Transaction Costs Are Killing Your Business (How To Lower Them)

Many business leaders see transaction costs as a necessary evil of trading. It’s something that’s to be expected, like paying wages. 

But, of course, transaction costs are something that, like everything else, eats into margins. Sometimes, processors can charge upwards of 2%, which is about 40% of your margins if you make an average of 5% on everything you sell. 

Transaction costs, therefore, matter because they comprise a significant proportion of your operational expenses. It’s not just your merchant account that’s part of this cost, but anything that gets in the way of you taking money from consumers. Furthermore, higher transaction costs can have nasty knock-on effects on your business, like deterring customers from using your services or preventing you from scaling to the point where you could become genuinely scalable. 

There are multiple types of transaction costs you’ll encounter along the way, from bargaining costs to policing and enforcement. All of these make your business less efficient and prevent you from exchanging your time and resources for money in an efficient manner. 

So how can you fix high transaction costs? Here’s some answers: 

Use Technology For Research

One of the first things you could try is using technology for research. Various platforms exist for comparing transaction costs across the board, including for things like supplies but also for payment processing. It’s just a question of finding these platforms and using them for whatever prices you want to check. 

Built Trusted Networks

Another way to lower transaction costs is to build trusted networks. The more you can gather these around you, the more likely you are going to be able to conduct transactions frictionlessly. 

The best way to build these networks is to join industry associations. These can connect you to the people who matter, enabling the construction of high-trust societies. You can also develop relationships with others on platforms like LinkedIn, building trust over time. If you can meet people who are entrenched and part of established networks, that’s much more likely to result in a positive outcome for you. 

Adopt Clear Pricing Models

Another approach for reducing transaction costs is to adopt clear pricing models. These minimize haggling and allow you to show the structure of who gets what, including who pays for which elements of the service. This makes the transaction costs clear and shows everyone where they stand. 

Batch Negotiate

If you can batch negotiate, that can also lower your transaction costs. This approach avoids the need to negotiate every single interaction. 

Simplify Checkout For Customers

Another approach is to simply simplify the checkout process for customers, allowing them to use PayPal online or their Apple Pay on their devices if they are walking around, transacting in person. 

When it comes to checking out, every second counts. Ideally, you want the process to be instant to avoid issues elsewhere. 

Automate Invoicing

Finally, make sure you’re automating your invoicing so you can avoid issues relating to admin and payments. You don’t want to spend all your time working, just to collect money you’re owed.