Will Square’s New Flat-rate Pricing Accelerate SMB Adoption?
Square is running circles around the competition. With big-name mobile commerce services like Google Wallet and Isis (backed by the carrier triumvirate of Verizon Wireless, AT&T, and T-Mobile USA) slow to get out of the starting gate, Square continues to make significant inroads: As of mid-June, more than 2 million businesses and individuals nationwide are accepting credit and debit cards via the Square platform, doubling from 1 million in late 2011, and users are processing more than $6 billion in payments on an annualized basis.
In addition to its signature card reader—a small dongle that plugs into your smartphone or tablet audio jack—Square now offers a host of corresponding applications including Pay with Square, which leverages geofencing technology to allow consumers to make purchases and settle tabs without ever removing their mobile device from their pocket or purse.
A recent Pay with Square update lets merchants offer in-app customer loyalty programs and related services, complete with reporting tools supplying real-time data on sales trends and inventory levels. There’s also Square Register, which enables mom-and-pop businesses equipped with Apple’s iPad tablet to accept cash and credit transactions, customize inventory, and issue receipts via text, email, or printed copy. Square notes that Register merchants are five times more active on a weekly basis than their Square card reader counterparts and process approximately double the revenue.
Square is also making significant strides beyond its core SMB userbase—in August, coffeehouse colossus Starbucks announced its 7,000 company-owned U.S. locations will dump their existing point-of-sale terminals and begin processing all credit and debit card transactions using Square services, a move to slash operational costs. Starbucks also will invest $25 million in Square’s Series D financing round, and CEO Howard Schultz will join Square’s board of directors. Starbucks customers are well acquainted with mobile commerce initiatives: The Starbucks Card Mobile App, which connects iPhone, Android, and BlackBerry devices to the consumer’s prepaid Starbucks Card account, accounts for more than 1 million Starbucks transactions every week. (Starbucks will continue supporting the app alongside the new Square services.)
Since its inception, Square has charged a flat fee of 2.75 percent on all transactions, promising users no contracts, monthly fees, or hidden costs. That model clearly works for millions of merchants, but with millions more still sitting on the sidelines, Square is now rolling out an alternative approach: Small businesses that process up to $250,000 in transactions per year can still opt for the flat 2.75 percent processing fee, or they can select new flat-rate pricing totaling $275 per month, including a zero percent processing fee and no additional charges or contract. Once a merchant eclipses $250,000 in annual transactions, the 2.75 percent fee automatically goes into effect.
Square is betting that simplifying its pricing structure will drive SMB adoption. “The main reason people don’t participate is because they are bewildered by it,” Square COO Keith Rabois told The New York Times. “Most people have no idea what 2.75 percent per swipe will amount to. They’d rather be making cupcakes for their customers instead of trying to parse all this stuff.”
In the event that you’re as mathematically challenged as I am, you’ll be pleased to discover that Business Insider has applied some back-of-the-envelope calculations to determine how Square’s new flat-rate model shakes out. Business Insider notes that Visa, MasterCard, and American Express claim an average of 1.65 percent on credit card transactions, also tacking on a 10-cent processing fee—Square transactions average $75 each, so if a merchant processes $10,000 a month at $75 per sale, Square generates a profit of $97 per month on that user after the 1.65 percent/10-cent card processing charge is applied to all transactions. But if a small business processes closer to the $250,000 flat-rate limit—corresponding to an average of $20,833 a month at $75 per transaction—Square will lose $95 a month on that merchant once it ponies up about $370 per month in card fees. (Square breaks even at $15,000 per month, Business Insider adds.)
It’s still up to each individual small business owner to determine whether or not Square is right for them, of course. But with expanded pricing options, new mobile marketing programs, and more efficient analytics tools in its arsenal, Square’s utility continues to grow, and the Starbucks alliance will further boost the platform’s mainstream visibility and reach.
Now’s the perfect time to give it a serious look or at least reconsider if recent changes and enhancements more closely align it with your company’s payment wants and needs. As Square’s circle of partners and users expands, you don’t want to be on the outside looking in.
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