Are Fees Killing Your Business?

Please Pay Cash At The Pump

Are merchant account fees actually killing your business?  You may not be the only one and the problem is more common than you think.

The credit crunch of 2008 unfortunately has made the problem much more easy to define because consumers use less cash in several niche industries.  Let's take a closer look at Gas stations for our example.

Most of the profit for gas stations and convenient stores is made away from the pump.  Margins on fuel are very slim so business owners rely on convenience items, sundries and impulse buys for their livelihood.

The U.S Energy Information Administration release statistics every year.  The 2011 report shows that there was a 2% decline in fuel sales from 2010.  This amounted to a nearly 5% drop in foot traffic inside the stores themselves.


The decline is being blamed on higher gas prices which force consumers to cut back on usage but more importantly for our example, cuts the amount of their discretionary income.  The impulse buy suffers because the "impulse" is now governed by thought.

This issue also clearly exposes another problem that business owners tend to overlook in more robust times.  That is that when facing hardships of any kind, consumers spend less cash and resort to credit cards. While any type of spending is good for a merchant, accepting credit cards cuts into profits because of the merchant account fees charged by the merchant services provider.

So know we can see the double impact on business.  People are spending less on convenience items and buying fuel on credit while the merchant account fees are wiping out the slim margins on gas.

Let's look a little deeper so we can understand why this entire niche is being killed by fees.

A gas station on average earns only $.12 a gallon on gas.  Please understand that when fuel prices rise, their profit never does.  Most people believe that gas stations make money when the price goes up when in fact they lose it.

Here's How Merchant Account Fees Can Wipe Out A Business

Merchant Account Providers average about 3% in fees on a credit card transactions.  If you factor in the average of 12cents a gallon a gas, that would be a fee of 9cents a gallon when the price is $3.00 a gallon.  This leaves only 3cents a gallon profit for the gas station.

Now what about at $4 a gallon?  At $4 a gallon the gas station in our example pays 12cents a gallon and makes nothing.  Anything over $4 a gallon actually costs the Merchant money if the the consumer uses a credit card.  When people are buying other items inside the store, the gas simply serves as a loss leader.  When they are not buying the gas serves as the lifeblood of the business.  When your products cost you money to sell, then you go out of business.

The margins on gas are so small that over the last few years we have seen big fuel companies sell off their retail outlets and focus on the wholesale market. Exxon has dumped most of their corporate owned stores and Chevron has dumped more than 1100 stores in their inventory.  The companies that can afford the losses are getting out of the game by choice while the franchise owners may be getting forced out.

The answer for many merchants is to offer cash discounts as in the old days but competition for fuel sales is fierce among retailers so even this squeezes their margins.  As long as consumers are spending less inside the stores, the business owners are in trouble.

These cycles are a part of doing business and the outlook is a bit brighter this week as fuel prices dropped to a national average on $3.90 but there is no guarantee that consumers will regain any or all of their discretionary income.

My advice for gas station owners feeling squeezed by their merchant account fees is to contact their merchant services provider and negotiate a better rate.  There are some great merchant account offerings because this industry is also highly competitive.