Don't Forget Transaction Costs

Recently I had a discussion with a friend about exactly where the money goes when iTunes takes their fee from a sale. For each $0.99 song, it's estimated that Apple pays $0.70 to the major labels (which is over 85 percent of their sales), and $0.60 to $0.65 to independent labels. This means that the average price per song is approximately $0.69, of which Apple keeps about 30 cents from every sale.

This might seem like a huge amount but what everyone forgets is that this isn't pure profit; Apple has costs too. There are network fees, transaction fees, and general administrative expenses associated with operating the iTunes Store. It's believed that the network fee is about $0.05 per song, which includes the delivery fee and the hardware and software to facilitate delivery, and the operating expenses are a little less than $0.05 per song, based on the relatively small number of Apple employees that are believed to work on iTunes.

That leaves the biggest and most overlooked cost of all - the transaction cost. This is the amount that the bank charges for the privilege of using a credit card. It's believed that when iTunes first started this cost was as high as 24 cents per sale, which left Apple with a mere penny or two of profit for every sale. It's now believed that they've brought this cost down to about a dime, which still leaves a profit of about 10% (or 10 cents) on every sale, which is far below what the perception is.

The point of all this is that transaction costs are frequently overlooked when doing business, and they are the secret expense that eats your profit. If you take credit cards for merch and music, I guarantee that's it's costing you way more than what a giant like Apple can arrange.

All credit cards charge you multiple fees. First of all, there's a monthly transaction that's a minimum of $20 (usually more), a "gateway" fee of between $5 and $20, and a monthly minimum transaction total. Slip below that total and you're charged a penalty.

Then there's the transaction costs per sale, which can go from $.20 to as high as $.35 (it's usually higher for an Internet transaction), plus a charge of between 1.5 and 3% of the total of the sale. Add all that up and it means that if you only make a dozen or so song sales a month, you've actually lost money. Even if you've met your monthly minimum, you still may be only making less than half of a $1 sale thanks to the transaction costs involved.

Hopefully these transaction costs will soon come under control as micropayment fees become more widely available. This is were the traditional bank costs are bypassed, and  only a small fixed fee per transaction is paid. Paypal has recently instituted a system of micropayments, and I've written about more about other possibilities in other blog posts. Check out my recent post of Square for a good example of this type of fixed transaction fee.

So be aware of your transaction costs in order to be sure that you're earning exactly what you think.

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Credit Cards Transactions For Bands Made Easy

More and more we're living in a cashless society. People are more likely to make a purchase with a debit or credit card when they want something, especially if they're short of cash. Of course this can be a drag at a gig when you're selling CDs and merch and have to rely on the green because of the hassle of taking credit and debit cards.

If you've ever looked into taking credit cards for merchandise purchases at a gig, you know  what a hassle it can be. First of all you have to enter into into a long term contract with a bank, then pay for the card reader, and in many cases pay a monthly subscription fee. Then after a purchase you have to wait for the money to hit your account, with the bank taking their piece through processing and transaction fees that are like the phone bill - lots of small fees for each transaction that no one can seem to explain.

But this has all changed over the past year or so as a service called Square Up has slowly but surely made a big impression on large and small touring merchandising entities alike. With just a $10 reader that attaches to any iPhone 4, iPad or iPod Touch (there's a $10 rebate so it's actually for free), you can now have your customers easily pay by the card of their choice. What's more, it's paperless. You swipe the card, the customer uses a fingerprint to sign to the purchase by touching the screen of your IOS device, and the customer receives an email receipt later. Square takes a flat 2.75% transaction fee, which ends up being at a better rate than most traditional credit card processors.

The novelty of signing with your fingerprint is so cool that many acts report that their sales have increased just by the fact that people want to try it out! The best part is that you can now get the Square reader from the Apple online store, and it's reported that it will be available soon from their retail stores as well. The transaction software is free.

I think the best part of this is the fact that you don't have to deal with a large bank. They make too much money from us already, so anything that can take even a small piece of their action can only be a good thing for you and your customers. You can check out the app here.
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Help support this blog. Any purchases made through our Amazon links help support this website with no cost to you.

You should follow me on Twitter for daily news and updates on production and the music business.

Check out my Big Picture blog for discussion on music, engineering and production tips and tricks.