I stopped by one of my clients the other day and had an interesting
conversation. For background, this particular merchant was set up for doing
dual-pricing at a 3.75% rate.
Apparently, one of his business owner friends had stopped by and
questioned how he was able to charge that rate when they themselves
were stuck with only being able to do a 3% surcharge. They even
questioned the legality of what my client was actually charging.
This made me realize that not all merchants understand the difference
between the two pricing models and the resulting confusion of what’s legal,
what isn’t, and how to navigate those challenges.
So I decided to write a quick blog post outlining the differences and
similarities between the two different pricing models.
Why do Surcharging/Dual-Pricing
For starters, let’s get the big reason for the existence of both programs.
In short, they both allow the merchant to transfer some, or all of, the cost of
processing credit card transactions to the customer. Depending on how
much processing volume your business does, the saving can be
substantial.
In most cases, those savings can be between hundreds, to even
thousands, of dollars a month in transaction fees.
The way these programs transfer those fees is by adding a fee per
transaction as a percentage increase in the sale. But that’s where the
similarity ends.
What Is Surcharging
In a nutshell, for every transaction, a fee is added to cost of the
products/services sold. Without getting into the weeds on when, or even if,
you can attach a surcharge, the main rule of thumb is that the most you can
charge is 3%. This is a rule set by the card companies like Visa and
MasterCard. You also can’t surcharge pinless debit transactions either. And
if you’re caught charging more than that, you can be fined significant
amounts for each infraction.
It’s also not legal in all states, and in some states that do allow it, the state
has set a maximum rate that can be assessed to only 2%.
What is Dual-Pricing
The main difference between dual-pricing and surcharging is when the fee
is applied. Rather than adding the fee to the overall cost of the transaction,
dual-pricing instead has you increase the price of all products and services
by a specific percentage amount, which can be as much as 4%. Then,
when the customer checks out, the merchant offers the customer the ability
to get a discount off the transaction if they pay by cash/check, rather than
paying by credit.
Why Choose One Over The Other
The end result of both programs are the same. Instead your business
footing the cost of accepting credit cards, you pass those expenses on to
the customer. Where the big difference comes in, assuming you don’t
include the ability of dual-pricing to provide even greater savings by
charging a higher percentage rate, is in the customer’s perception.
With surcharging, the customer is never really sure how much they’re
going to be charged without doing some math to calculate how much
they’re going to pay after the surcharge is applied.
With dual-pricing, they know up front the most they’re going to pay for
the transaction, but they also have the option to save some money if they
decide to pay by cash or check. One of the unexpected benefits of getting a
discount by paying cash is, if your business accepts tips, customers have a
tendency to give higher tips when offered a discount by paying cash.
I won’t get into the legalities that deal with the signage that needs to be
displayed for either program since that could be a whole other article.
Suffice it to say, you need to let the customer know how much they’re going
to be charged with surcharging, along with having a line-item on the receipt
displaying the surcharge fee. With dual-pricing, you only need to display
the credit price and then either display the percentage discount if paying by
cash/check, or display the cash price alongside the credit price.
Conclusion
As mentioned before, both programs serve the purpose of saving your
business the expense of processing fees by transferring them to your
customers. The perception of implementing either program, from the
customers perspective, are going to be quite different. One shows the
customer that they’re going to pay more if they use a credit card, while the
other shows the customer they’ll pay less if they pay by cash/check. And
that difference in perception can make difference in the end.
It’s all a matter of perception, but regardless of which you choose, they can
both improve your bottom line by a significant amount at the end of the
year.
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