MARKETING

Payment Plans

Selling online can open your business up to customers far and wide. What's the best way to let them pay?
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When 66-year-old Ken Gates started a college sports merchandise retail business post-retirement in 2002, he knew the Internet was the best way to reach his customers. Unfortunately, his reach extended too far, and it ended up costing the startup hundreds of dollars.

Like many other online stores, Gates' CollegeSportsStuff.com accepted all major credit cards. But unlike the others, he accepted payments from anywhere in the world, and nearly every international order turned out to be fraudulent.

"We got burned until we knew what we were doing," he says.

Although selling products and services online can increase your revenue and expand your customer base, accepting payments through the Internet can expose your company to new hassles. Like many small business owners who are new to e-commerce, Gates didn't know that accepting international credit cards would harm his business. So how can you know the best way to have your customers pay online?

Before you build your online store, get to know several payment options such as merchant accounts (which allow credit card transactions directly through your website), hosted solutions (where an e-commerce handles the full transaction), electronic transfers from bank accounts, and other payment alternatives.

Merchant Accounts
If you sell your products or services through another medium, like a catalog or call center, odds are you already have a merchant account, which is an agreement between a business and a bank that allows you to post charges to a customer's credit card. If you are building your site from scratch or are just adding an online store to your existing site, a merchant account is one of the best choices for accepting online payments, says Jason Berry, owner of Irvine, Calif.-based website development company TopLingo.

In order to apply your merchant account to the Internet, you need to set up a gateway -- a virtual credit card swiping machine - to a processing bank, like Wells Fargo, for example, and a security company, such as Authorize.net. You will also need to hire a web developer to set up an online store, shopping cart, and checkout system for your site. This can be fairly expensive -- anywhere from $5,000 to $25,000. But it can be a good investment if you want customers to stay on your site.

Adam Sarner, principal analyst at Connecticut-based IT research firm Gartner, says online buyers want make purchases on websites that are as seamless as possible, so having your own interface could place you above competitors. It also gives the appearance of credibility, he says. But if your business just doesn't have the extra cash to invest in a custom site designer, there are other options.

Hosted Solutions
Setting up online stores through another website like PayPal or Yahoo! Store can be a cheaper, easier way to accept payments, especially if you don't want to go through the trouble of setting up a merchant account. Hosted Solutions usually charge a monthly fee and take a fixed percentage from each transaction, but they also manage the gateway, processing bank and security for you. For business owners who want to invest their money in other facets of their company, like advertising and marketing, Berry says using a hosted solution is the most economical choice.

Some business owners, like Gates, believe accepting payments through an established name like Yahoo! Store allows customers to feel comfortable with giving their credit card information online. But experts say this doesn't matter as much as keeping customers within your site, which payment service solutions don't offer. Though you can use your own domain name, when a customer goes to pay, he or she will hop off your site and hop onto the hosted solution's site to complete the payment process. For many customers, this is an extra leap they aren't willing to take.

"People are online because of the convenience, and seamlessness fits in with the instant gratification theme," Berry says. "Online pricing doesn't matter as much as how easy and intuitive your site is."

Electronic Banking Transfers
If customers don't have access to a credit or debit card, you can still accept their payments through an electronic banking transfer. Basically, a customer can enter their bank account and routing number, and the amount will be transferred from their account to yours. Berry says he's never had a client use this option because most online consumers have access to a credit or debit card.

Prepaid Phone Cards
Since e-commerce was invented, consumers without banks have generally been out of luck with making online purchases. But thanks to new technology, customers can now buy products online with prepaid phone cards. Berry strongly advises against accepting phone cards as payment because, he says, it opens your business up to all kinds of mischievous behavior and fraud.

Pre-commerce Options
This section includes the "bill me later" and Cash on Delivery options, which means you ship the product or activate the service without billing the customer immediately. Berry says he could never recommend this to a client because if a customer already has your product in their hands, they have no motivation to pay you, and things can get messy. "Generally, in e-commerce if it sounds dicey, it is," he says.

Ticketsnow.com, a Crystal Lake, Ill.-based online ticket broker and 2004 Inc. 500 company, only accepts credit and debit cards online because their customers have never complained about a lack of options. "If there was a demand, we would consider alternatives, but we're not hearing that," says Gene Golden, vice president of information technology at Ticketsnow.com.

Of course, it's always a good thing to present options for customers. Gates thought by accepting international payments he was giving consumers more options, but sticking with what's popular -- credit cards and a strong security presence -- makes you and your customers more comfortable doing business online.

So how many payment plans should you offer on your site? Sarner says it strictly depends on your target market. "No business should have five," he says. "You want to make it easy, but you should generally know who is buying and how they're buying."

Last updated: Jul 1, 2005




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