Square used to offer two different pricing options to its customers
- A fixed percentage on transaction amount, typically 2.75%
- A flat fee of $275 per month for monthly transactions of $21,000 or less
When they introduced the flat fee model I said how they would have arrived at the $21,000 number and the $275 fee. From all their transactions data they would have seen a distribution of transaction amounts the small businesses did over an year. It was likely a bell curve with a short right tail of businesses making sales of more than $10,000 a month.
Hence they set $275 (2.75% of 10,000 ) as a flat fee. The flat fee model simplified transaction process and helped ease business owners worrying about every transaction. For Square the fee helped grab more than they would have from those making far less than $10,000 a month. (According to US Census data 20% of small businesses make an average of $5000 a month. )
But recently Square announced they are getting rid of the flat fee model and going with per transaction commission only. This in effect is a price increase on all those businesses who were making more than $10,000 a month.
Why this change? The best possible explanation is the change in customer mix. While Square likely attracted the really small businesses making $5000 a month its popularity brought in the next round of businesses making more than $10,000 a month upsetting their previous math.
If you were to look in the Census data I quoted above you will find 39% of businesses make just over $21,000 a month (coincidence?). It is highly likely many of these moved to Square to take advantage of its flat price that caps the fee (i.e., $275 pays for first $10,000 transactions and after that they don’t pay any transaction fee). So they now have a customer mix with higher proportion of those making far more than $10,000 a month. So they fixed the price to remove the flat price option.
How are they communicating this price increase (it is a price increase on those taking advantage of its flat price while making more than $10,000 in transactions).
Well according to Square it is because their customers asked for it,
Square made the change due to feedback from customers who said the “caps and limits” of the flat fee were “inhibiting growth,” said spokeswoman Lindsay Wiese.
Very well crafted statement and as I repeatedly say, effective pricing requires effective communication. We have seen this method near perfectly executed by Starbucks. Clearly the statement makes absolutely no sense, how can this inhibit any business’ growth? What about other customers asking for flat price model? But it does not matter, all they need to do is give some reason, any reason other than ,” we are increasing prices to maximize profit”. That will do.
Nothing wrong with it and absolutely nothing wrong in a business getting its fair share of value created and correct its past pricing sins.