28 March 2019

Customer Transaction Costs and How to Cut Them

See all blog posts

Selling is all about addressing your customers’ needs. Whether it’s offline or online, you seek to get to know your client segments and offer them what they’re looking for. However, there are several things all consumers have in common. It’s a human thing that we like when things go quickly and effortlessly. Fortunately, thanks to the Internet, we can shop the way we like: saving our time and effort. But is it enough to let your customers buy online? Can you still make their shopping experience less absorbing – and your brand more competitive as a bonus? Let’s take a look at the transaction costs. What are they? And why is it worth slashing them?


What variables shape the transaction cost?

Transaction cost is an integral part of every product or service purchase process. It is the total financial and non-financial cost apart from the product’s or service’s price one must pay in order to undertake a transaction or make use of its result. To cut a long story short, it is everything but price we pay before and after the purchase, be it money, time or effort.

Transaction costs are covered by both merchants and their customers. The seller has to pay legal fees, taxes, communication charges, infrastructure expenses, and so on. These vary depending on the type of online business, technical and legal requirements a merchant operates under etc. and usually are stitched in the price. Therefore, in this short entry, I’m focusing on the transaction costs carried by customers, as those influence your competitiveness directly yet are seldom included in merchant balance sheets.

The customer transaction costs are mainly non-financial. It’s easy to assign them to the areas of your company’s actions that can potentially reduce them:

  • the cost of identifying one’s need and searching for information about the product/service or its seller (marketing),
  • the cost of negotiating price and finalizing the transaction (sales),
  • the cost of learning how to use the product/service (customer support),
  • the cost of learning the seller’s platform and adjusting the product/service to the customer’s needs (UX).

straal 007 v1

These non-financial costs translate mainly into the time and effort your customer has to pay to purchase and use your merchandise. For instance, if your company offers SaaS products, your customer has to invest their time to find information about your company, find the best-matching pricing plan on your website, carry out payment and then put effort into learning how to navigate your platform and use the software. As you can see, non-financial costs are often invisible for the customer until they make a purchase but might noticeably affect their post-purchase actions – extremely important in the face of the VaaS economy where customer retention is paramount.

Speaking of retention, transaction costs are also connected with the, so-called, switching costs: the “price” your customer would have to pay in order to switch to one of your competitors. It might be financial (e.g. account activation cost), but – again – is usually non-financial and associated with learning how to make the most of the product/service and the means to use it. High switching costs are beneficial for merchants as they facilitate customer retention: when predicting a time-consuming switching process, clients become more willing to stick to their current service providers. This is known as the lock-in effect or vendor lock-in.

Why should you cut your customer’s transaction costs?

Customers can easily compare digital goods available on the market as well as their prices. Consequently, differentiating your brand is more challenging than ever and the price war changes into the customer convenience war. Furthermore, once you’ve managed to gain a client, you should find a way to retain them over time. It’s worth remembering that attracting a new customer is even five times as costly as retaining an existing one.

When selling online, cutting your customers’ transaction costs will help you:

  • make your offer more attractive without reducing the price of your digital goods by making your customers “pay” less,
  • increase your customers’ loyalty and retention statistics (which is especially important in subscription-based businesses) by saving their time and effort,
  • take advantage of the lock-in effect.

How to cut customer’s transaction costs in your online business?

It’s not that difficult. Here are some tips that will help you gain competitive advantage by reducing the non-financial costs of your clients:

  • be informative: provide your customers with complete information about your company and particular products so that they don’t have to do additional research (e.g. fit your product pages with users’ reviews, enlist the specific benefits of using each product),
  • try cross-selling: enrich your offer with complementary products/services, i.e. the ones that your customers might need as well (selling video editor subscriptions for designers? try offering photo editors as well – most clients need them at work, too); it’s also a great way to generate more revenue from your existing client base. The “you may also like” suggestions may not be crazily effective, but purchase predictions based on customer life-cycle analysis are a different story; the big data analysis helps you understand how your customers’ buying habits change over time (i.e. their life-cycle) and, as a result, facilitate offering them better adjusted complementary products/services; remember that your clients’ needs are not given once and for all – they change;
  • make transactions easier: provide your clients with a truly frictionless purchase process – eliminate redundant waiting time, reduce the number of the checkout process steps and save your customers from entering innumerable items of data; take advantage of the best fintech can offer, fitting your online store with modern payment methods (e.g. convenient one-click payments) and an efficient payment gateway; consider switching to a subscription-based revenue model, too.

As I mentioned in one of my previous blog posts, even a two-second delay is likely to increase cart abandonment rate up to 87%, decreasing the conversion rate dramatically. Reducing the time of the transaction itself is a very simple yet powerful method of cutting customer’s transaction costs.

Cutting non-financial costs rewarded

Reducing the non-financial transaction costs of your customers is relatively simple and, simultaneously, very rewarding. What you receive in this exchange is your customers’ loyalty and trust accompanied by a special position of your offer on the market – and all that just for saving your customers’ time and effort. Remember that good news spreads quickly so you’ll also get an extra bonus in the form of word-of-mouth marketing.

Michał Jędraszak

Chief Executive Officer

Michał is an experienced executive who combines his deep technical background with outstanding business savviness. Prior to joining Straal, he had developed his managerial and analytical skills at a top tier consulting firm - The Boston Consulting Group - where he specialised in strategic advisory for the financial services sector.

At Straal, Michał is responsible for creating and operationalizing the company’s go-to-market strategy, coordination of key business development projects and building fruitful relationships with all stakeholders.

He holds a degree in Mechanical Engineering at Imperial College London.

You might also like...
What is Subscription Management Software?
5 August 2019

Let’s face it: the subscription-based model provides you with loads of valuable customer data but, unless you hire a full-time data analyst, it’s impossible to make full use of them. Moreover, managing subscription plans of every single subscriber manually is a real nightmare. That’s why subscription management software has been created. What is it and how to make the most of it?

Read more
Optimizing Card Payments: Smart Retry
19 July 2019

In the face of Subscription Economy, offering your merchandise in the form of a subscription-based service may seem tempting. Before you pivot, however, it is worth getting familiar with technology designed to make recurring payments more effective. Here comes Smart Retry aimed at increasing card authorization rate. How does it work and why should you implement it?

Read more
What to Look for in a Payment Gateway? Part II
19 June 2019

In my previous entry, I have proposed some basic questions an online merchant should ask before selecting a payment gateway. If you run a subscription-based business, you should get acquainted with several extra questions specific to your business model. A subscription-friendly payment gateway is a way to gain higher control over your business.

Read more
What to Look for in a Payment Gateway? Part I
10 June 2019

If you’re reading this, you’re probably searching for the best tool to collect payments from your customers and need to understand the differences between diverse solutions available on the market. Here’s a brief guide to selecting the right payment gateway for your online business.

Read more
Subscription Metrics to Track and Optimize
9 May 2019

Customer retention is paramount for companies operating in the subscription-based model. One should learn how to measure it and make the most of the statistics at hand. What subscription metrics to track? And how to convert them into actionable insights?

Read more
Predicting Your Subscriber’s Behavior
25 April 2019

Despite the uniqueness of every customer, the purchasing process they carry out doesn’t vary so much from one to another: they follow specific patterns. The marketing concept of customer lifecycle can help you improve your commercial effectiveness. Learn how to make the most of your subscribers' behavior analysis.

Read more
New Chargeback Thresholds – Don’t Panic. Get Ready.
15 April 2019

As of October 1st, 2019, Visa, the world’s largest card organisation, is updating its fraud and chargeback monitoring policy. Will it affect you? If you accept cards online – it certainly will. Should you be concerned? Not necessarily, if you have a well-thought risk management strategy. If, however, you do not yet have any fraud prevention mechanisms on board, you better hurry up in getting some.

Read more
6 Subscription Business Trends for 2019
30 January 2019

2018 was without a doubt prosperous for subscription businesses. The model has matured, evolved and boldly developed in a number of new industries and markets. Here’s a list of 6 trends that will have the greatest impact on companies operating in the subscription model in 2019: trends one cannot afford to overlook if they aim high on this promising yet ever more competitive market.

Read more
Anything-as-a-Service: the Future of Distribution
16 January 2019

Anything-as-a-Service (or XaaS) is a product distribution model, where companies shift from selling products to providing their value proposition as a service. Since XaaS can, quite literally, be anything, it isn’t hard to get lost in the jumble of buzzwords, jargon and concepts. This brief article will help you get an in-depth understanding of the new, service-based economy.

Read more
4 Tips to Win the Holiday Shopping Season
22 November 2018

Whilst Black Friday and Cyber Monday, or “Black Friday Weekend and Cyber Week” according to some experts, do not mean as much as, say, 2-3 years ago, the pre-x-mas shopping spree is still among the key determinants of the thickness of your top line. Here’s how to - in the realm of intangible merchandise - make the most of the daddy of all holiday sales.

Read more
3 Tips to Grow Your Online Business
15 October 2018

Simplicity of User Experience, efficient billing model and a well-thought risk management strategy. These are the keys to unlock your business potential on the ever more competitive market of digital services, as uncovered by e-commerce professionals at the very first edition of Warsaw Ecommerce Tech Sessions (WETS) – a new series of meetups powered by Straal and Business Link.

Read more
Your Business in the Face of Fraud
17 July 2018

Have you fallen victim to fraud? If the answer is "yes", I assume you have learnt your lesson and already thoroughly inspected what went wrong. The “no” answer does not exist in the case of fraud. It’s only “not yet”. Be my guest and let me invite you to explore the dark side of ecommerce.

Read more
Is the Freemium Strategy Right for Your Startup?
20 May 2018

Look at you, a fledgling entrepreneur at the threshold of international success. I bet it feels fantastic to see your idea come to life. So now that you’re inevitably positioned for success, give your product away for free - that's how the freemium model works. But is it really that simple?

Read more
When One Second Costs $2.5 Million
17 April 2018

Your customers won’t wait or engage in cumbersome processes to get your products and - if your competitors are able to provide the service faster – why would they? Straal presents the mathematics of instant e-commerce. Lean on these statistics to put your business in the fast lane!

Read more
The Essentials of Subscriber Experience
28 February 2018

In the times of flourishing sharing economy, we’re renting, sharing and getting access to everything we need. The line between products and services is becoming thinner and thinner, whereas possession is no longer guarantee for the customer satisfaction. What is in that case?

Read more
4 Reasons to Migrate to the Subscription Business Model
8 February 2018

Do you remember the first time you sold your product or signed a contract for your service? I bet it felt good. Do you know what feels even better? Becoming a trusted provider of your services and products to your loyal customers. That lasting feeling is what the subscription-based business model holds in store for success-hungry entrepreneurs.

Read more
3 Must-knows about the Role of Payment Solutions
16 January 2018

How do payment solutions chosen by your company influence your business performance? It's important to decide on such that will not only meet your current requirements but also support your development strategy in the long term and smoothly scale your business.

Read more
5 Things You Should Know about the Payment Ecosystem
30 November 2017

Fintech insiders oftentimes erroneously assume that consumers, let alone merchants, know much more about the payment ecosystem than they actually do. This might lead to disturbing misunderstandings, make companies miss business opportunities, consumers get a headache and vendors fritter away their marketing budgets.

Read more
Show more releases