Paypal As A Merchant Account

I’ve been asked about using Paypal and Google Checkout as a method of payment in a store. I’m happy to give my thoughts, but first a disclaimer. I’ve never used Google Checkout, so I don’t have any comments about it. I would assume that many of my thoughts about Paypal would also apply to Google Checkout, but I really don’t know.

As I’ve mentioned before, I own and run two separate online stores. Both of them have Paypal loaded as a payment option in addition to a regular merchant account. Here’s an interesting tidbit, my first store, which has been open for almost three years, gets a Paypal payment almost every day. My second store, which has been open for around six months, has never gotten a Paypal payment. I have no earthly idea why this is. Both stores are hosted by Yahoo, have the same checkout procedures, and sell similar (but different) product. It’s very interesting to me that customers would use Paypal on one, but not the other. Any ideas?

I think that having a Paypal option on your site is really important in this day and age. EBay and Amazon both offer it, so why not you? It’s free and simple to set up a business account. Plus it gives consumers a little more confidence as they don’t have to type in their credit card number into your site.

I don’t notice much difference between the fees of Paypal versus my merchant account. One drawback is that Paypal does not automatically deposit funds into your checking account like your merchant account does. If you want that money moved to your bank, you’ve got to manually do it. Not a big deal to me, but some might find that to be a pain.

Paypal gives consumers the option to verify their shipping address, and their bank account; plus they protect the merchant if you sell to consumers who have taken the time to verify both. Unfortunately, many consumers fail to complete these processes even though they are terribly easy. Many complete one and not the other. This gives you a decision to make. If they’ve failed to verify anything, I handle it just like an AVS mismatch on my merchant account. If they’ve done one, I usually look at the order and make a decision.

There can be lots of hassles and paperwork involved in setting up your merchant account, in which case Paypal can be a great alternative if your store is new and you just want to get your feet wet. However, I do feel that it is a mistake to use Paypal exclusively for the long haul. An overwhelming percentage of my customers DO NOT use Paypal for their purchases. So I feel I would miss out on a great deal of purchases by not offering a credit card option.

All in all, I think Paypal is a great service. It’s certainly mainstream, and can lend some credibility to your store. Just make sure it’s a payment option, not a requirement, if you want to be a serious retailer.

Have I been charged twice?

So what was the most popular email I got from my customers during the holiday rush? Well, it was an email that went a little something like this:

Hey, you guys charged my credit card twice for the same order! I want the second charge reversed immediately or I’ll…

Have you gotten that one yet? Of course, most are much more polite, but some go on to threaten calling their credit card company and the BBB. I tell you, I must have gotten this email fifty times or more in December alone. Here is the interesting part; I didn’t double charge one single customer. Not one. So why all the emails? Let’s take a look.

How credit cards work

We first need to understand how credit cards work. When a customer enters their information on your site, the system sends for an authorization. Basically, it’s alerting the credit card company that there is a charge coming, making sure that there is room on the card for the transaction, and checking the billing address information. You’ll be alerted if the billing address doesn’t match, or if the authorization is declined for any other reason. The credit card company, in turn, leaves a temporary “charge” on the account, to hold the money while waiting for the actual charge. Keep in mind that no money has changed hands at this point. All that’s happened so far is the retailer’s system has said “Hey credit card, we’ve got a charge coming for $50, everything look good on your end?” And the credit card; “Yeah, looks good here, we’ll hold it for you, let us know.”

At this point, you as the retailer will complete the sale, and at the end of the day, your credit card batch will process. The credit card company will then see that an actual charge has gone through, and will move the temporary charge to an actual charge. This is when the money actually moves. All banks are different, but each will keep the temporary charge open for a set amount of business days. If a real transaction never comes through (due to the order being canceled or something) they will delete the temporary charge off the system. No harm done. Follow me so far?

Why does my customer think they’re being charged twice?

Most customers do not understand the difference between a temporary transaction, and a real transaction. Most of the time when a customer says they’ve been charged twice, it’s actually true that the card has been authorized twice. Now I’m not a banking expert, so I won’t pretend to know all the reasons that this happens, because I’m sure there are tons. One of the big reasons is that the original authorization came back with a billing address problem (AVS mismatch). So you corrected the billing address, and tried again. Resulting in two authorizations. Again, there are a million scenarios where more than one authorization could post. The point is that they are temporary.

When the credit card company sees that you’ve sent in one “real” transaction for that card, they should delete the extra authorization off the account.

How to respond

This didn’t used to be a problem. Before everyone had online access to their credit card statement, people used to look only at their paper statement. Well, the paper statement only shows real transactions. It doesn’t show pending authorizations, like they do online. So when you get this customer email, a little education is usually all that’s needed.

I send an email like this:

Mr/Mrs. Customer,

Thanks for your note about the double charge on your credit card. We only show one charge in our system for your order. Your bank just authorized the charge twice (they both probably say something like “pending”). Nothing to worry about, it happens all the time. Once they see that we only charged your card once (which won’t happen until tonight), they’ll delete the other authorization off the system. Hope that helps.

Conclusion

Customers don’t always know the ins and outs of the business world. Truthfully, before you were a merchant, you didn’t know much about it either. People get really touchy when it comes to money. But a quick message that explains what has happened usually takes care of it.

How Can Others Sell Cheaper Than Me?

This is a question that drop ship retailers pose all the time.  “My supplier said I should charge full MSRP for my items.  But I see people all over the place selling for much less than me.  Why?”

Do They Stock?

Well the most obvious answer is they could be stocking the product.  While drop shipping may be our preferred method of product fulfillment, we all know that better prices can be obtained by buying in bulk and stocking the product yourself.  Remember however that stocking isn’t the be-all end-all solution.  Stocking brings on a whole new list of challenges, such as storage, paying someone to pick and pack, and property taxes.

Low Overhead

Your competitor could also have much lower overhead.  Does their website look like they made it for free?  Do they only have an email address for contact (i.e. no customer service toll free number?).  All of these are ways to keep a businesses expenses down, so he can afford to sell cheaper than you.  But, doesn’t that kind of give you an idea of how well they treat their customers?

Are They A Start-up?

They may be the new kid on the block.  Arguably, when a business just starts out, price is all they’ve got.  They’ve got no track record, no online reviews, and no loyal customers.  Once a company has been around a little while, and some of these things are in place, they should be able to raise prices and take advantage of their hard work.

Different Strategies

They may just have a different scheme than you.  Their overhead is low, they’ve got no additional mouths to feed, and they’re able to get free rent in their mother’s basement.  For whatever reason, they’re comfortable with 10% margins, rather than 30%.  Maybe they use those drop ship products as loss leaders, and really make some hefty margins on other items on their site.  It’s easy for us to think that every other retailer out there is in the same boat that we are, but that often is not the case.

Be Careful

With all that being said, you’ve got to be careful and find a happy medium.  Don’t price yourself out of the market.  There are plenty of things you can do to justify your prices, but being too high can make all of that a moot point.

Conclusion

The pricing game can be evil, cut-throat and dirty.  Nobody wins when a pricing war is fought.  While the lowest price can be a way to get quick sales, it generally isn’t a great long-term strategy.  There has got to be other reasons people buy from you, whether it’ a superior customer experience, excellent customer service, or unique product selection.  Without any of these other things, pricing wears out fast.

At What Point Should A Customer Be Charged?

What a terrible, terrible problem for the drop shipper. Unfortunately, there is no good or easy answer for this.

Background – In traditional stocked retail, a customer’s card is charged once the order is about to be put on the truck for shipment. This ensures that the customer isn’t paying for something that isn’t coming or delayed (i.e. unexpected backorders) and is, in my opinion, good appropriate customer service.

This can be difficult for the drop shipper. We almost always find out about a shipment after it has happened and is already out the door. It is very common for me to get shipping confirmations the following morning. So taking payment right before shipping is almost impossible. Paying late would be alright, but you are putting a whole lot of trust in your customer. I have had times where I approved a charge after the item was on its way, only to have the credit card declined. Now there is no way to stop the shipment. You’ve got to hope you can get a hold of the customer and get them to pay up; not a fun situation to be in.

My preferred method is to take payment at the time of the order. While this poses the least risk for you, the retailer, there are some key problems with it. First, customers simply don’t like it. They don’t want to pre-pay for goods and will often be upset if they’ve paid but not gotten their goods. This leads to problem two, if the item is back ordered or otherwise unavailable, you’ll often have to do some back-peddling. “Why did you charge my card if you didn’t have the product?” Again, not a fun conversation to have. Finally, if an item is unavailable, the order will often be canceled. This results in you having to refund the transaction and end up paying your discount rate twice.

So, what is the best scenario? I don’t know. Every situation will be different, but it is important to know what the risks are for which ever method you choose. When do you charge for the order?

Tags: drop ship, business