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To Fee, or not to Fee, That is the Question: Let Data Guide You to Your Answer

Business Strategy
October 6, 2023
Andrew Gleiser

Recently, I was asked by PYMNTS about what questions and topics came up most frequently with Aeropay’s merchants and partners; while the nuances vary by customer segment, more often than not, customers are looking for ways to limit the impact of processing fees on their business. This is especially true in the Cannabis industry, where razor-thin margins, a result of competition, federal restrictions, and lack of interstate commerce (among numerous other reasons) have forced operators big and small to look twice at every expense that impacts their cash flow. 

Passing direct credit card fees onto customers is legal in the vast majority of the US, with only 2 states left where doing so is still fully illegal. As a result, a surcharge as a means to increase profit margins (and by proxy profit) per transaction can be a viable business decision that the vast majority of operators can (and should) consider as a tool at your disposal. However, whether or not to leverage this tool on a new or existing payment method is a decision that needs to be data-driven at its core lest you may be inadvertently limiting the profit you are trying to maintain. Here are a few things to consider before you ask the next customer who walks in the door to cover the bill:

Do customers spend more with me when they pay with X?

This is the first analysis you should look at as it is the most direct answer to the question: “Does this make me more money?”. For example, in the Cannabis industry, cashless payments via bank payments (ACH) such as those offered by Aeropay increase cart sizes on average 25% versus cash; while credit card interchange rails are currently illegal in Cannabis, uplift via compliant credit offerings such as Kindtap can be as high as 50%. So what’s the uplift math then to see your uplift?

Does Charging a Fee Lower Payment Method X Adoption?

Sure, people may pay more with cashless options, but the next question I am usually asked is would a small fee really discourage usage? To rephrase this, the question actually being asked is whether or not the ROI calculated above is “incremental”, that is, would that person still pay with X even if I charged them for the convenience? To figure that out is considerably more complicated than the simple comparing and contrasting done above, but can still be worth looking at long term, especially as payment stacks continue to get more and more complex. In my opinion, there is one way you can determine this accurately, and a few other ways you can guestimate the impact: 

• A/B Test Fees With an E-commerce Experience: If you are an operator who owns your own e-commerce experience, the most surefire way to test the incrementality of charging a fee versus not would be to run a randomized A/B experiment to see the amount of payment method adoption when a fee is listed in the total versus absent. 

• Pre/Post Analysis: When launching your new payment method, launch without a fee, then after a pre-determined period of time, start charging a fee (or vice versa). If there is more usage without the fee, there is likely an incremental impact.

• Lift in Profit: Did profit margins (or gross profit) come in above expectations? If so, it’s quite possibly the result of your new payment method.

Does Charging a Fee Impact My Customer Loyalty and Experience? 

• They will go next door: Morning Consult survey commissioned by American Express study in 2021 showed 78% of consumers agree that a surcharge makes them feel like a business does not appreciate their purchase. Even more concerning, is that the same study found that 77% of these consumers, if given the option, would shop at a location that does not charge them for which payment method they choose. While incrementality testing and ROI analysis is a critical piece of the decision-making process that all businesses should conduct, there is the intangible impact to consider that is less measurable, but just as, if not more important. It is likely this reason, more than any other, that the vast majority of well established retail brands do not charge fees for processing as they have determined that doing so would hurt their bottom line. 

• They will abandon their cart: Extra costs at checkout is the number 1 reason that customers abandon their carts. If you think about it, how many times have you gone to buy something from a merchant, only to switch back to good ole’ Amazon Prime to avoid the shipping fees. The internet allows for unprecedented comparison shopping across all industries; when taking all of the above research into account it goes without saying that examining your current local competitive landscape should be a critical piece of the decision making process.
decision-making

In conclusion, deciding whether to implement fees for payment methods is critical and can significantly impact your business's profitability and customer experience. To arrive at the right answer, let data be your guiding light.

• Evaluate the Impact on Average Order Value (AOV): Determine whether customers tend to spend more when using a particular payment method. Analyze the uplift in AOV, calculate net AOV lift, and assess the net profit and ROI associated with each method.

• Consider Adoption and Incrementality: Delve into whether charging a fee for a payment method would discourage its usage. Run A/B tests, conduct pre/post analyses, and monitor profit margins to gauge the incremental impact of fees.

• Assess Customer Loyalty and Experience: Understand the intangible effects of fees on customer loyalty and experience. Studies show that surcharges can make customers feel unappreciated and drive them to competitors. Be mindful of potential cart abandonment due to extra costs at checkout.

• Competitive Landscape Analysis: Examine the competitive landscape in your local market. Determine whether other businesses charge fees for payment methods and how this affects customer behavior.

While these considerations are essential, remember that each business is unique, and the decision should align with your specific circumstances. Consider factors like the true cost of cash and potential theft risks for cash-heavy businesses. Begin with a thorough analysis, gather relevant data, and adapt your strategy accordingly to maximize profitability and customer satisfaction.

Author

Andrew Gleiser

CRO
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