Maybe this is obvious to you, but a core part of pricing strategies and profitability is how a fee is built into a sales price. Even though it may be no surprise, understanding this concept better, and internalizing these pricing strategies can save you considerable amounts of money, and allow you to negotiate like a Pro.
Percent (from the latin per centum, or by the hundred) is an elemental concept, and one that we must be able to flip our mental calculations around in order to weed through mathematical marketing tools. Based upon the sophisitication of the consumer it is sometimes deemed smarter to present a value as a percentage, and sometimes as flat fee.
A great example of presenting as a percentage is with tipping, when presented with a high priced restaurant bill is it is easier to tack on a generally accepted 18% to a $500 lunch than ask for $90 for the service you just received. ‘Oh sir, it is just the standard 18% if you enjoyed the service we recommend 25%’. Another time where it is useful is during a house sale. If your property is listed for $500,000 it is a lot easier to negotiate a 6% fee than to try to sell the owner on a $30,000 fee. Of course, there is the argument that percentages work better for variable numbers, and since the final sales price is not certain this keeps things simple. The real meat of the matter though, is that it is a lot easier to market a percentage when talking about big numbers, as by its nature a percentage is a number less than 100, and frequently less than 10.
An example of a flat fee being marketed well would be for a construction job. Think for example of a bathroom remodel. The quote will come in at say $10,000 for labor. If enough quotes have been collected to form an idea of a market rate and this seems like value many people would accept that rate. However, if the job gets done in a week what you could say is that construction worker was just paid an hourly rate of $250 (for 8hrs a day, including paying for their lunch hour) does it sound like such a bargain now?
Understanding the nature of these pricing models
Whilst there will be natural variance in estimating the Flat Fee Value of the Percentage, it can be done with relative accuracy, and in doing so you can create the first negotiating tool, The Cap.
The Cap is the maximum you will allow the actual fee of a percentage to grow to before it ends. Caps are used frequently in corporate negotiations, and effectively make percentages decline in a regressive manner after they are reached. They are normally set high enough to be generous, but control expenses and risk. When deployed properly, they can be an effective tool for the consumer also, a good double negotiation for a home seller with a home valued at $500.000 in a hot market would be to reduce the Percentage points from 6% to 5% and then cap the commission at $25,000. If they listed close to their price and received more than $500,000 in the final offer the fee paid would reduce.
The Reverse Cap
Actually, we are finally reaching one of the inspirations for this post. The exploitative nature of a flat fee on an unsophisticated consumer. The Reverse Cap is what I call companies that charge a flat fee with a product of variable cost. A Vanilla Reload card has a fee of $3.95 and a variable load value between $20 and $500. What that creates therefore is a reverse cap (the minimum they can receive will be $3.95) and the percentage of the fee will be variable.
Gift Cards and Reloads are products targeted at the poor, the people who are buying Vanilla Reloads with cash to load their Bluebird cards and have a ‘checking account’. These are the target market of such products. If you were to profile such a consumer you can think of them as earning money in cash or check form, perhaps using payday loan companies to liquidate, and yet who need a debit card and bill pay for certain elements of their life. People with middle class incomes don’t need to rely on loading a Bluebird account.
The beauty of this from the side of Incomm (the company behind Vanilla Reloads) is that such consumers have little savings and small income streams, perhaps paying on a weekly basis. That means in one month they could see one of these people putting $1000 onto their Bluebird card over perhaps 5-10 transactions, resulting in very high margins.
In short, the variable nature of the value, coupled with the fixed nature of the fee creates a percentage that is far beyond what people might think. Imagine that $1,000 monthly load on 10 transactions for a cost of $39.50 it creates a monthly fee rate of 3.95% – the flat fee just became a percentage. Scarily, if the amount loaded was $20 (and they do want people to load $20 because that is an option) the fee to load would be 19.75% and who would pay that? The poorest, most financially illiterate and most vulnerable segment of society.
Just because you cannot see it doesn’t mean it is not there
I understand that many of my readers consider themselves savvy consumers, and rightly so. And I am sure none of you would ever try to buy a Vanilla Reload card for any less than $500 value, with anything less than a 2x Card (or perhaps a SPG Amex) However I do think that sometimes we cannot see the wood from the trees.
When it comes to a Vanilla Reload the fee is on the front of the card, so a quick calculation will tell you that $3.95/ $500 equals a fee of 0.79% any rewards earned in excess of that = profit. But many things don’t have a fee on the front of them, yet it is there. Sometimes the fee is a transaction fee, sometimes it is a convenience fee, sometimes it is ‘I can’t perform tax evasion now’ fee, sometimes it is a risk of default/fraud fee. Interestingly, card protection benefits is a key element that provides consumer side protections against a firm in a situation like this, effectively a mirror of the fee passed onto you.
Don’t Get Excited when there is no fee to use a card
There is a fee, it is just that is baked in already. I constantly hear of people who are obsessed with points and miles collection who get really excited when they have a major project that they can put on the credit card without a fee. These people literally jump for joy at the opportunity to put say $10,000 on a credit card, but they forget something elemental. The simple phrase: How much for cash?
Now, think about this. We know that the vendor is paying a fee on the transaction, so we know they prefer cash but accept credit because it offers them more options to receive customers. Many people, much to my dismay, will seek out a bathroom remodel on a credit card because they can pay over time – vendors know this and therefore accept cards, it is the difference between a sale or not.
Control the Conversation
Next, consider what you can actually earn on the card, if it say, a builder then you are unlikely to get a bonus multiplier on a card (sometimes cards will offer a rotating bonus in home improvement, which may count, but often is restricted to purchases from a Home Depot or Lowes type store. So lets go with the concept that you can earn 2% Cash back (if they take Amex) from the Fidelity Amex. If your project cost is $10,000 you would earn $200 in rewards from that, so therefore any price you can negotiate below $9,800 is profit.
I am here assuming you have already beaten down the price using regular means, and this is the final step, so you get to that final price of $10,000 and say. How about $9,500 for Cash? You can haggle from there, but anything below $9,800 is profit, because you know about the percentages, and you are reducing by a flat fee, even if they don’t appear to be any.
Let’s be really savvy consumers, and calculate fees when they don’t appear to be there, and work out the cheapest way to agree a price. Sometimes it will be a Percentage, sometimes a Flat Fee. And remember everything is negotiable.