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Customer Convenience Fees Are Killing Your Sales

Many cannabis businesses require their customers to pay transaction or convenience fees through a cashless ATM fee, “cash discount” pricing, or a per-transaction fee.

This seems like an easy way to avoid or offset merchant services fees, but the analysis isn’t so simple when you consider the impact charging transaction fees has on customer behavior.

Not surprisingly, cannabis customers don’t like having to pay transaction fees. In a survey of cannabis customers, 81.5% said they either don’t think having to pay a convenience fee is right or are frustrated by convenience fees. 

Some cannabis payment solutions, like cashless ATMs, leave you no choice but to charge customers a convenience fee but there are plenty of dispensary payment options that give you options for who pays the transaction fees.

To learn more about the available secure payments for dispensaries, check out our guide to cannabis payments.

The effect transaction fees have on customer behavior

Customers are price sensitive and when faced with having to pay transaction fees their behavior will change in two ways that will negatively impact your business. When you charge a transaction fee, some customers will:

  1. Pay cash to avoid fees
  2. Shop somewhere else to avoid fees

How customers react to being charged a transaction fee is different for every business, but every business will have some customers that fall into the two categories above.

Even if only a small percentage of your customers change their behavior, it may be enough to change the economics of charging transaction fees.

Cash customers are less profitable

When customers pay cash to avoid transaction fees, you make less money because:

  1. Cash customers spend less
  2. Cash costs more than merchant processing fees

It’s widely accepted that when customers can pay electronically and aren’t limited by the cash they have on hand, they spend more. How much more depends on the study but generally ranges from 2x to 5x more.

To eliminate the impact of credit cards and large dollar purchases, the assumption that cannabis customers paying electronically will spend 25% more is reasonable.

According to a study, the cost of cash for non-cannabis retail businesses ranges from 4-15% and averages 9.1%. The businesses in the study averaged 30% of sales in cash.

With a percentage of cash sales more than twice the businesses in the study, cannabis businesses can expect a cost of cash at the high end of the range (10-15%).

Even for businesses at the low end of the range (4%), their cost of cash is higher than merchant services fees (3-4%).

Your cost of cash isn’t as obvious as merchant services fees but it’s almost certainly more expensive than merchant processing fees. For more on this concept, see our article on the cost of cash for cannabis businesses.

We have a free calculator to help you compare the difference between cash sales and electronic sales, and the impact they have on your business.

Losing customers over transaction fees

The survey mentioned above also found that 70% of cannabis consumers would choose to shop at a store where they don’t have to pay a convenience fee. See the full cannabis customer payment survey results.

It’s unlikely you’ll lose 70% of your customers over transaction fees, but you will lose some.

Profitability analysis

It doesn’t take many customers to start paying cash or shop somewhere else to have a meaningful impact on your business.

The analysis below shows the impact of changing from charging customers a convenience fee to the merchant paying the processing fees. This scenario assumes that only 15% of customers paid cash instead of paying electronically (to avoid fees) and 3% of customers shopped at a competitor (to avoid fees).

analysis comparing net sales with customers paying transaction costs vs the merchant paying processing costs

The analysis above uses conservative assumptions but still yields a 3% increase in sales, net of payment processing fees and the cost of cash. Your results could be dramatically different.

We developed a free calculator you can use to perform the analysis above for your business.

Indirect costs

When running the analysis above it’s hard to come up with a scenario where charging customers a transaction fee is materially more profitable.

Even if the analysis shows you break even, is that worth all the explanations to customers and lost goodwill for being the store that charges customers a transaction fee?

Next steps

To maximize the profit and efficiency of your business, your goal should be to encourage as many electronic sales as possible. Requiring customers to pay the processing fees is counter-productive to this goal.

Every business is different, but hopefully, we’ve given you some food for thought as you decide how to handle merchant processing costs.

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Strategic Guide to 

Cannabis Payments