For decades, transaction fees have been an unavoidable cost of doing business for merchants. This document seeks to explore The Cost of Poor Quality and the implications Bitcoin has to eliminate these costs and dramatically increase profit margins.
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Bitcoin, Transaction Fees and The Cost of Poor Quality
1. By: Ryan Walker
Bitcoin, Transactions Fees
and The Cost of Poor Quality
For decades, transaction fees have
been an unavoidable cost of doing
business for merchants. This
document seeks to explore The Cost of
Poor Quality and the implications
Bitcoin has to eliminate these costs and
dramatically increase profit margins.
Twitter: @RyanMWalker 1
2. TABLE OF CONTENTS:
Section Page
1. The Cost of Poor Quality 3
2. The Hidden Costs: Transactions Fees 6
3. Profit Margins: The “Real Opportunity” 9
4. Case Study: Overstock.com 12
5. Conclusions & Author Information 15
2
4. The Cost of Poor Quality (COPQ) can
be defined as the sum of costs that
would disappear if a system, process,
or product were designed and
executed perfectly.!
In Chart 1.A the total cost to provide
a service is $100. For this example,
the Cost of Poor Quality is $25.
These costs are experienced for a
number of unfavorable reasons. If
this cost were reduced the merchant
could return higher profit margins or
offer their services at a lower cost to
their customers.
The Cost of Poor Quality
$0
$25
$50
$75
$100
}
True Cost!
($75)
Cost of Poor!
Quality !
($25)
}
Due to risk,
errors, poor
processes, poor
price negotiation,
write-offs, etc.
Due to expected
purchasing costs,
labor & capitol,
administrative
costs, etc.
4
Chart 1.A: Cost of Poor Quality Example
5. The Impact of Reducing Cost of Poor Quality
! 5
Chart 2.A: The Impact of Reducing the Cost of Poor Quality
By managing the Cost of Poor Quality, organizations can reduce their overall costs. This savings can be directed to profit
margins or be utilized to offer customers lower costs, thus making the merchant more competitive.
$0
$25
$50
$75
$100
True Cost!
($60)
Cost of Poor!
Quality ($30)
Profit = ($10)
$0
$25
$50
$75
$100
True Cost!
($60)
Cost of Poor!
Quality ($20)
Profit = ($20)
$0
$25
$50
$75
$100
True Cost!
($60)
Cost of Poor!
Quality ($20)
Profit = ($10)
Revenue and
Costs of Current
Business
Reducing COPQ
to Increase Profit
Margin
Reducing COPQ
to Maintain
Profits Under
Pressure
7. Transaction fees are charged by
payment processors to facilitate a
transaction. These fees vary based
on a number of variables and
structures.!
Based on the conditions of their
agreement merchants can expect to
pay on average between 2% and
3% in fees per transaction. In
addition to these standard fees,
agreements include stipulations and
penalty fees that burden merchants
with the risk of additional cost.
Traditional Payment Processors and Transaction Fees
7
For a detailed description of transaction fees please the cardfellow.com blog:!
http://www.cardfellow.com/blog/average-fees-for-credit-card-processing/
$75
$80
$85
$90
$95
$100
Profit (5%)
Transaction Fee (3%)
True Cost
(92%)
Chart 3.A: Transaction fees and profit margin as a
percentage of revenue for major payment processors.
Example based on an expected profit margin of 5%.
8. With the proliferation of Bitcoin and other
cryptocurrencies in 2013, more and more
services are competing to provide
payment processing services to the
merchants of today and tomorrow.!
Professional, business, and enterprise
level service suites are already available
and in use by merchants world wide.
Additionally, user-friendly apps are being
released almost daily to facilitate the on
and off ramps of large and small scale
operations. !
The most significant differentiator of these
services and payment solutions is the vast
difference in transaction fees which range
between 0% and 1%.
Bitcoin Payment Processors and Transaction Fees
8
Chart 4.A: Transaction fees and profit margin as a percentage
of revenue for Bitcoin payment processors and wallet services.
Example based on a historical profit margin of 5%.
$75
$80
$85
$90
$95
$100
Profit (7%)
Transaction Fee (1%)
True Cost!
(92%)
10. Transaction Fees as a Cost of Poor Quality p
10
Chart 5.A: Transaction Costs as a Cost of Poor Quality - Example based on a
sales revenue of $100 and expected profit margin of 5%.
For merchants, the transaction fees paid to payment processors have long been considered part of the “True Cost” of
facilitating a sale or transaction. Bitcoin and crypto-currencies have now exposed these fees to be a Cost of Poor Quality.
$75
$81
$88
$94
$100
Profit (5%)
Transaction Fee (3%)
True Cost!
(92%)
$75
$81
$88
$94
$100
True Cost!
(92%)
Transaction Fee (1%)
Profit (7%)
$75
$80
$85
$90
$95
$100
True Cost!
(95%)
Profit (5%)
Revenue and
Costs of Current
Transaction
Recognizing
Transaction Fees
as COPQ
Reducing COPQ
by Utilizing
Bitcoin to Avoid
Fees
11. The Impact of Reduced Transaction Fees on Profit Margins
11
Chart 6.A: Transaction Costs as a Cost of Poor Quality.!
Example based on an expected profit margin of 1%.
$90
$93
$95
$98
$100
Profit (1%)
Transaction Fee (3%)
True Cost!
(96%)
$90
$93
$95
$98
$100
True Cost!
(96%)
Transaction Fee (1%)
Profit (3%)
Recognizing
Transaction Fees
as COPQ
Reducing COPQ
by Utilizing Bitcoin
to Avoid Fees
The “real opportunity” in accepting
bitcoin transactions lies in the
impact that reduced transaction fees
will have on the bottom line.!
As displayed in Chart 6.A, a
reduction in transaction fees from
3% to 1% will add 2% directly to the
profit margin of the sale. !
In a world where many high
volume business operate with razor
thin profit margins of as low as 1%,
an additional 2% in profit margin
would represent a 200% increase in
profits.!
13. In January 2014, Overstock CEO Patrick
Byrne announced that his organization had
partnered with bitcoin-based service
Coinbase to integrate Bitcoin as a means of
payment to U.S. customers.!
This news was well received and the
organization made over $127,000 in sales
within the first 24 hours. Byrne projects
Bitcoin sales to account for 1% of their sales
in 2014. This represents $13 million in
revenue.!
For Overstock, the expected margin on sales
is 2%. Reducing their transaction fees will
dramatically add to this margin and increase
profits. As displayed by Chart 7.A, this could
increase profits by 75% (from 2% of revenue
to 3.5%) for all related bitcoin sales.
Overstock Now Accepting Bitcoin
13
Chart 7.A: Estimated Sale Margin for Overstock.com
$90
$93
$95
$98
$100
Profit (2%)
Transaction Fee (2.5%)
True Cost!
(95.5%)
$90
$93
$95
$98
$100
True Cost!
(95.5%)
Transaction Fee (1%)
Profit (3.5%)
Sales Incurring
Historical
Transaction Fees
Sales Utilizing
Bitcoin and
Coinbase
For Overstock.com, all sales made by customers using bitcoin
14. As of March 4th, 2014 Overstock had announced
that it had surpassed $1 million in bitcoin related
sales revenue. Chart 8.A displays the increased
profit for these sales in terms of realized dollars.!
It is worth noting that many merchants
experience bumps in sales volumes of upwards
of 11% after choosing to accept bitcoin as a
method of payment.!
!
Potential Impact:!
Overstock had revenue of $1.3 billion in 2013. If
over the course of 2013 10% of these sales were
transacted in Bitcoin, Overstock would have
realized $2 million in reduced transaction fees. If
50% of sales were transacted with Bitcoin,
Overstock would experience a reduction in
transaction fees of $9.75 million.!
Overstock Now Accepting Bitcoin
14
Chart 8.A: Estimated Bitcoin Sale Margins for
Overstock.com
$90
$93
$95
$98
$100
Profit!
($20,000)
Transaction Fees
($25,000)
True Cost!
($955,000)
$90
$93
$95
$98
$100
True Cost!
($955,000)
Transaction Fees!
($10,000)
Profit
($35,000)
Sales Incurring
Historical
Transaction Fees
Sales Utilizing
Bitcoin and
Coinbase
15. Bitcoin is a disruptive technology whose impact is only
beginning to be realized. One of the earliest use-cases for this
technology is as a means of transaction. In the short term, as
adoption of bitcoin or alternative cryptocurrencies gains wider
acceptance, merchants and businesses would be wise to
incorporate this technology as a competitive advantage.!
In the long term this will prove to be a requirement to maintain
profit margins as it will allow other merchants within the
market to provide their goods and services at discounted cost.
Conclusion
15
!
About the Author:!
Ryan Walker is an entrepreneur, freelance writer, and quality consultant. !
For business inquiries or referrals please contact via Twitter or LinkedIn.!
!
Twitter: @RyanMWalker!
LinkedIn: http://lnkd.in/bgMH5kh!
Blockchain Wallet: 153Cpm4vxGTKyUXyVWLQkx5s8fLwcb24mD!
Figure 1: Bitcoin Accepted Here icon
