Embedded payments pricing essentials

Embedded Payments Pricing Guide for Vertical SaaS Platforms (Part 2 of 6)

This post is part of a series on the optimal product, positioning, and pricing strategy for embedded payments.

SaaS companies can easily miss out on the full revenue potential of embedded payments because the payments implementation or go-to-market strategy is a little off.

This series will highlight the different factors in building a successful payments strategy and help you determine the best path to success for your particular platform.

Two approaches to embedded payments pricing

One of the most common questions we hear about pricing is “How much should SaaS platforms mark up embedded payments?”

That question will be answered (we promise!) but the mark-up is only half of the pricing equation. In order to understand the range of prices you could charge, we recommend looking at pricing from both the top-down and bottom-up perspectives.

The top-down price is going to be the advertised price. This means examining your competitors, the overall price-sensitivity of your customers, and the value of your product.

When we build the bottom-up price, we’ll look at your costs and desired margin to determine the minimum price you can charge and earn your desired margin. This is an important data point for your business, but it probably won’t be the price you advertise or the highest price you can ask!

How should vertical SaaS companies balance competitive pricing with maintaining healthy margins?

Complete both the top-down and bottom-up estimates outlined in this guide! The bottom-up estimate is the lowest price you can charge and earn your desired margin. The top-down estimate is the highest price your customers will be willing to pay. The result will be a range, where you can advertise a price at the top of the range but offer prices lower in the range to key customers.

Key terms and concepts

In card processing, you’ll see a lot of price tags that include both a percentage and a fixed dollars-and-cents amount. The percentage is a “volume fee”, and the fixed amount is a “per-item” fee. Here’s an example:

2.9% + $0.30

The first number (2.9% in this example) is the Volume fee

Calculated as a percentage of the payment amount
Volume fees scale with the payment size
Merchants with moderate to large average ticket size will be more concerned with volume fees

The second number ($0.30 in this example) is the Per-item fee

Flat fee applied regardless of payment size
Per-item fees ensure that costs are covered even on very small transactions
Merchants with a very small average ticket will be more concerned with per-item fees

For larger payments, the volume fee will have more impact. For smaller payments, the per-item fee will have more impact. This table shows the impact of a $0.30 per-item fee at various payment sizes:

Average ticket: This is another term for the average size of a payment. This can be determined for a merchant or an entire platform by dividing the total processing volume by the number of transactions to get the average.

For example, if a merchant processes 500 transactions per month and the total volume of those transactions is $100,000, the average ticket for that merchant is $200.

Pro tip: If you know the average ticket size, you can use this formula to estimate the total fee as a percentage:

Total fee % = Volume fee + (Per-item fee / average ticket)

e.g. For a $150 average ticket, using the same fees as above, total fee % = 2.9% + ($0.30 / $300) = 3.1%

Basis point: 1/100th of a percentage point, or 0.01%. 100 basis points is equal to 1%. 50 basis points is equal to 0.50%. Basis points is abbreviated as “bps”. In conversation, it sounds like “bips”. Payment provider fees and SaaS company payment processing profit margin are often measured in basis points.

Interchange: Fees set by the card networks and paid to issuing banks. Turn to page 30 for a more detailed explanation of interchange.

Dues, fees, and assessments (DFA): Fees paid to the card networks.

Passthrough rate: The sum of Interchange and DFA. These fees are a mix of volume fees and per-item fees. Total passthrough fees are divided by the payment volume to get the passthrough rate as a percentage. If your average ticket size is less than $50-$100, you’ll want to think about passthrough costs in terms of both a percentage and per-item fee, because the per-item fee is most impactful on smaller ticket sizes.

Card processing pricing structures

Interchange plus

Also known as IC+, Cost Plus, Passthrough-Plus

Offered as a buy-rate on top of processing fees, e.g. IC+ 40 bps + $0.30
Unpredictable for merchants, predictable margins for the platform
Interchange optimization savings benefit the merchant
Requires less analysis to determine the buy rate, but more analysis for regular billing
More complex reporting and reconciliation
Requires more detailed reporting from payments provider
Exposes platform profit and gives merchants incentive and information to further negotiate price
Hard to net fees from merchants, thereby increasing collection risk, expense, etc

Blended

Also known as Flat

Card processing fees and markup are all rolled into a single price which usually includes a percentage and per item fee, e.g. 2.9% + $0.30
It’s also possible to have just a percentage, e.g. 3.2%
Clear and predictable for merchants, less predictable for the platform; month-to-month variability can be mitigated with ongoing monitoring and adjustment
Interchange optimization savings benefit the platform
Requires more analysis to determine the price point, but less analysis for regular billing
Easy reporting and reconciliation
Easy to net fees on a daily basis from the merchants, which can reduce collection risk, expense, etc.

Bundled Pricing

Bundled pricing is similar to flat pricing, but the SaaS fee is also included. Instead of charging $99 per user per month plus 3% on payments, the platform would charge 5% on payments and the core SaaS product would be included.

This strategy has all the benefits of flat pricing:

Simple for merchants; easy reporting and reconciliation
Interchange optimization savings benefit the platform
Fees can be netted daily from merchant deposits, which reduces collection risk

Bundled pricing can also have advantages over flat pricing:

Higher gross margin on payments cushions against month-to-month variation in interchange passthrough
Embedded payments is viewed as part of the platform
Easier for sales teams to position the holistic value of the platform
Less pricing pressure from merchants because its harder to find a direct comparison with other providers

What pricing model should vertical SaaS platforms use?

Interchange passthrough costs will vary between transactions – passing the exact processing fees on to customers will add complexity, which isn’t in the best interest of your customers. A clear volume fee and per-item fee will be consistent across all transactions and make it easier for your customers to understand their payment activity and processing fees.

IC+ pricing is best for very large merchants (like regional and national retailers). These merchants usually contract directly with merchant acquirers and have entire departments dedicated to optimizing their payment processing fees.

For most SaaS platforms, flat or bundled pricing will provide the best merchant experience.

Pricing structure FAQs

1. Should we pass through the exact processing fees to merchants?

When SaaS companies ask this question, it may indicate that they aren’t totally bought in on the value of embedded payments.

When implemented well, embedded payments add real value for merchants. In-context payment reports, embedded deposit reporting with transaction and fee level detail, one-stop support, and easy reconciliation all help merchants save time so they can focus on other areas of their business. Features like Apple Pay and card account updater services add further value by reducing friction in the payment flow.

If there are concerns about whether the embedded payments product is “good enough” to warrant premium pricing, there are two places to look.

Does the embedded payments provider enable a reliable, fully embedded payments experience with accurate data, in-context reporting, and easy reconciliation?

If not, the solution isn’t to sell payments at cost. The solution is to partner with a payments provider that helps you deliver the payments experience your merchants deserve

Is the SaaS product essential to merchants in terms of growing revenue and saving time?

If the core SaaS product lacks critical capabilities, has usability issues, or otherwise isn’t saving time and helping merchants win, adding embedded payments won’t compensate for other product shortcomings. And pricing payments at cost won’t change that.

Build a comprehensive product that your users rely on every day. Then add embedded payments. When you do that, there’s no reason to price payments at cost.

2. Should we offer different pricing tiers?

In many cases, it’s not necessary. Here are two situations where you may want to offer different pricing tiers:

If you have distinct segments – e.g. single-location businesses processing $200k-$500k/yr vs multi-location businesses processing > $1M/yr, you may want to offer slightly lower processing fees to the businesses with higher processing volume.

If you have multiple tiers in your SaaS product, e.g. single user, team, and enterprise, you may want to reward higher-tier customers with slightly lower payment processing rates.

3. Should we pass through certain fees (e.g., return fees, chargeback fees) directly to merchants or build them into our overall pricing?

The goal should be to simplify pricing as much as possible, without compromising revenue. Historically, payment providers made money by nickel-and-diming merchants with auth fees, PCI compliance fees, statement fees, etc. This creates an opportunity for modern software companies to differentiate their payment offering by using a simple, predictable pricing model.

The degree to which a platform can simplify without compromising revenue will vary depending on the vertical. For example, a platform in an extremely low-risk vertical might want to build chargeback fees into their overall pricing. This allows the platform to present the simplest possible pricing. The small amount of revenue that would be generated from chargeback fees isn’t worth the friction created by presenting and explaining the fees.

In industries where merchants can reduce their chargeback rates by offering clear refund policies, real-time order status, and excellent customer service, it makes more sense to pass these fees on to the merchant as an incentive to keep chargeback rates low.

Next post: Value-based pricing