Lose A Dime On Each Sale, We’ll Make It Up On The Volume

Suppose I offer to buy dollar bills from you for ninety-four (94) cents. How many would you be willing to sell to me? A couple, few, many? If you thought about it your rational answer would be….NONE! What, are you crazy?

Let me ask you another question. How much you charge to sell a dollar bill if you knew you would only collect the above mentioned ninety-four cents? The reasonable answer is at least a dollar and six cents to cover the expected loss on the next transaction. By doing this you would at least break even.

Now, where does these questions make contact with the real world? Apparently most people in America have no clear idea of what actually occurs when they use a credit card to make a purchase. To persuade a company to advance you a loan for buying the #4 cheeseburger meal with fries and a large coke, the card company agrees to pay the restaurant less than the actual amount charged, at a rate that depends on the companies involved, but somewhere between five and fifteen percent. When you pay the full amount (eventually, the 25% interest charge on late payments is just gravy for the company) allows the company to make enough profit to survive, nay, thrive.

And per the second question above, the fast food joint will charge you more than they need to since they need to recover lost funds for the credit card charge. A vicious circle of eat and be eaten, with the customer at the bottom of the food chain. It is increasingly common for some places to charge more for credit purchases than cash driven ones. Here (in the greater Detroit area where my kid’s live and my current visit is about to end) there is a ten-cent additional charge for purchasing gasoline if you use your credit card. A station that prices gas at $2.389 a gallon for cash will ding your card for $2.489 each for the same gas. They are making sure they don’t eat the service charge from the credit card company. Surprise…you are.

So to encourage you to use your card more, some companies are offering a cash back program. One ad on TV talks about a card that will “…give you 1% back when you purchase and another 1% back when you pay…” for a grand total of 2%. Who do you think is supplying the money that you are being (so generously) given? [WARNING: this may be a trick question]

For the record, I have a BBA degree in Accounting, taught macro-economics in college, have worked as an accounting manager for a number of companies, and have had a small business consulting firm for almost twenty years. I have had a fair amount of experience and feel pretty confident about the answer I am about to reveal below. (Hint: it’s NOT the businesses involved.)

Answer:   You. [Sorry, it was not a trick question after all.] And it’s not just service fees for taking credit cards rather than cash. Every expense incurred in a business will, eventually in the long run, be paid by the customer. Regardless of the title of this blog, you cannot make up a loss by increasing the volume. You recover the cost by increasing the profit (raise prices or reduce costs). No exceptions, no tickie, no shirtie.

Government regulations require a licence to operate? Charge everyone a little more to cover the cost. Minimum wage goes up -> profits go down -> EITHER increase profit [prices go up] OR reduce expenses [number of employees goes down]. Sales Tax increases raises costs of materials purchased making profits go down…so either buy cheaper products or raise prices.

Look, the reason business is out there in the first place is to MAKE MONEY. Short answer. There may be other reasons going along with the profit driver, but ultimately when you sign the checks to pay the bills, you want to make sure there’s enough to pay everything with at least a little leftover for your own use. Even the “not for profit” business HAS to get close to making a profit (or be subsidized by government fiat to continue to take a loss for the team…guess who pays for the subsidy!) Nobody in their right mind will knowingly and willingly continue to throw money into the fire without getting a large enough return to at least break even.

Last question: guess how many credit cards I don’t have in my wallet? (Extra credit if you can identify which company it’s not.)


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