Yesterday, we had a customer call up to get an external hard drive from us for $88.  I even offered to write him a quick backup script that would back his Windows user profile up to his external hard drive for no extra charge if he brought his computer with him.  Apparently he was coming from almost half an hour worth of driving distance, and at no point in the TWO telephone calls he made to my store did he ask about payment methods.  He liked our prices and I added further value to the service by offering to integrate the items he was purchasing for no additional cost.

When this man arrived at the store, he noticed my large green sign posted prominently on the front door stating that “we do not accept credit cards (but there’s an ATM next door!)”

The first words that myself, my wife, and one of my customers heard from this man were “I drove 25 minutes down here and was going to buy $160 worth of stuff, but you don’t take credit cards!”  His tone of voice was clearly hostile, as if I had insulted his mother.  He then said something which I cannot recall the exact wording of, but the gist of it was that “we just lost a sale because we didn’t tell him.”  My response to his poorly chosen attitude and words was “You didn’t ask, sir!”  That irked him enough to make him turn back around and say, “I’m not the one in business here, you are!” and subsequently storm out of the front door.

After an experience like this, you might be as perplexed as I was.  I did some thinking over the remainder of the day while my wife and customer issued some negative comments on this man’s handling of the situation, and felt that this topic was certainly important enough to deserve a very big blog post, explaining why this experience will NOT result in me taking credit cards.

I will openly admit that I am not blameless: I could have informed all customers on the telephone from the very beginning that we do not accept credit cards and prevented this scenario from occurring.  However, at the same time, this individual was dealing with a business which he knew nothing about, and made an (erroneous) assumption that “all businesses take credit cards.”  Common sense dictates that if one is dealing with a business that one has no experience with, the payment policy at that business is part of the information gathering process that a responsible consumer must engage in; while it’s safe to assume that Best Buy or Wal-Mart take credit cards, a lesser-known business such as mine is a great big question mark.  If you change auto mechanics, for example, and you’re calling a shop you don’t know anything about, do you ask the shop if they take credit cards, or do you make an assumption that they do and get flaming mad when they don’t?  It’s your payment method of choice, so it’s your responsibility to ensure that it’s accepted where you want to use it BEFORE you drive 25 minutes away.  While I am not blameless for failing to proactively inform potential customers, the customer is, at a minimum, equally at fault for the misunderstanding.

On to the main reasons why a very small business like mine does not take (and cannot afford to take) credit cards.  You need to understand how profit works, so let me explain it in brief.  Profit is easy: it’s just the price I charge a customer minus the price someone else charged me.  Let’s pretend that I purchase an item from a supplier for $60 each and resell the same item for $70 each.  On each item, I have made a profit of $10, because my price to a walk-in customer is $10 more than the raw amount I paid for it.  This would also be called a 17% markup.  (Cosmetics have markups as high as over 100%, but grocery markups are usually low single-digits.)  The bottom line:  my total profit on the $70 retail sale of an item is NOT $70, it’s $10.  The other $60 is just recovering the original cost of the item.  I’d have to sell $700 worth of those items just to make $100 in actual money for the business.

You also need to understand that credit card merchant services take a cut out of the total amount charged to the card before giving me my money.  As an example, this would usually be around 1.9% of the item’s cost plus $0.30.  I use 2% as an easy number to work with.  On a $100 item charged to a credit card, the card company takes a $2 cut, meaning I get $98 instead of $100.

Now, let’s explain how credit cards have affected my business so far.  This man refused to buy $88 of equipment, on which my profit would have been about $13, because we don’t accept credit cards.  We have been open for a little over one month so far, and out of all other credit card requests, this has been the only one that actively refused to make a purchase; the others walked to the bank immediately next door and pulled cash from the ATM, or wrote a check.  Therefore we are currently losing one sale per month due to our refusal to take credit cards.

The true problem lies in the ~2% cut that the credit card companies take.  For taking credit cards to not be worth that one lost sale’s potential $13 profit, I have to make enough credit card (a.k.a. “CC”) sales that I lose $13 to the CC company cut.

[Math Alert!]….If the $13 I lost is 2%, then 1% is $6.50, meaning 100% is $650.00 in sales on credit cards instead of cash that I have to make per month to lose money by taking cards.  If that sounds confusing, let me say it another way:  if I sell $650.00 a month or in merchandise on CCs instead of cash simply because I made CCs available, then I’ve paid that $13 I would have earned to CC companies anyway!  $650 a month is roughly equivalent to 11 hours of PC service before I pay a contract technician $20 for each hour of labor! If you consider that my business only yields $40 per billable hour, yet I’d be charged the 2% rate on $60 instead, that’s $1.20 per billable hour and represents a 3% cut instead of 2%.  In other words, once you stop looking at a credit card fee as a percentage of the cost to the customer and start looking at it after some expenses are paid out, that “little” 2% fee starts to grow pretty huge.

Let’s take all this stuff and expand it out a bit more with a (simplified) hypothetical situation.  If you were to examine CC cuts in terms of my net profit (actual money made after all obligations paid) instead of gross profit (money earned beyond the original cost of the item or sale, meaning services are usually pure gross profit), the picture gets worse: supposing I sell two hours of service a day, about 25 days a month, and half of those hours are charged on a credit card.  That’s $3,300 in a month for services, half of which I lose a 2% cut on, which is $33.  Now, $33 out of $3,300 total sounds awful small…until you pull out the double-whammy:  expenses.  The power company ain’t givin’ us no free powah!  You think the plaza space is as cheap as your apartment, too?  No, sir!  Cut out $1,000 a month for the retail space, $120 a month for power, $30 a month for water/sewer, $120 for business DSL, and a random figure of perhaps $100 in consumables such as paper and toner.  Then, after that $1,370 or so is deducted, don’t forget that the tech got 1/3 of the labor charges, so $1,100 was paid out to the tech for his work as well!  (All that ignores my initial startup costs and interest on the small business loan for SIMPLICITY, so this is an UNDERESTIMATE!)

In such a simple example, we took in $3,300 total from customers for services.  By the time expenses were taken into account, $2,470 of the $3,300 was gone.  Before the CC fees, this example yields $830 in net profits.

Anyone who’s been in school knows that percentages are easy:  “part over whole, times 100.”  So take the CC fees of $33 and do the math:  (33/830) x 100 = 3.976% of my actual earnings lost to the credit card companies.

This assumes that no one uses a stolen credit card and issues a chargeback, which could potentially cost me hundreds or even thousands of dollars; for example, if someone buys a $750 computer with a stolen card and the card’s owner issues a chargeback because they (honestly) didn’t purchase the computer and shouldn’t be out that $750, the CC COMPANY TAKES THAT MONEY AWAY FROM ME WITH ALMOST NO RECOURSE.  One fraudulent purchase of a new computer could wipe out an entire month’s net profits.

How do bigger businesses deal with these issues?  There’s only one answer:  everything is more expensive.  Period.  I can give a 4GB flash drive to a customer for $17 while my small but established competitor sells them for $40 because these “costs of doing business” are not rolled into the price of my products and services.  I don’t have 4% or more of my actual earned income being eaten by CC fees.  I don’t have the threat of CC fraud and subsequent chargebacks.  Add to that the fact that my margins and rates are already quite low and my customer service and turn-around are a million times better, and there’s no way even an established competitor can actually compete.

(Granted, a check could do about the same thing to me, so adding cards to the mix makes the risk significantly greater, and CC fraud is far more prevalent and easily executed than check fraud.)

The point is that the cost of taking credit cards isn’t exactly worth it, and the risk of chargebacks is too hazardous.  If the customer wants to use cards so badly, they can always step next door and withdraw a cash advance from the ATM, and eat the CC fees themselves that way.  So far, I have yet to have that happen to my knowledge.

If the customer doesn’t want to eat the CC fees, why in the heck would I?

If it wasn’t against CC merchant agreements for me to charge an extra fee for taking cards, I’d take them without too much hesitation.  The only way I can charge customers extra for taking cards and not run afoul of merchant agreements is to price all my items and services with the CC fee increase included, then offer a “cash discount” for non-CC buyers.  It’s the same thing as charging a fee to the card user, but also causes all my stated prices to increase, decreasing my competitiveness.  Completely unacceptable.

When the CC companies learn and change their merchant agreements, I’ll probably take cards.  Until then, it’s too risky and expensive, especially to such a small business as mine.