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Creating Opportunities at the Merchant Level

How leading payments companies leverage merchant-level analysis to optimize revenue.

How Can I Optimize Revenue?

Optimizing a company’s performance is an easy enough concept. Just answer the question, “how can I optimize revenue considering current resources and assets?” In practice, it is challenging to wrap your head around the current status quo. Revenue optimization feels like a ‘boiling the ocean’ exercise where the opportunities seem impossible to identify.

For payments companies, one way to determine opportunities is to laboriously sift through a merchant portfolio merchant-by-merchant to evaluate needs and optimal product solutions. In this Case, this level of strategic solution fit is easily addressed during the sales and onboarding process but is more involved post merchant acquisition.

Ideally, payments companies should strive to optimize the merchant relationship throughout the stages of a merchant’s lifecycle within an acquiring portfolio: sales and boarding, actively retained, and attrition (retention). The ability to isolate and act at the merchant-level sets leading payments companies apart from the competition. To be clear, strategic actions and tactics should be implemented for larger merchant segments, but creating those segments requires a more granular view of merchant-level performance.

The Key is in the Exclusions

It is natural to challenge opportunities to identify what is realistic. It’s easy to say a portfolio has $3M in annual revenue opportunity from under-market portfolio segments, but it would be hard to believe there would not be an objection citing, “the relationship won’t allow it,” “we don’t have control over that segment,” or “we captured marginal opportunity from the merchant just six months ago.”

In short, objections will have different levels of validity, but what if we concede to these objections? That’s the benefit of completing merchant-level benchmarking. Creating exclusions and removing any noise on the front end of strategic pricing initiatives makes the revenue opportunity more realistic and inspires confidence – while avoiding adverse attrition. Specifically, for strategic pricing initiatives, the following are some common methods to establish an ‘exclusions list.’

Methods to Establish an Exclusions List

  • Recently boarded merchants
  • Contractually limited
  • Recent pricing actions
  • Over-market merchants compared to external benchmarks

The first two exclusion methods are characteristics of the merchant, the third is action-driven, and the last requires a benchmarking exercise. Since the first three exclusion methods are easily identified merchant characteristics, we will focus on the feasibility of the last method. By aligning each merchant that remains in the ‘addressable’ merchant base (what’s left after exclusions) with a comparable benchmark, a portfolio manager will determine merchants with additional revenue generation opportunities.

TSG’s Acquiring Industry Metrics (AIM) platform accomplishes merchant-level benchmarking in an automated fashion through the Merchant-Level Analysis feature. With the click of a button (visit AIMvision), AIM automates the benchmarking process by aligning merchant performance metrics with a comparable benchmark based on industry type and volume tier.

Let’s take an example merchant, Andy’s Pizza Shop, which processes $2.5M in annual credit/debit volume. Here, the benchmark sample would consist of Eating Places, Restaurants (MCC-5812) with annual credit/debit volume of $2M-$3M. If Andy’s Pizza Shop is currently priced under-market by 0.3% (or 30 basis points), this presents an opportunity.

Cohort Implementation

As a result, with the addressable population and opportunity identified, there is still work to be done. Common patterns are being ascertained from the remaining group by focusing on what type of action is appropriate for specific cohorts. Note that the list below is not all-inclusive nor mutually exclusive:

  • Increase rate by offering value-added services
  • Per transaction fee
  • Discount or percent of volume rates, or
  • Change pricing model

Strategic pricing is not the only method of optimizing revenue through merchant-level analysis.

  • Merchant-level analysis uses go-to-market rate reviews. Meaning, do merchants boarded within the expected pricing guidelines set by your strategic pricing team? Ensure that, not only are the revenue targets for new merchants being met but are new merchant rates strategically within market rates?
  • Retention teams leverage merchant-level analysis to identify merchants with over-market rates to proactively, or reactively, inform next steps. Is the merchant finding value in the solution offering? What are their concerns? How can retention teams respond to ensure merchants receive and perceive value from their merchant services provider?

So, Are You Optimizing Revenue?

Is a payments company competing against themselves or the rest of the market? The ability to measure internally provides a measuring stick, but nothing to measure against. Precise external benchmarking provides payments companies an understanding of how they are competing and where opportunities may exist.

Are you optimizing revenue? Approximately 20% of merchants are priced more than 0.10% (or 10 basis points) under-market. The steps above provide the blueprint for success, and AIM’s Merchant-Level Analysis feature can help you implement it across your merchant portfolio. Contact us today for a demo.

By Josh Istas, Senior Director of Analytics