Discount Rate Pricing Format basics

Merchant Account pricing is often a hot topic in merchant circles because it can represent a major cost center and be quite confusing. It is likely that you will receive discount rate quotations in different formats containing some dissimilar fees. The best way to evaluate discount rates is to examine your total percentage fee, which is the sum of all your fees divided by the value of the sale. This can be calculated on a transaction basis or in aggregate for a specific time period.

Discount fees generally contain a percentage-of-sale and fixed per-item components. An example would be 2.5% + $0.20. To calculate the total percentage fee, we must convert the $0.20 into a percentage. This can be accomplished by dividing this fee into the average ticket value (ATV) of your product(s). In this case, a $40.00 ATV would the yield a per-item percentage of $0.20 / $40.00 = 0.5%. Adding this to the percentage-of-sale component yields a total percentage of 2.50% +0.5% = 3.00%.

You may have noticed that the average value of your products is a variable, and your total percentage will increase as the ATV decreases. A $5.00 ATV in the pricing example above would yield a per-item percentage of $0.20 / $5.00 = 4%, and therefore a total percentage of 6.5%! So, the per-item component of processing fees can be very expensive for merchants selling products with low average ticket values. Merchants with low ATVs should therefore scrutinize all proposed per-item charges including authorization and gateway fees, address verification fees, settlement fees, assessments, etc.

Merchants with high ATVs should focus on the percentage-of-sale component. 2.5% of our $5.00 product equates to a fee of $0.13 per sale, while equaling $1.00 per sale on our $40.00 product. So, the percentage-of-sale component of processing fees can be very expensive for merchants selling products with high average ticket values. Because the average credit card transaction in the U.S. is approximately $70.00, we use the weightier metric of total percentage to compare offers.