The Downside of Transaction Pricing

Transaction pricing is a wonderful thing, a thing of beauty. We’ve seen payments companies and infrastructure companies delink labor from their pricing and harvest the benefits of this model. It’s the quintessential non-linear model. It sounds great. But there’s a danger.

The problem with transaction pricing is that providers essentially commoditize their offerings. Never forget that people are involved in services relationships. Pricing on a transaction basis makes it more difficult to maintain interpersonal relationships, which then leads to a commoditized, purchasing exercise.

For example, if a provider’s cost per check or cost per server is $10 and another provider can offer it for $5, price becomes the dominant factor. The issue then becomes one of switching costs. The result? Low switching costs accelerate the race to the bottom and sever the interpersonal relationships that often build and sustain services contracts.