth it.
And if you knew exactly what goes into processing those payments, you’d be shocked that the fees aren’t even higher.
Credit card processing fees — just like payroll, supplies and legal fees — are a cost of doing business. Spend less time trying to save that last 2%, and more time growing your business.
You’ll forget about those tiny fees in no time at all.
Still think the customer should pay?
Instead of making them pay, just raise your prices to cover the fees.
You’ll be no worse off than making your customers pay the fees directly, and you won’t run the risk of turning them off with last-minute fees.
It’s unlikely that your customers will even notice the tiny price hike — or care, for that matter.
And even if your customers do notice, they won’t have a problem.
Your customers would rather pay a little bit extra up-front than be slapped with an unexpected fee at the last minute.
But if your customers do complain about your price hike, just explain that you know how annoying last-minute fees can be for them. That’s why you’re raising your prices — so that things are more transparent for them.
They’ll forgive you.
How about you? Do you make your customers pay extra for using a credit card, or do you pay the processing fees yourself?
Leave a comment below to let me know what you think.