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It's time to help clients eliminate 'minimum credit card' policies

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I recently stopped by a grocery store to purchase a quart of milk but when it came time to pay I was not allowed. Why? Because the grocery store owner didn’t let me use my credit card because my purchase fell under his minimum $10 requirement. Like many people today, I don’t carry much cash. So what could I do? I had to leave the milk on the counter and go somewhere else to buy a quart. Somewhere that accepted my credit card.

For a small-business owner struggling to make a living on very tight margins, isn’t it a shame that they have to turn away customers? Can’t something be done? Yes, it can. They just need a better accountant. That's because it's our job, as accountants, to teach our clients certain financial strategies that will enable them to not have customers like me walk away without purchasing because of a poorly implemented (and, in my opinion, lazy) “minimum purchase” policy.

So what's the credit-card-acceptance strategy you must teach your client? It's just the simple spreading of costs. And better, variable pricing.

We all know that most people use credit cards and that fewer of us walk around with cash. We also know that those big chain stores and fast food restaurants accept credit cards, regardless of the amount purchased. How can that 7-11 make any money on that $1.50 candy bar purchased on a card when the transaction fees alone would eat up any profit? Regardless of the transaction or the size of the business, there are always minimum fees. Yes, larger companies have more economies of scale which can then offset these costs. But there’s another part of that. These same companies are better at spreading their costs to cover their overhead, and pricing their products to make up the added fees.

What your clients need to do is better understand the true costs of their credit card fees so that they can make better decisions about how they spend their money and price their products. How?

First, you’ll need some history. You’ll need to help your client separately track all credit card fees for all purchases for a few months or even a year. After that period, you’ll then be able to help them figure out a key, yet simple metric: the average cost of credit card fees as a percentage of total sales.

So for that grocery store owner to make a $10,000 profit at year end (after salaries, I hope), were all credit card costs about 2 percent of sales? Three percent? If your client knows that, then they will be better positioned to make sure that their credit card cost doesn't exceed that on a transaction. He will know that a typical $3.00 purchase will create a 2, 3 or even 5 percent minimum credit card fee. He will know that, to profit from this sale, he will have to make some adjustments.

The retailer has three choices to still hit their $10,000 profit levels. They can attempt to raise prices across the board by that amount wherever possible to accommodate the fees, which is easier said than done. They can try to lower their overhead by that amount, which is also easier said than done. Or — to me the best option — he can allow people to use a credit card for those smaller purchases, but also incur a slight, variable surcharge.

A surcharge? Sure. Because would I pay the extra $0.50 to $0.75 (or more) that’s needed by the grocer to profit on a $2.75 purchase of a quart of milk for the convenience of using my credit card? I would. And I bet most people would too. We get that credit cards are a cost to the small-business owner. We also want our milk fast.

If the retailer knows his numbers, then that extra surcharge (which would be variable based on the purchase) would sustain his targeted profit levels. More importantly, I wouldn’t walk out of the store and spend my money elsewhere. They wouldn't lose my business … now and in the future. It’s easier for a grocer to just have a blanket “minimum purchase” policy. But it’s also lazy.

The problem is — and with all due respect — the typical grocery store owner (and many of my small-business clients) may not be able to figure this out on their own. But their accountants can teach them. It'll take an hour or two of time. But if it helps a client to run a business profitably for a longer period of time, it'll be worth it.

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