This is post three of a multi-post series with Ershad Jamil, former Chief Growth Officer at ServiceTitan. Ershad shares his experience in launching embedded payments for ServiceTitan to guide similar Vertical SaaS companies.
One of the most important considerations of launching embedded payments for SaaS is determining how you price the product. Pricing embedded payments means accounting for all costs associated with the partner you choose and the team to sell, onboard, and support embedded payments. The key question to answer is — “how can I maximize embedded payments value with price and get the most customer adoption?”
The first thing is to understand how the economics work across all parties involved with embedded payments. The three main parties involved with the economics are the credit card issuers (Visa, Mastercard, Discover, Amex), the partner(s) and your Vertical SaaS business. It’s basically a revenue share across all three. It’s also important to understand that credit card cost and pricing is different from ACH or checks – look at the examples below for more detail.
A few pricing basics to know:
- What are different types of pricing for payments?
- Qual/Non Qual (e.g., 2.9% + $0.30 / 3.3% + $0.30)
- 3-tier
- Intechange+
- Do I charge a premium or do the match or beat pricing?
- Ideally can charge based on value (i.e., higher than a non integrated experience)
- Premium: pricing should be your default pricing that the majority of your customers are charged for your Payments offering. Developing a truly embedded payments experience within your platform adds significant value to your customer and their customers and vendors experiences. By standing firm on the value of your embedded offering, you should be able to charge more than what a generic payment processor, ISO or bank is offering for stand alone processing. The best vSaaS platforms inherently understand the value they’re providing by offering a one-stop unified offering and stand firm on pricing commensurate with their value.
- Match: A subset of your customer base will be resistant to paying more than what they’re currently being charged. Depending on how strategic the customer is you can offer to match their current processing rate. In this instance you would ask for their current merchant statements to corroborate their pricing and offer them that same effective rate. This should be used seldom to not dilute the value of your integrated offering and should be a negotiating tool to request other concessions i.e. up-front fees, longer term, etc. If you’re offering Match pricing regularly you’re not positioning the value of your payments integration effectively and should rethink your approach.
- Beat pricing: Similarly to match pricing, for a very minute segment of your customer base you could offer to beat their current payment processing pricing. You should never default to this, but for a highly strategic partner like a Franchisee Group or large Enterprise Chain this could be a tool in your kit to earn their business. If you’re offering to beat their pricing regularly you’re not positioning the value of your payments integration effectively and should rethink your approach.
- How does pricing change over time as the payment business evolves over time?
- As the value of the product goes higher, pricing can shift and be higher
- Pricing should be based on value and ROI vs. a simple feature
- How do you consider margins?
- Need to factor in partner buy rates and the resources it takes to onboard and service customers on embedded payments
Let’s see how an example pricing embedded payments could work for credit cards.
Say you price your product at 3% for every qualified transaction. Qualified is a low-risk payment made with a physical card that is swiped or inserted into a chip card reader. Qualified transactions are the least complex and have the lowest rates. The specific rate that the credit card companies keep for interchange depends on the card type, the merchant category code (MCC) and other factors. We won’t go into the details, but say Visa keeps 2% for every qualified transaction on your platform. This leaves 1% left that could be shared between the credit card processor and your company. Depending on what you negotiate and work you take on as a software business, you could end up with 0.5% take rate. There are also transactional costs and other fees involved, but this is just a simple example of how the economics work.
How pricing embedded payments works for checks and ACH
Many software companies also allow their customers to process checks or the digital version which is Automated Clearing House (ACH). ACH is a system that allows for electronic funds transfers (EFTs) between financial institutions. You could charge your customers a flat say $0.99 per ACH or even charge 1% with a dollar cap. It really depends on the value perception of your customers on what they will pay.
Determining how you price your customers
What is the right pricing for your customers? While it always depends on the industry, the size of your customers, volume and type of transactions, there are a few pricing approaches you should know. Usually as a platform you have to be flexible on the pricing and offer a few options depending on the size of your customer. For example you can offer what’s called a qualified/non-qualified pricing which could look something like 2.9% + $0.20 per qualified transaction and 3.2% + $0.30 per non-qualified transaction. Qualified transactions (also known as a qualified discount) are the least expensive, and non-qualified transactions are the most expensive. Each time a customer buys something using a credit or debit card, the processor determines whether it’s a qualified or non-qualified transaction.
Another credit card pricing model is called interchange+. This pricing is not a ‘fixed’ pricing like qualified/non-qualified meaning as interchange changes based on many factors described above, there is a specific amount of basis points (bps) that you can charge your customer above interchange. So for example, a merchant that does $300k in monthly credit card volume, may want more flexibility on their pricing and get a ‘discount’ and not want the fixed pricing. For this merchant, a pricing like interchange+ 20 bps may be a more competitive offer in order for them to utilize your platform.
The key to pricing is to initially determine what principles you want to have as an embedded payments product. Do you want to price on value or match/beat the current pricing your customers receive? With embedded payments in one platform, you are typically offering more value and features to help with time savings, efficiency etc. for your merchants, so I always recommend pricing at a ‘premium’ in order to build a long-term successful business line and view embedded payments as its own P&L. If you are pricing as a premium, you also have to deliver the most value to customers regarding embedded features like embedded reporting, refunds, etc. Additional online flexible payment features like allowing the ability to send an email with the invoice/payment link is an example of how your embedded payment solution would be a better solution vs. your merchant using an outside credit card processor.
Once you have a good idea of pricing and margins, what’s next?
It always comes down to the customer. One thing I always recommend is to build high-resolution designs of embedded payments, articulate the value you will deliver and share it with your close customers. Once you explain the time savings, efficiency gains, etc. you can also share the proposed pricing with some close customers to receive feedback. Some customers will most likely be ok with the pricing and others may be a bit skeptical if it would mean they would be paying more. This doesn’t mean you should drop pricing from the beginning. It takes time to build out the product and actually show real value, so you should stick with your initial assumptions and do proper alpha/beta testing with live customers.
Additionally in parallel, it’s best to have a dedicated payments team that can sell, onboard and support customers for your SaaS platform. This team could sell other products but ideally a few folks on the team have a payments background who can help others ramp on the payments terminology and processes. Determining if and how to show pricing on your website depends, and this team will also have great insight to help you determine the best approach.
We’ll discuss the team and operationalizing payments in the next article!