Embedded payments pricing models for vertical SaaS

As a vertical SaaS company launching (or re-launching) embedded payments, choosing the right pricing model for your payments product is critical. The pricing model will impact how easy or hard it is to sell payments, how many customers sign up for payments, the amount of payment volume they actually process through your platform, and the overall profitability of your payments product.  

This article will explain the three most common pricing models for embedded payments, and how to choose the right model for your product.

Interchange plus

Interchange plus pricing is where you pass the actual processing cost on to your customers, plus a buy-rate. This model is also known as IC+, cost plus, or passthrough-plus.

Interchange plus pricing will usually be described as a buy rate. For example, a buy rate of 40 bps + $0.30 means that the merchant will pay passthrough cost, plus 40 basis points, plus $0.30 per transaction.

Passthrough cost includes interchange fees determined by the networks and paid to the issuing banks, plus dues, fees and assessments (DFA) paid to the card networks. It does not include your payment provider fees, so your payment provider fees need to be considered when determining the buy-rate. If your cost is passthrough + 20 bps and you want a margin of 25 bps, you’d set your price at passthrough + 45 bps.  

Interchange plus has certain benefits:

• Predictable margin for the platform
• Easy to determine the buy rate based on desired margin

However, this model can also create several challenges for platforms:

• Billing, reporting, and reconciliation are complicated
• Merchant fees will vary based on the interchange rate
• Fee variability combined with reporting complexity makes it harder for merchants to see how much they’re paying and why, which leads to more support requests
• Billing is dependent on detailed reporting from payments provider
• Interchange optimization savings don’t benefit the platform because all savings are passed on to the merchant
• Platform profit margin is exposed, which encourages merchants to further negotiate price
• Interchange detail isn’t available at the time of transaction, so it’s difficult to net out fees prior to depositing merchant funds and collecting fees later increases collection risk and expense.

For these reasons, interchange plus is not the optimal pricing model for most vertical SaaS platforms.

Flat

Flat pricing is what most merchants are familiar with. This model is also called blended pricing because card processing fees and markup are all blended into a single price.

The flat or blended price 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%

Flat pricing has the benefits of simplicity and predictability:

• Clear, consistent pricing for merchants
• Billing, reporting, and reconciliation are straightforward
• Interchange optimization savings benefit the platform
• Easy to net fees on a daily basis from the merchants, which can reduce collection risk and expense.

Flat pricing has a few tradeoffs as well:

1. Variation in interchange rates can impact platform gross margin. This risk can be mitigated with interchange optimization, ongoing monitoring of interchange rates, and working with a payments provider with the expertise to understand and anticipate the factors that impact interchange.
2. In order to protect margin, SaaS companies need to know the expected passthrough costs before establishing price. This is a little more research and number-crunching up front, but this model tends to yield higher margins than interchange plus because the software company’s profit margin isn’t exposed to the merchant.

Flat pricing is a popular pricing model for vertical SaaS platforms and for many platforms it’s the optimal choice.

The third option takes the concept of a blended price one step farther.

Bundled pricing

Bundled pricing is similar to flat pricing, but the SaaS fee is also included. For example, instead of charging $99 per user per month plus 3% on payments, the platform might 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

Bundled pricing works well where payments is integral to the core SaaS product and it’s impossible (or very rare) to use the core SaaS product without also using the embedded payments capability.

What pricing model should vertical SaaS platforms use?

For most platforms, the optimal pricing model will be flat or bundled. If payments is essential to the core SaaS product, bundled pricing is an opportunity to simplify billing while protecting or increasing margins. If some merchants tend to use the core SaaS product without using payments, flat pricing is likely the right choice.

Interchange passthrough isn’t ideal for most vertical SaaS platforms because one of the core value props of vertical SaaS is ease of use, and interchange passthrough is the opposite of user-friendly. Costs will vary between transactions. Passing the exact processing fees on to customers adds complexity, which isn’t in the best interest of your customers.

In contrast, 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. Flat and bundled pricing both offer this clarity and, for most SaaS platforms, these pricing models will provide the best merchant experience.

Learn more

Looking for expert pricing and go-to-market strategies for embedded payments?

Get payments strategy secrets from our team of consulting alums in the free Embedded payments pricing guide for vertical SaaS platforms.

You'll find:

• 3 payments pricing models for vertical SaaS platforms
• The specific price range your customers are willing to pay for embedded payments
• Calculations to determine your payments margin
• Exactly how to create a winning merchant experience that commands premium prices
• Strategies for launching and optimizing embedded payments in your SaaS product

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