The Green Sheet Online Edition
February 2, 2011 • 11:02:01
The risks of riding the gravy train
It was going to be a big weekend. Pete's (not his real name) goddaughter was getting married, and it was going to be a lavish affair. He had grown up with her father, Joe (also a pseudonym). They were roommates throughout college and had remained as close as brothers.
After various jobs, Pete started his own ISO. Joe joined his family's business to help revive it at about the same time. From that date forward, Pete provided processing services for Joe's business.
As Pete's ISO grew, so did his friend's business. After 20 years, both still operated thriving enterprises. It had been a healthy friendship and a productive business partnership, with Joe's business accounting for over 30 percent of the ISO's revenue.
An unexpected loss
The wedding was a celebration of the marriage and - as Pete saw it - a celebration of a long-term friendship.
The Monday following the wedding Pete received a call from Joe. They shared small talk about the wedding and their upcoming golf weekend, and then Joe told him he had some bad news.
It seems Joe's new son-in-law was in the payment business. Joe had a choice of upsetting his daughter by maintaining the status quo or giving his new son-in-law his processing business. Joe said, "I love you like a brother, but blood is thicker. I really have no choice."
After trying to come up with alternatives, Pete realized there was nothing either could do. Of course he understood the decision, and their friendship was strong enough to survive, but a 30 percent immediate loss in revenue was going to be tough to absorb.
A difficult lesson
Pete told me this story a year after it happened. His business had survived, but barely and only after a very hard year. He learned a valuable lesson: you have to be a meat-and-potatoes company and not just live off the gravy - no matter how secure your gravy accounts might seem to be.
Pete learned the risks of failing to maintain the foundation on which his business' survival rested: a continuing abundance of small to midsize merchants.
He depended too heavily on one large client (Joe's business) and was forced to rebuild his company when that one client left. With that lesson learned, Pete wasn't going to allow any single merchant - even a friend - to have that great of an effect on his portfolio in the future.
We all give lip service to this lesson, but do we really know if we're at risk? Do we really know if we can survive the loss of a key merchant? Do we really know who our gravy merchants are and what type of impact their departure might have on our revenue levels?
If you can't honestly say yes to all of the questions I just asked, now is the time to act. Answering them will both identify your risk and give you a game plan to help mitigate it. Remember, it pays to be proactive.
The right mix of merchants
Now, I have three more important questions for you:
- What percentage of your revenue comes from your most profitable merchant? One way to measure this is to subtract the income from your most profitable merchant from your total income.
Divide the remaining amount by your total residuals to learn what the effect of losing that particular merchant would be. If this figure exceeds 10 percent of your income, the merchant is likely to be a gravy merchant.
For a larger portfolio, one thing to consider is the weighted percentage of your top merchants. If 1 percent of your total portfolio generates 10 percent of your income, that 1 percent could be considered gravy.
- What is your current attrition rate? This question requires honesty. No one retains 100 percent of his or her merchant base because some merchants close up shop, sell their business or otherwise stop processing.
- Could you survive if you lost any of these merchants? Only you can answer this question, but keep in mind there are many contributing elements. You must factor in your attrition rate when determining your income risk.
New merchant growth can increase your revenue, but it must also offset the merchants you lose organically. The immediate loss of a large-revenue merchant cannot be solely compensated for by normal new and organic merchant growth.
The key to balance
If you find you've been living off the gravy, it's not too late to protect yourself. It takes planning and concentrated marketing efforts to dilute the impact of losing the gravy merchant, at least to an acceptable level. It's time to start concentrating on the meat-and-potatoes merchant segment.
For example, if you have determined you could survive a loss of 10 percent of your income, but find you have one merchant accounting for 20 percent, you must add multiple merchants to reduce that impact to less than 10 percent.
The key is multiple meat-and-potatoes merchants so that the loss of any one of those merchants doesn't handcuff your efforts.
Examine your new merchant target, and adjust it upward accordingly. Budget a greater part of your time to selling than you had originally planned, and follow that plan to the last detail.
A revenue bump
Don't forget: the goal of your additional sales efforts is to help prevent a dramatic negative impact on your bottom line if you lose one or more of your largest merchants. The best part is the significant upside you'll see.
Until you experience loss of a gravy merchant (which is likely to occur at some point), you'll see a nice bump in revenue - more than you anticipated.
Additionally, by diluting the impact of one or more gravy merchants on your revenue, you can improve the value of your portfolio. Both of these are major benefits.
Don't find yourself scrambling to recover, as my friend did. Execute a plan for your specific merchant base so you can survive on meat and potatoes, and the gravy will become just that, an added benefit instead of a staple. It will be much more filling and satisfying.
Jeff Fortney is Director of Business Development with Clearent LLC. He has more than 12 years' experience in the payments industry. Contact him at jeff@clearent.com or 972-618-7340.
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