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Mobile Payments : It's all in the pricing

Date post: 24-May-2015
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A in-depth view of how credit-card payment processing ecosystem work and Square is trying to establish itself in this difficult industry. Payment industry operates on very thin-margins and hence pricing makes a huge difference for a new player like Square to succeed.
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Pamela Oren-Artzi| Anaida Cholakyan | Prashant Gosavi| Ravi Vayuvegula| Ambrish Verma
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Page 1: Mobile Payments : It's all in the pricing

Pamela Oren-Artzi| Anaida Cholakyan | Prashant Gosavi| Ravi Vayuvegula| Ambrish Verma

Page 2: Mobile Payments : It's all in the pricing

Credit Card processing structure

1. Swipes CC 2. Seeks Authorization

5. Approval Processed

3. Verify Funds

4. Bank Authorizes Transaction

8. Funds deposited next

day to Merchant’s Bank

6. Merchant Receives Approval

7. Merchant Batches end of day

Card Issuing Bank

Merchant’s Bank

ProcessorMerchant

Page 3: Mobile Payments : It's all in the pricing

Credit Card industry fee structure

Only variable element in the

fees…

Fixed for everyone (1.54%)

Interchange Fees Dues & Assessments

Processing Costs

Page 4: Mobile Payments : It's all in the pricing

Square’s competition

FeaturesDongle, iOS,

AndroidDongle, iOS,

Android

Phone body, iOS only

Dongle, iOS, Android

Hardware cost

Free Free $29 Free

Swipe fee2.7% or

$12.95/mo. + 1.7%

2.7% $19.99/mo. or

Tiered/ transaction

2.75%

Non-Swipe fee

3.7% or$12.95/mo. +

2.7%3.5% + $0.15 N/A 3.5% + $0.15

Intuit GoPayment PayPal Here PAYware mobile Square

Page 5: Mobile Payments : It's all in the pricing

Square’s current offering

Page 6: Mobile Payments : It's all in the pricing

Who is using Square? And how?

1hr of Square location usage with general business category and relative dollar volume

Source: Data Visualization, Square, Inc. by Mike Bostock

Transaction Size

Repair, Contracting and

Business Services (>$250)

Occasional very large bubbles (ticket sale)

Merchants

Food, specialty Retail (earliest targeted and

adopters)

Local and Social Media

propagation

Location Distribution

Matches the US Night map

Page 7: Mobile Payments : It's all in the pricing

The Solution is ... The Problem

Price mechanism led to early adoption of

Small Businesses

Very Low Barrier to entry

The need to innovate on features in order to win the

competition

Page 8: Mobile Payments : It's all in the pricing

Brand

Fixed Fee

Per Transaction Fee

CRM Solution

Device

Customer Support

Transactions

Conjoint Analysis Feature Set

Reference Product

Features Options

Page 9: Mobile Payments : It's all in the pricing

12

1110

7249

Pr87

%00.36%75.25

275$499.9$3

21

OnlineInPerson

BinBNFCDNFCD

X

emiumLevelMid

PayPalIntuit

nTypeTransactio

DeviceDevice

Support

CRMCRM

RateRate

FixedpriceFixedprice

BrandBrandU

Utility function

Page 10: Mobile Payments : It's all in the pricing

Analysis overview

4. Regression analysis within clusters showed higher correlation

1. 28 Surveys conducted

Just answer our questions and

you won’t get hurt!

2. Initial regression analysis showed low correlation

It’s a non-linear pattern with outliers…but for

some reason I’m very happy with data.

3. Two clusters identified using K-Mean Clustering• Feature of IBM SPSS statistical analysis software

A

B

Page 11: Mobile Payments : It's all in the pricing

Analysis Results – Cluster 1

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.7969

R Square 0.6351

Adjusted R Square 0.6168

Standard Error 2.1381

Observations 252.0000

ANOVA

df SS MS F Significance F

Regression 12 1901.524 158.460 34.663 0.000

Residual 239 1092.583 4.571

Total 251 2994.107

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Intercept 7.8690 0.4666 16.8657 0.0000 6.9499 8.7882

$275 per month -6.3810 0.3299 -19.3411 0.0000 -7.0309 -5.7310

$9.99 per month -1.8690 0.3299 -5.6652 0.0000 -2.5190 -1.2191

InPerson+Online 0.7857 0.2857 2.7500 0.0064 0.2229 1.3486

3% per transaction -0.7619 0.3299 -2.3094 0.0218 -1.4118 -0.1120

Intuit -0.5119 0.3299 -1.5516 0.1221 -1.1618 0.1380

Premium 0.4405 0.3299 1.3351 0.1831 -0.2094 1.0904

Dongle+NFC+BinB -0.3929 0.3299 -1.1908 0.2349 -1.0428 0.2571

PayPal -0.2381 0.3299 -0.7217 0.4712 -0.8880 0.4118

2.75% per transaction -0.2024 0.3299 -0.6134 0.5402 -0.8523 0.4475

Mid Level 0.1667 0.3299 0.5052 0.6139 -0.4832 0.8166

Dongle+NFC 0.1429 0.3299 0.4330 0.6654 -0.5071 0.7928

24X7 -0.1071 0.2857 -0.3750 0.7080 -0.6700 0.4557

Statistically Significant Variables

Utility Coefficients

Cluster 1Lower Avg Revenue per Month

Page 12: Mobile Payments : It's all in the pricing

Analysis Results – Cluster 2

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.3292

R Square 0.1084

Adjusted R Square 0.0636

Standard Error 2.2685

Observations 252.0000

ANOVA

df SS MS F Significance F

Regression 12 149.5178571 12.459821 2.4212305 0.00555942

Residual 239 1229.910714 5.1460699

Total 251 1379.428571

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Intercept 6.8631 0.4950 13.8641 0.0000 5.8879 7.8383

$275 per month -1.2500 0.3500 -3.5711 0.0004 -1.9396 -0.5604

PayPal -0.8333 0.3500 -2.3807 0.0181 -1.5229 -0.1438

Mid Level -0.5357 0.3500 -1.5305 0.1272 -1.2253 0.1538

$9.99 per month -0.5000 0.3500 -1.4284 0.1545 -1.1896 0.1896

3% per transaction -0.4524 0.3500 -1.2924 0.1975 -1.1419 0.2372

24X7 -0.3571 0.3031 -1.1781 0.2399 -0.9543 0.2400

InPerson+Online -0.3036 0.3031 -1.0014 0.3176 -0.9007 0.2936

Premium -0.3214 0.3500 -0.9183 0.3594 -1.0110 0.3681

Dongle+NFC -0.1905 0.3500 -0.5442 0.5868 -0.8800 0.4991

Intuit 0.1548 0.3500 0.4421 0.6588 -0.5348 0.8443

2.75% per transaction -0.1548 0.3500 -0.4421 0.6588 -0.8443 0.5348

Dongle+NFC+BinB 0.0119 0.3500 0.0340 0.9729 -0.6776 0.7015

Statistically Significant Variables

Utility Coefficients

Cluster 2Higher Avg Revenue per Month

Page 13: Mobile Payments : It's all in the pricing

Analysis results

• All merchants were price sensitive to fixed monthly fees • Negative utility coefficients

• 50% of the merchants surveyed were brand sensitive and preferred Square over PayPal

• 50% of the merchants preferred same payment processor for both online and in-person transactions

• The most preferred product was

Page 14: Mobile Payments : It's all in the pricing

Utility Value & Market Share Analysis

Coefficients

Square

(Base

Product 1)

Square

(Base

Product 2) Paypal Intuit

Recomm.

Product 1

Recomm.

Product 2

Intercept 7.8690 1 1 1 1 1 1

$275 per month -6.3810 0 1 0 0 0 0

$9.99 per month -1.8690 0 0 0 1 0 0

InPerson+Online 0.7857 0 0 1 0 0 1

3% per transaction -0.7619 0 0 0 0 0 0

Intuit -0.5119 0 0 0 1 0 0

Premium CRM 0.4405 0 0 0 0 0 0

Dongle+NFC+BinB -0.3929 0 0 0 0 0 0

PayPal -0.2381 0 0 1 0 0 0

2.75% per transaction -0.2024 1 0 1 1 0 0

Mid Level CRM 0.1667 0 0 0 0 0 0

Dongle+NFC 0.1429 0 0 0 0 0 0

24X7 -0.1071 0 0 0 0 0 0

Utility Value 7.667 1.488 8.214 5.286 7.869 8.655

Market Share 33.8% 6.6% 36.3% 23.3% 36.8% 39.1%

Page 15: Mobile Payments : It's all in the pricing

Customer Merchant SquareCredit

Card Orgs

Square’s Transaction Mechanics

Price = $1002.75%

1.84% + $0.28

Page 16: Mobile Payments : It's all in the pricing

Square’s Break-Even analysis

$30 83cents 83cents 0cents

TransactionAmount

Cost to Merchant

Cost to Square

Loss/Profit to Square

$1 3cents 30cents -27cents

$10 28cents 46cents -18cents

$20 55cents 65cents -10cents

$40 $1.1 $1.0 10cents

$50 $1.4 $1.2 20cents

Page 17: Mobile Payments : It's all in the pricing

$30

0

1

10

100

1,000

10,000

100,000

1,000,000

0% 5% 10% 15% 20% 25% 30% 35%

Tran

sact

ion

Am

ou

nt(

$)

Effective cost to square

Minimum cost curve

• To generate profit Square’s average transaction amount has to be ≥ $30• Profit from high amount transactions will offset loss from low amount

transactions

Area of profitability

Area of loss

Variable fee Fixed fee

Consolidated cost/transaction 1.84% $0.278

Page 18: Mobile Payments : It's all in the pricing

Pricing solution

Merchant Mix

Option 1 Option 2

Pricing solution

Merchant Mix

Static

Control Static

Control

What Should be Controlled?

Page 19: Mobile Payments : It's all in the pricing

Recommendations

Current Value Prop: • Easy setup• Simple Pricing• Get paid fast

Goal: Square must attract higher value transactions via:

• Incentivizing merchants• Targeting segments with higher amount/transaction

Recommendations:1. Reward merchant to have high value transactions

a) Merchants get 0.25% cashback >= $50 transaction2. Target industries with higher amount/transaction

a) Provide industry specific rewards, e.g. merchants in travel, hotel and insurance payments via Square get 0.25% cashback.

3. Remove $275/month fixed fees product option.4. Add online &mobile payment processing. (e.g. Square Wallet)5. Incentivize customers to use Square Wallet:

• Customers using square wallet get 0.5% cashback for transactions $50 - $1000• Customers using square wallet get 1% cashback for transaction >= $1000

Page 20: Mobile Payments : It's all in the pricing

Takeaways

• Volume of transactions (market share) does not mean profitability

• Does Value Creation match Value Appropriation?

Page 21: Mobile Payments : It's all in the pricing

Thank You


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