Thursday, January 14, 2010
CH 12.3: Gas Stations Say 'no' to Credit Card Fees
Summary
During a deep economic recession in the U.S., the majority of of businesses are going through hard times. Therefore, some businesses turn to cash discounts for some releif. That is exactly the case for Roger Randolph, a gas station manager in West Virginia. What resulted in his decision to offer cash discounts up to 10 cent per gallon are the ridiculous high credit card fees also called interchange fees, which gets as high as 10 cents a gallon. Gas stations in South Carolina, Georgia, Maryland, New Jersey and Arizona are some other gas stations that are following this trend as well. With the interchange fees, most small gas stations are barely making money. Randolph says that he has to pay approximately $500 of credit card fees per month. "It's brutal," is how Jeff Lenard, spokesman for the Alexandria, Va.-based National Association of Convenience Stores, describes it. Last year, convenience stores paid a total of approximately $7.6 billion in interchange fees.
Connection
The connection of this article is to chapter 12.3's cash discounts. Many businesses may offer cash discounts. By offering cash dicounts, the business will stimulate more cash flow and avoid the interchage fees. Customers will also appreciate the cash discounts.
Reflection
In my opinion, offering cash discounts to have more cash in hand as well as increasing cash flows, which is especially beneficial for small businesses. Many large businesses offer cash discounts as well. Regarding the cash discounts of the gas stations, I am not sure if it will benefit much. Mainly because I do not think many drivers that go fill up for gas will be carrying enough cash on hand to pay for the gas. Especially with the high gas prices, I think most people will continue to pay with credit card for their vehicle's gas fill ups. And for the gas station that ban credit cards, they might risk losing customers.
Source
http://autos.yahoo.com/articles/autos_content_landing_pages/587/credit-card-fees-some-gas-stations-say
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Sometimes cash discount is not a fair thing. Some small business can't afford cash discount which will result in losing customers. Some businesses don't offer cash discount because they have no other ways to collect payments like grocery stores. Banks don't give cash discounts because it just sounds ridiculous. Managers need do measure their need over cash. The only purpose of cash discount is to get cash, not to get customers.
ReplyDeleteAlthough you may be right regarding most service-based business where profit margins are fixed, you couldn't be farther from the truth with retail businesses that rely on traffic to increase revenue. Gas stations don't make money (at least not much) from the sale of gas. They make the lion's share of profit from inside sales. Cash discounts on fuel give the customer a reason to go inside and make impulse buys or simply get something "since I'm here anyway". More inside sale mean more profit for the business. Also, with credit card companies charging 3% per transaction, there gas station stand to make a larger profit from fuel sales.
ReplyDeleteExample - a gas station sell 100,000 gallons of fuel at $3.00 per gallon. The credit card company makes $0.09/gal or $9000. Most gas station only makes $.01 per gal or $1000. If 25% of the fuel sale is made with a $.05 cash discount. Then the credit card company will make $6750 while the gas station will make $1500 on the cash sale and $250 off the credit sales for a total of $1750 (a 75% increase). This also saves the consumer $500 that they will most likely spend on purchase inside which has a higher margin. When fuel prices go up to $4.oo/gal then sales of fuel go down and the need to get people into the store to buy higher margin items is even greater. ‘
Traffic plays a huge part of any retail business, offering cash discount up to 2.5% can increase traffic and provides more profit for the retailer simply because the retailer does not have to pay the 3% interchange fees, giving them a .5% increase in profit, plus the consumer has more money to spend, increasing sales.