How much profit does vertical SaaS make on each payment?
Vertical SaaS companies tend to net $1 to $2 per $100 they process. Companies with greater pricing power can charge more for processing payments, which lifts profitability. Other levers include cutting payment fees and negotiating with Stripe. Adding services that merchants value helps too. Tracking take rates shows which lever to pull.
Is processing payments for merchants profitable?
Processing payments for merchants is profitable for vertical SaaS companies. Most net up to 2% of the volume processed. This is known as the net take rate. It is what remains after network fees, Stripe fees and other processing fees.
Payments do add complexity, because the company now runs payment operations. Even at small scale, it is common and worthwhile.
Gross take rate is what the platform charges the merchant for processing payments. From this amount, the platform owes payment fees. Net take rate is gross take rate minus those fees, per dollar processed.
To illustrate the difference, take an example. A hypothetical vertical SaaS company provides business management software to barbershops. It also processes $100 million of monthly payments for them. Call it Barbershop SaaS.
The gross and net take rate calculation starts with the balance summary in Stripe. The balance report lists every movement of money on the platform. This is where our team starts every engagement. The report only helps when Stripe payouts reconcile to the books.
The calculation then runs in this order.
- Take charges. Charges are the money the platform processes for its merchants.
- Subtract transfers. Transfers are the money sent on to those merchants. What remains is the payments revenue.
- Charges and transfers are shown net of refunds, reversals and disputes.
- Divide payments revenue by charges. The result is the gross take rate.
- Subtract fees from payments revenue to get net revenue. Divide net revenue by charges. The result is the net take rate.
Barbershop SaaS processed $101.7 million in January and sent $98.6 million to its merchants. The difference, $3.1 million, is the payments revenue. It implies a gross take rate of 3.03%. Fees were $2.0 million. Net revenue was $1.1 million, a net take rate of 1.08%.
Run for each month of the year, the same calculation gives this table. Amounts are in thousands of dollars.
| Month | Charges | Transfers | Revenue | Fees | Net | Gross % | Fees % | Net % |
|---|---|---|---|---|---|---|---|---|
| Jan | 101,664 | 98,584 | 3,080 | 1,978 | 1,102 | 3.03% | 1.95% | 1.08% |
| Feb | 105,925 | 102,788 | 3,137 | 2,043 | 1,094 | 2.96% | 1.93% | 1.03% |
| Mar | 102,282 | 98,807 | 3,475 | 1,986 | 1,489 | 3.40% | 1.94% | 1.46% |
| Apr | 102,901 | 99,450 | 3,451 | 1,998 | 1,453 | 3.35% | 1.94% | 1.41% |
| ... | ||||||||
| Dec | 99,513 | 96,425 | 3,088 | 1,972 | 1,116 | 3.10% | 1.98% | 1.12% |
| Year | 1,200,480 | 1,162,732 | 37,748 | 23,336 | 14,412 | 3.14% | 1.94% | 1.20% |
This one table sets up the high-level payment metrics. It is also what a CFO presents to the board. Investors look at gross take rate and net take rate. They compare each month with the last month and with the same month last year.
Be ready for the questions that follow. A declining gross take rate or rising payment fees will draw them. The cause needs to be known before the meeting. That depends on how long the monthly close takes.
Payment volumes up $2 million. Revenue down. What's going on?
Take rates vary month to month, year over year. Revenue can drop when payment volume rises, because the gross take rate fell. Take Barbershop SaaS, a hypothetical vertical SaaS company serving barbershops. From December to January, it processed $2.2 million more. Revenue still fell by $8.4K.
Gross take rate slipped from 3.10% to 3.03%. Fees rose by $5.6K over the same month. Net revenue, which is revenue minus fees, fell by $14.0K. Net take rate fell from 1.12% to 1.08%.
Gross and net take rates are not stable metrics. Many factors push on both the gross take rate and the payment fees.
More volume does not guarantee more revenue. The mix of payments behind the volume matters more. Understanding that mix means going deeper into the Stripe reports.
Where do I see a breakdown of every payment fee?
A breakdown of every payment fee is in the payment fees report in Stripe. The fees report lists fees down to the transaction level. It can be cut by card, payment method, geography and ticket size.
Here is the fee breakdown for Barbershop SaaS, a hypothetical vertical SaaS company serving barbershops. It covers January and February, in dollars.
| Fee type | January | February |
|---|---|---|
| Captured charges | 1,875,216 | 1,942,942 |
| Failed charges | 6,092 | 6,292 |
| Authorizations | 36,589 | 38,131 |
| Refunds | -15,130 | -21,508 |
| Refund authorizations | 341 | 446 |
| Disputes | -1,619 | -1,509 |
| Card attachments | 7,313 | 7,443 |
| Setup intents | 1,535 | 1,588 |
| Other | 67,313 | 69,497 |
| Total fees | 1,977,650 | 2,043,322 |
Fees held steady for Barbershop SaaS. Across the year, they stayed between 1.93% and 1.98% of the volume processed.
Founders often believe fees cause the swings in net take rate. More often than not, they do not.
Why did the gross take rate decrease?
A gross take rate decreases when mix, pricing or costs change. Gross take rate is the revenue earned divided by the volume processed.
Take Barbershop SaaS, a hypothetical vertical SaaS company serving barbershops. Its gross take rate moved from 3.03% in January to 2.96% in February. Then it jumped to 3.40% in March. Over the year, it ranged from 2.89% to 3.40%. Fees stayed near 1.9% of volume.
Six drivers are common. They are not an exhaustive list, so expect others. Each one changes the rate charged or the mix of payments processed.
Merchant mix
Merchant mix is often the biggest driver. Large multi-location merchants negotiate custom take rates. They ask for lower fees in return for volume.
The larger their share of volume, the lower the gross take rate. Smaller merchants usually pay closer to the standard rate. Growth in either group shifts the blend.
Payment method
Payment method covers online versus in person, the type of card, and bank transfers (ACH). Each carries its own cost. Many platforms also price each one differently for the merchant.
Credit cards cost more to process than debit cards. For Barbershop SaaS, credit fees ran about 2.35% of volume across the year. Debit ran about 0.56%. A shift toward debit or ACH changes the mix.
Product type
Product type changes the rate because each product is priced and processed differently. Barbershop SaaS takes payments for services and for retail purchases. Services are booked online in advance. Retail is paid in person by card.
Online and in-person payments carry different rates. A shift from one to the other moves the gross take rate.
Ticket size
Take rates differ by ticket size. A percentage fee earns more dollars on large tickets. A fixed per-payment fee earns more, as a share, on small ones.
Payments are best grouped into four bands. Those are under $25, $25 to $50, $50 to $75, and $75 and up. A shift in that mix moves the gross take rate, even when volume is flat.
Refunds
A refund returns money to the cardholder. It usually reverses the revenue earned on that payment. A dispute does the same and adds a dispute fee.
It is common for refunds to run 1% to 2% of the volume processed. A certain amount is fine. What matters is that the rate stays flat from month to month. A jump often traces back to a few merchants.
FX conversion
FX conversion matters when merchants collect money outside the United States. Barbershop SaaS processes nearly 5% of payments abroad. It works with local processors there. It then converts those funds back into US dollars.
FX conversion adds revenue, and it can land a month after the sale. That makes it lumpy. A busy conversion month lifts the gross take rate, and a quiet one lowers it.
How does a gross take rate bridge work?
A gross take rate bridge is a helpful approach. It shows exactly what drives each month's change in gross take rate. BoP is the beginning of the period. EoP is the end of the period. The drivers are merchant mix, payment method, product type, ticket size, refunds and FX conversion.
The bridge is built in three steps.
- Take last month's gross take rate as the BoP.
- Measure how much each driver moved the rate this month.
- Check that the BoP plus the six effects equals the EoP.
The table below is for Barbershop SaaS, a hypothetical vertical SaaS company serving barbershops. Each column shows the change into that month.
| Values are percentage points | Jan | Feb | Mar | Apr |
|---|---|---|---|---|
| Gross take rate, BoP | 3.10% | 3.03% | 2.96% | 3.40% |
| Merchant mix | -0.01 | -0.04 | +0.05 | -0.02 |
| Payment method | -0.01 | -0.02 | +0.03 | +0.01 |
| Product type | -0.02 | -0.03 | +0.07 | 0.00 |
| Ticket size | -0.01 | +0.01 | 0.00 | +0.02 |
| Refunds | +0.02 | -0.02 | +0.01 | -0.01 |
| FX conversion | -0.04 | +0.03 | +0.28 | -0.05 |
| Gross take rate, EoP | 3.03% | 2.96% | 3.40% | 3.35% |
From December to January, volume rose and revenue still fell. Gross take rate dropped 0.07 points. FX conversion explains 0.04 of that, and product type explains 0.02.
February to March moved the most. Gross take rate rose 0.44 points. FX conversion explains 0.28 of that. Product type and merchant mix explain most of the rest.
A bridge shows which driver to chase first. Bridges prepares it for every client as part of its strategic finance services.
What can improve profitability on each payment?
Two levers inside payments and one outside them can improve profitability. The first lever is the gross take rate. The second is payment fees. The third is selling other services.
Raising the gross take rate means earning more from merchants on each dollar processed. Cutting payment fees means paying less to process the same dollars. Either one lifts the net take rate. Each lever carries trade-offs for merchants and for margin.
Should payment fees be absorbed or passed on to clients?
Whether to absorb payment fees or pass them on is a strategic pricing question. The answer is to stay in line with the market rate. Processing is a commodity, and small businesses know the going rates.
Merchants cannot directly compare the price of the software. They can easily compare what is charged per payment. That alone can frustrate them enough to churn.
1. Check the market rate
Find what comparable processors charge businesses like the merchants. Merchants can find that number in minutes. The platform should know it first.
2. Compare merchant cohorts
Compare net take rate across cohorts of merchants. Take Barbershop SaaS, a hypothetical vertical SaaS company serving barbershops. Its net take rate by account ran from 0.75% to 1.5%. The low rates did not line up with the least profitable accounts. Read the agreements to see what was promised.
3. Reprice the lagging cohorts
Raise rates for cohorts priced below market. Barbershop SaaS reviewed profitability merchant by merchant, then raised rates on certain cohorts. Raising the rate is the easy part. Justifying it without churn is harder.
4. Treat above-market rates as a last resort
Charging above the market rate is not recommended. The churn risk usually outweighs the extra margin. A fractional CFO would frame this as a company-wide decision, not a payments one.
What is the best strategy to increase the take rate?
A SaaS company has only so many levers to impact its take rate. Two sit inside payments: the rate charged and the fees paid. The third sits outside payments, in the value created for clients. The surest lever is the third.
Raising the rate can backfire
Increasing the take rate on clients can backfire. Processing is a commodity, and merchants can compare per-payment rates in seconds. They cannot compare the software the same way. A rate above the market can frustrate them enough to leave. The software leaves with them.
Companies with greater pricing power can charge more without losing merchants. Barbershop SaaS, a hypothetical vertical SaaS company serving barbershops, raised rates only on certain cohorts. It also pushed toward smaller merchants. Marketing was far more efficient there than selling to enterprises. Payments was one reason among several.
Lowering payment fees has limits
Negotiate once volume thresholds are crossed. Stripe offers custom pricing for large payment volumes, including Interchange Plus and volume discounts. The card networks set network costs. The room sits in Stripe's own fees and add-on products.
Add-on products cost money too. Stripe Billing charges a percentage of billing volume on top of processing fees. Using fewer add-ons lowers the bill. Another way to run subscription billing may then be needed.
Creating more value for clients
A much more strategic conversation is how to create more value for clients. That means adding services and pricing tiers clients want to pay for. Examples are lending, insurance, accounting, tax compliance, and website builders.
Charge extra for them, or bundle them into a premium tier. Payments is rarely the main revenue line. It makes the core software stickier, and added value strengthens that. Weighing these choices is work for a fractional CFO.
