H.R. 627: a discussion of commodity (part 3)

This is part 3 of a 3 part series…Part one and part two are linked for your convenience.

On Friday I discussed the paid advertisements that appear when searching for the term “accept credit cards” via Google. Prior to delving into the concept of competition in a commodity market, I thought it would be interesting to expand (briefly) on the cost of that type of marketing.

According to spyfoo, the average CPC (cost per click) on the search term above is between $1.07 and $9.92. With 21 advertisers and a cost per day that ranges between $18.64 and $230.00. At one point, I had some source research on paid advertisement marketing for the card acquiring space. If/when I locate it again, I can layer those numbers on top of the conversion rate associated and work out a cost of customer acquisition via online marketing. Truly a commodity analysis.

The true point of this discussion, however, is to explore methods of competition in a commodity market.

There are quite a few concepts I could discuss and the topic is worthy of excessive pontification and has been the subject of several books. As such, I will provide (at best) the simple summary of concepts that are particularly valid for the payments industry.

If there is a simple mantra it would be this:

Create differentiation.

Differentiation can be service based, it can be allowing the market to determine what should be added (think open source model), etc. For payments in specific, it boils down to two simple statements

  • Acquire More Customers
  • Retain The Customers You Own

Simple, eh?

Custom Acquisition:
Research, discussed here and elsewhere, indicates that the business today is looking for payments “in the workflow” of their day-to-day activities. This, simply, means that they have a system or a process that they know and trust. The “secret” (and if you look at industry trends it is no longer secret) is to ensure that the payments you are selling are in the workflow of the business.

One of my core beliefs is that technology indicates that closed moves to open and hardware moves to software. The days of a “free” (i.e. embedded in monthly cost) terminals is no longer considered by the business to be a unique value. Value is found either in higher quality service, or in providing a software application that meets the business payment needs. These applications can be highly integrated, highly vertical, wildly generic (i.e. accounting applications) but, for the business (and in particular the SMB), they are unique and valuable. Capture that opportunity while it still exists.

Custom Retention:
“churn”

Much of the payments industry market share is not comprised of new customer acquisition…rather there is a fair amount of share shift occurring in which Acquirer A loses X% of customers to Acquirer B who loses Y% to Acquirer C. A vicious cycle of share shift…The goal is to take your extant customer base and make them sticky.

Payments in the workflow helps with this…but as important is the 2nd service. Remember my contention that business makes their service decision at the time that they are presented with a tender? If that holds…then there exists a substantial up-sell opportunity within your current customer base. Do they have credit today? Great, offer check conversion (if retail)? Are they a MOTO customer? ACH would be an excellent addition. Beyond customer retention, there is a monetary component to the 2nd service that is quite compelling (and worthy of its own discussion at some point in the future).

A summary of the last 3 posts
In abiding with the old public speaking concept of “tell them what you told them”…I provide you with the following statements.

Payments are commoditized.
This commoditized nature can be proven through sales behaviour.
Competition in a commodity market requires adding value to the merchant experience.

As the disclaimer says at the footer of this page…posts like this are as much an exercise in exploring my own thoughts as sharing them with my readers. To that end, as my thoughts develop and change I will reference this series and post new missives as appropriate.

What’s your perspective? Agree? Disagree? Anything to add? Critiques? The comment form is below…

May 25, 2009

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