Tiered pricing is the most common pricing structure. Yet, it’s also the most expensive. Why? We’ll take a look at the reasons behind the costs of tiered pricing and what your business can do to reduce processing fees.
Your parents probably told you not to follow after the crowd. They may have even used the ‘if everyone jumped off a bridge, would you do it too?’ approach.
We recommend taking the same approach with your business: don’t just follow other businesses off a financial bridge–or in this case, tier.
Let’s take a look at what tiered pricing is, why it’s more expensive, and what your business can do to save money on credit card processing.
What is tiered pricing in payment processing?
Also known as bundled pricing, tiered pricing is a way for a payment processor to organize how much to charge a merchant for processing each transaction. This way of organizing fees (also known as a fee structure or model) breaks processing rates down into three tiers, or buckets.
These tiers are qualified, mid-qualified, and non-qualified. Qualified are the lowest fee tier, while non-qualified are the most expensive. The “qualified” part refers to whether the transaction “qualifies” to be part of the least-expensive tier. If not, it’s grouped into one of the others.
What are these tiers? As you learned in our how credit card processing works article, various parties charge fees to process credit card transactions. These include the payment processor, merchant bank, card association, and issuing bank.
Ultimately, these fees usually get passed on to the merchant who accepted the credit card payment from the customer.
This is where the tiers come into play with tiered pricing models:
The merchant will pay one of three rates for that transaction, depending on what type of transaction took place:
If it was a debit card or a non-reward credit card that was used by the customer that was either swiped or inserted to the point of sale, it will be the least expensive “qualified” rate charged to the merchant.
If the customer used a specialty card such as a loyalty, membership, or rewards card, or if the card was manually keyed into the point of sale, it will likely be put into the “mid-qualified” tier.
These rates are charged for card-not-present (CNP) transactions, along with specialty cards such as high-reward credit cards, international cards, or corporate cards. These rates are often two to three times higher than qualified rates.
So who is responsible for making sure each transaction is placed in the proper bucket, or tier? And what could be bad about such a clear, easy to understand model? Read on to find out the answer.
Are there advantages of a tiered pricing system?
In short: no. Tiered pricing is more expensive than other pricing structures.
Many believe tiered pricing has the advantage of being easy to understand. And at the outset, it may look clear: three separate categories of processing rates, depending on the transaction, each with a set rate.
However, this is misleading; it’s actually not so defined. We’ll get into that next.
Why tiered pricing is more expensive
Usually, simple is good… if it’s actually simple.
But not so with tiered pricing. That’s because it’s deceptively more expensive and complicated, despite the “simple” outward appearance.
This is due to two reasons: 1. Who decides which tier the transaction belongs in, and 2. The basic math of using a tiered rate structure.
We’ll start with the first reason: The payment processor is usually responsible for putting the transaction in the proper tier. They are free to set their own tiers and criteria as to what is a qualified, mid-qualified, and non-qualified transaction.
On top of that, processors often don’t disclose their exact criteria for deciding which tier a transaction goes into.
What does this mean in real life? Even though it seems straightforward, your business will have almost no way of determining how much of a markup the processor is charging for your transactions–that is, if you’re actually willing to track down the interchange fee for each transaction.
Which leads to the next reason tiered pricing is more expensive: basic math shows that it costs more.
Again, non-qualified tiered rates are two to three times more expensive than qualified rates. And the payment processor is also able to decide costs. Put these together, and it’s easy to see that the majority of transactions will end up placed in the mid or non-qualifying tier.
Thus, your business will be charged more when using Tiered Pricing in comparison to other pricing structures (such as Interchange Plus).
What businesses are most affected by tiered pricing?
As revealed in the rate brackets above, non-qualified payments are 2x-3x more expensive. These non-qualified payments include card-not-present (CNP) transactions–in other words, when a card is not physically presented.
Who would these include? All online payments and eCommerce transactions are CNP.
So not only does the average merchant pay more with tiered pricing, but especially anyone accepting online payments. This is essential to note, since online payments have increased in popularity by nearly a third since the COVID-19 pandemic began according to the US Dept of Commerce.
What are the best ways to lower your processing costs?
To save money on payment processing costs, make sure you’re using Interchange Plus pricing if your business is doing over $3,000 in volume per month. If you’re doing less than $3k a month, consider using a flat rate system offered by Stripe, Paypal, or Square.
Along with choosing the right pricing structure for your business, implement zero-fee processing via Cash Discounting. This 50-state approved system lets your business reduce or even eliminate credit card processing fees. There’s even a free online tool that shows how much you’ll save per month based on your monthly credit card processing volume.
In short: avoid tiered pricing. It is deceptively complicated and your business will be charged too much compared to other pricing structures.
Instead, use a better structure, such as Interchange Plus pricing. Also, make sure you partner with a payment processor that isn’t secretly charging too high of rates. And use a Cash Discount Program to reduce or eliminate your processing fees.
Progressive Payment Solutions has the guaranteed lowest rates in the industry, along with friendly advice from helpful experts whenever you need. Contact us today to stop paying too much on processing and start saving money.