Is Square Going To Lose Money With Its New Pricing Plan?

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Photo: Ellis Hamburger, Business Insider

Square just announced new pricing.The payments startup will offer a $275 per month unlimited plan, with no per-transaction fees, no percentage cut of sales, for small businesses doing up to $250,000 a year in sales.

The old plan—2.75% of sales—is still in effect.

The monthly plan is better for businesses which consistently do more than $10,000 a month. Smaller businesses or ones whose businesses are highly seasonal are probably better off sticking to the 2.75% plan.

So is this profitable for Square?

We’ve done some back of the envelop maths and the answer is, it depends.

Square tells us its average transaction is $75. (This is surprising. Most people assume everyone is using Square to buy $3 lattes.)

The fees Visa, MasterCard and AmEx charge for payments processing vary, but the typical transaction on the back end is 1.65% of the total plus a 10-cent transaction fee. (Debit transactions have a much-lower percentage and a higher per-transaction fee; some premium credit cards command a higher percentage fee.)

If a merchant does $10,000 a month at $75 per transaction, Square brings in $275. It will cost Square $178 at the 1.65%/10-cent rate to process those transactions. So that’s a $97 per month profit on that merchant.

If a merchant does closer to the max—an average of $20,833 a month—at $75 per transaction, it will cost Square about $370. So it will lose $95 a month on that merchant.

Breakeven is about the midpoint of $15,000 a month.

This an admittedly crude analysis. To model Square’s overall profitability, you have to know a lot more about the mix of cards used. (Debit cards, for example, are far more profitable for Square to process except on the smallest transactions.)

Bottom line: Square can probably afford to lose some money to lure away bigger businesses, who might otherwise stick with existing processors who give volume discounts. Meanwhile, it will make a nice profit on clients who do $180,000 a year or less in credit-card payments, assuming the $75 average transaction size.

Meanwhile, small business owners who hate reading credit-card merchant-account statements and trying to puzzle out the fees will likely love this plan.

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