Tiered Pricing Contracts: Three Reasons to Stay Away

When it comes to credit card processing, there are typically three different pricing structures that you will run into:The first, and typically best, type is interchange-plus pricing. With this pricing structure, processing companies simply charge merchants the universal interchange fees plus a small processing fee.The second type is called pure percentage or flat-rate pricing. In this pricing structure, processors charge one flat percentage on every transaction rather than adjusting to the specific interchange rate applicable to the transaction.The third and final pricing structure is called tiered pricing, in which transactions are sorted into different levels, each of which incurs a different interchange-plus rate. While this pricing structure claims to be transparent and easy-to-understand, it’s quite the opposite, which we’ll explain below. In short, tiered pricing should be avoided at all costs.Unfortunately, it’s all too easy for business owners to get roped into using a processor that utilizes tiered pricing. However, knowing how to spot a tiered pricing structure when you see it and being aware of their predatory nature can help you stay as far away from these contracts as possible. Here are three you should steer clear of tiered pricing:

It’s entirely opaque

To keep you in the dark about how much of your money they are taking, processors offering tiered pricing models are intentionally vague about how their tiers are really defined. If your customers use a lot of one type of card, for example, the processor might intentionally place that card in the highest-cost tier, costing you more money. In some cases, not even the salespeople offering the contract truly understand which tier any given card will fall under.The fact of the matter is that tiered pricing structures are designed to trick you into thinking that you are getting a fair deal. In fact, they are cleverly designed to look like interchange-plus pricing structures to lure unwitting business owners into a contract that will end up costing them in the future.

Rates are compounding

One of the many ways that companies offering tiered pricing trick merchants into paying more is by compounding their rates. For example, if the credit card processing company that you are using has three tiers and you complete a transaction that falls under tier 2, you will not only pay the rate assigned to tier 2, but the rate assigned to tier 1 as well. So, if your contract lists a rate of 0.5% and 15 cents per transaction in each of the three tiers, your highest tier will cost you 1.5% and 45 cents per transaction.Of course, this is simply an example of how a tiered pricing structure really works. More often than not, tiered contracts increase their prices as the tiers progress, ensuring that they have the ability to squeeze more pennies from the business owner’s pockets.

Tiered pricing leads to higher variability of monthly fees

Credit card processing is the second highest operating expense that business face, only behind labor. The problem? Much of that cost is variable. If business owners are unable to predict how much money will go towards payment processing, it’s hard to forecast profits or budget for other important expenses.Tiered pricing is particularly difficult in this regard. It’s tough to predict how many transactions you’ll complete and what type of card your customer will use, but that difficulty is compounded when you consider that each of those transactions will be assigned different processing rates based on arbitrary tiers.Sticking to a realistic budget is extremely important to running a successful business, so why sabotage that by signing on to a tiered pricing payment processing contract?At the end of the day, tiered pricing structures are specifically designed to prey on uninformed business owners. These companies know all too well that the average person has little knowledge of how credit card processing works, and they take full advantage of it. Fortunately for you, the best way to defend yourself is by knowing that these companies are out there and understanding how they operate.