I always want to know how our sales activity is doing. I am always looking for measures that tell me whether or not we are hitting our goals. Here’s one I use to tell me whether our sales production each month is measuring up to what our goals demand. Sales groups are usually measured on the number of merchants sold each month – also known as “stick count” or “head count” or “rooftops.” Also, the total cost of running the sales department and the average cost of each new customer sold are all important numbers to know. There are all good basic measures, but they leave some questions unanswered. For example: What kind of merchants are we selling? Are we selling at a price that creates a sufficient profit margin in our residual stream?
    This last question is key. What is the profit productivity of our sales efforts? What do I mean by profit productivity? Simply this: For every dollar of credit card volume our merchants generate, what is the profit margin? Furthermore, has that margin changed over time? If so, how and why? And, perhaps the most important question: Where is that margin likely to be a year from now – bigger or smaller?
    I like to measure the quality of our new customers by the ratio of dollars of residuals we earn to dollars processed by merchants. Residual dollars includes everything we receive in our residual check – total revenues, whether it’s from statement fees, communication charges, monthly minimums, whatever. If it’s on the check from our processor, then it goes in the residuals number. Monthly processing volume is just that – the dollars all the merchants processed in the month in question.
    To get a handle on the math, take this theoretical example: a portfolio processing $1,000,000 a month with a residual payment of $10,000 per month would have a ratio of .01, or 1%, or one cent of residuals per dollar processed.
    Now, for some real life numbers. I looked at a portfolio recently which had $19,202 in residuals and processed $6,574,628 in the month of June, 2005. The ratio here is .29 cents of residual per dollar processed. There were 465 merchants at the time, most of which were solid bricks and mortar establishments, with an average volume of slightly over $14,000 per month. Most of these merchants had been added to the portfolio within the last year.
    I looked at another portfolio composed of merchants who were sold before September 2003. This portfolio had 174 merchants generating $31,352 in monthly residuals on volume of $3,322,348. The average volume per merchant was $19,094. The ratio here is .94 cents of residuals per dollar processed, which is a lot higher than the first portfolio.
    If you can take these two portfolios as a proxy for the market as a whole (and I know that is a stretch), then it would appear that the efficiency dropped from .94 cents per dollar to .29 cents per dollar or about 70% in less than two years. That’s a lot! I don’t think computer prices relative to performance have dropped that much in that same time frame.
    This means that to make the same gross residual dollars in 2005 as in 2003 would require about three times the volume. Let’s say your monthly overhead is $100,000, and naturally, you want to generate enough residuals to cover that expense. To generate $100,000 in residuals in 2003, it took $10.64 million in volume (times the .94 cents per dollar of volume). In 2005, it’s going to take $34.45 million in monthly volume to generate $100,000 in residuals.
    Another look at this data suggests that the merchants sold in 2003 yielded a monthly residual averaging $180.18 each. In the 2005 portfolio, however, the average residual per merchant was $41.29 each. That means we had to sell 4.36 new merchants in 2005 at that yield level to replace ONE 2003 level merchant leaving the portfolio. Looking at that math, it’s obvious that taking care of our merchants, regardless of when they were sold is crucial.
    All this is to show that the price compression in the market is tough right now. Merchants are benefiting from this kind of price pressure, but it’s challenging ISOs to come up with new business models.