Become more profitable by understanding and controlling transaction costs

Become more profitable by understanding and controlling transaction costs

Published Apr 24, 2018 

Imagine your farm or business handles six hundred thousand dollars per year. The transactions vary in size from a few dollars to a few hundred dollars for the most part. Thousands and thousands of transactions. You know that your margins are tight - just a few percentage points separate you from being in the red or black. But how much attention do you pay to the impact those transaction costs have on your operation?

Transaction Costs - A stone age industry

For quite a while, businesses found themselves at the mercy of credit card companies and whatever charges they imposed to use their services. The three big Cs - cash, check, or credit cards ruled consumer transactions. But credit cards were the only one that avoided the dangers of having and handling large amounts of cash, or the fraud and other issues associated with checks. For this service and consumer convenience, businesses pay a tidy price - around 2.5-3% of the total value of each transaction.

If your business handled half a million dollars a year, and all your transactions came via credit cards, you were looking at around $15,000 or more in credit card fees. For many businesses, that is a pretty major outlay, the equivalent to a tidy profit or a much needed part-time employee. Also, if your transactions consist of mostly small dollar amounts - $25 and under - your percentage cost may be much HIGHER. This is because many companies charge a flat per transaction fee plus a percentage. So, the flat fee may be .75 cents, and then an additional 2.6%. On 10 dollars, this totals $1.00, or 10%, in credit card costs! Small transactions can be a small business killer. Many small farm businesses handle lots of small transactions, especially those dealing with produce or similar products.

So what are options to try and reign in credit card costs?

Cash Only

Interestingly, roughly half of all American small businesses still operate as “cash only” operations.

If your operation and sales setup lets you stay cash only, it has a number of benefits. No waiting for checks to clear the bank or risk of bounced and bad checks. No credit card transaction fees and additional bookkeeping from handling credit card and other types of transactions. Cash only has risks - handling large amounts of cash requires more frequent trips to the bank and if many people are handling transactions or have access to the funds, far more oversight to protect against loss and fraud. But cash only businesses have another, more pressing problem to consider as well. 

Going cash only is incredibly limiting market wise. Modern consumers are accustomed to using credit cards for most daily transactions. Many no longer carry checks and few carry any meaningful amount of cash. Studies show that around 80% of people carry $50 or less on them!

At the same time, the vast majority of people carry their credit card with them almost all the time. Cash only businesses thus face a slow demise at the hands of a consumer culture that continues to go more and more “cashless.”

Also, cash only doesn’t work with our internet based commerce age. Recent studies show that consumers may now do more than half of their shopping online, and this trend doesn’t show any signs of slowing down. A business that doesn’t adapt to these changing times can still succeed, but its ability to access larger markets or certain types of customers is going to be very limited. It is setting itself up for an uphill battle the entire way.

Alternatives to credit card companies

Over the past decade, the three Cs - cash, checks and credit cards - have finally faced a fourth C - competition! Paypal and other services have offered an alternative to them. The blockchain, cryptocurrencies, and other new technologies promise further changes to how people pay for goods and services.

While alternatives like PayPal exist, and are widely adopted by consumers, they don't always represent an opportunity for savings. Paypal’s fee is 2.90% plus .30 per transaction. This is the same as Stripe for basic transactions. Here is a breakdown of the major players handling transactions, along with one small startup that has been growing in popularity.

Type of payment


Total cost on 100,000 of transactions

Paypal and Stripe

2.90% +.30/transaction




Square (keyed)

3.5% + .15/transaction





Note, for the above, these are just BASIC, estimated rates and costs. There are other possible fees and charges you may encounter depending on all sorts of factors.

Also note, not all services are created equal. Stripe is solely for online payments. Dwolla, while incredibly affordable compared to any other options, is also only for online shopping AND is still only used by a small number of consumers.

Those that are better suited to farmer’s markets, roadside stands, or similar operations may also charge a fee for the credit card reader (the machine you need to swipe the cards when people pay). Rates also vary between in person credit card transactions and those done online - generally companies charge a higher fee for online transactions.

While Paypal has a BIG user base (270+ million people worldwide),

there are still many people who don’t have or use it.

What does all this mean? It pays to shop around, compare current rates and offers (rates, fees, and other costs change fairly often) and find the best solution for you and your business. Then, don’t stay married to any single solution- just like with auto or other insurances, it can save you big bucks to compare other options every so often, say every other year or so.

Pass the buck or make a buck

Another option for dealing with transaction costs is to pass the buck on to customers. Those that want to use credit cards know that they will pay an extra 3%. In some places, such an approach works. But in some areas, customers may find it a bit irritating.

A more common approach is to adjust your prices to include, but hide, the cost of credit cards. Go through and add 3-5% to your entire product line. This is a fairly common mistake I see in helping small, value added and other businesses just getting started - in determining their pricing, profitability, and the like, they neglect to catch some of these small costs that go into getting a product to market - especially a large enough, viable market, a market that uses credit cards and shops online.

Many years ago, when gas stations first started accepting credit cards, they charged customers more who used them. Some people became upset! So the stations instead started offering a discount to those who paid by cash - everyone ended up happy! In some areas, even to this day certain gas stations still give a discount to those who use cash instead of credit - I pass one every time I head to town and chuckle, since most likely people who go in to pay cash also end up purchasing way overpriced over stuff that more than offsets the small savings the station offers for cash buyers.

Framing and marketing are key if you want to pass on transaction costs. Generally, most businesses just add the costs into their prices. Consumers are used to this approach, so breaking out of it brings some risks.

If you want to avoid credit cards or just reward cash buyers, perhaps you give them $2.00 off on a $20 or more cash sale? Or a free small item with a cash purchase over $25 or $50? You can encourage slightly larger sales and avoid the fees associated with credit cards at the same time if your customers will embrace it.

Our experience

Years ago, we were an early adopter of Dwolla for our buying club. Over the past four years, it has saved us and our members close to $25,000 in transaction fees compared to if we had gone with a credit card option. It took time for people to get used to and embrace the system, similar to the slow adoption of Paypal in the 2000s. Since we had strong relationships with our members, they were willing to wade into unknown waters with us and embrace a system that is ⅙ or so the cost of credit cards, Paypal, and other payment platforms.

At the same time, we still had many, many members who wanted to use their credit cards to pay. Our ordering platform

had integration with Stripe and the ability to charge people who opted to use their credit card for payments. So, we decided to give members that option as well.

While a large number had requested it, so far, about three months in, very few use it. Why? My hunch is that they SEE the real cost of a credit card, instead of the hidden cost rolled into the product’s price (which they never think about in real life - no one stands in a store and says, “this $100 TV would only be $97 if it wasn’t for credit card costs!”). 

So, they take the time to use an alternative payment method like Dwolla. They realize that their 1% back or however many miles that their credit card promises comes with a pretty high price once it is out in the open.

Multiplying Options Makes a Mess or the Best

Also note, depending on your website, ordering system and other factors, multiplying payment options may or may not be feasible and also will increase the complexity of your book keeping and cash flow management. It will be worth your while to ask people already operating in your market and area what payment forms they accept and which are most popular to ensure that whatever you do ends up being worthwhile and worth the initial headache of getting it up and running, along with the added complexity and costs on the accounting and bookkeeping side.

What kind of payment methods do you accept for your business? Which are most popular with your customers and supporters, or which have they requested?