By: Ryan Walker

Bitcoin, Transactions Fees and The Cost of Poor Quality

For decades, transaction fees have been an unavoidable cost of doing business for merchants. This document seeks to explore The Cost of Poor Quality and the implications Bitcoin has to eliminate these costs and dramatically increase profit margins.

Twitter: @RyanMWalker 1

TABLE OF CONTENTS:

Section Page

1. The Cost of Poor Quality 3

2. The Hidden Costs: Transactions Fees 6

3. Profit Margins: The “Real Opportunity” 9

4. Case Study: Overstock.com 12

5. Conclusions & Author Information 15

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Section 1: The Cost of Poor Quality

3

The Cost of Poor Quality (COPQ) can be defined as the sum of costs that would disappear if a system, process, or product were designed and executed perfectly.!

In Chart 1.A the total cost to provide a service is $100. For this example, the Cost of Poor Quality is $25. These costs are experienced for a number of unfavorable reasons. If this cost were reduced the merchant could return higher profit margins or offer their services at a lower cost to their customers.

The Cost of Poor Quality

$0

$25

$50

$75

$100

}True Cost!($75)

Cost of Poor!Quality !

($25)}

Due to risk, errors, poor

processes, poor price negotiation,

write-offs, etc.

Due to expected purchasing costs, labor & capitol, administrative

costs, etc.

4

Chart 1.A: Cost of Poor Quality Example

The Impact of Reducing Cost of Poor Quality

! 5

Chart 2.A: The Impact of Reducing the Cost of Poor Quality

By managing the Cost of Poor Quality, organizations can reduce their overall costs. This savings can be directed to profit margins or be utilized to offer customers lower costs, thus making the merchant more competitive.

$0

$25

$50

$75

$100

True Cost!($60)

Cost of Poor!Quality ($30)

Profit = ($10)

$0

$25

$50

$75

$100

True Cost!($60)

Cost of Poor!Quality ($20)

Profit = ($20)

$0

$25

$50

$75

$100

True Cost!($60)

Cost of Poor!Quality ($20)

Profit = ($10)

Revenue and Costs of Current

Business

Reducing COPQ to Increase Profit

Margin

Reducing COPQ to Maintain

Profits Under Pressure

Section 2: The Hidden Costs “Transaction Fees”

6

Transaction fees are charged by payment processors to facilitate a transaction. These fees vary based on a number of variables and structures.!

Based on the conditions of their agreement merchants can expect to pay on average between 2% and 3% in fees per transaction. In addition to these standard fees, agreements include stipulations and penalty fees that burden merchants with the risk of additional cost.

Traditional Payment Processors and Transaction Fees

7For a detailed description of transaction fees please the cardfellow.com blog:!http://www.cardfellow.com/blog/average-fees-for-credit-card-processing/

$75

$80

$85

$90

$95

$100

Profit (5%)

Transaction Fee (3%)

True Cost (92%)

Chart 3.A: Transaction fees and profit margin as a percentage of revenue for major payment processors. Example based on an expected profit margin of 5%.

With the proliferation of Bitcoin and other cryptocurrencies in 2013, more and more services are competing to provide payment processing services to the merchants of today and tomorrow.!

Professional, business, and enterprise level service suites are already available and in use by merchants world wide. Additionally, user-friendly apps are being released almost daily to facilitate the on and off ramps of large and small scale operations. !

The most significant differentiator of these services and payment solutions is the vast difference in transaction fees which range between 0% and 1%.

Bitcoin Payment Processors and Transaction Fees

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Chart 4.A: Transaction fees and profit margin as a percentage of revenue for Bitcoin payment processors and wallet services. Example based on a historical profit margin of 5%.

$75

$80

$85

$90

$95

$100

Profit (7%)

Transaction Fee (1%)

True Cost!(92%)

Section 3: Profit Margins “The Real Opportunity”

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Transaction Fees as a Cost of Poor Quality Due to risk, errors, poor

processes, write-offs, etc.

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Chart 5.A: Transaction Costs as a Cost of Poor Quality - Example based on a sales revenue of $100 and expected profit margin of 5%.

For merchants, the transaction fees paid to payment processors have long been considered part of the “True Cost” of facilitating a sale or transaction. Bitcoin and crypto-currencies have now exposed these fees to be a Cost of Poor Quality.

$75

$81

$88

$94

$100

Profit (5%)

Transaction Fee (3%)

True Cost!(92%)

$75

$81

$88

$94

$100

True Cost!(92%)

Transaction Fee (1%)

Profit (7%)

$75

$80

$85

$90

$95

$100

True Cost!(95%)

Profit (5%)

Revenue and Costs of Current

Transaction

Recognizing Transaction Fees

as COPQ

Reducing COPQ by Utilizing

Bitcoin to Avoid Fees

The Impact of Reduced Transaction Fees on Profit Margins

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Chart 6.A: Transaction Costs as a Cost of Poor Quality.!Example based on an expected profit margin of 1%.

$90

$93

$95

$98

$100

Profit (1%)

Transaction Fee (3%)

True Cost!(96%)

$90

$93

$95

$98

$100

True Cost!(96%)

Transaction Fee (1%)

Profit (3%)

Recognizing Transaction Fees

as COPQ

Reducing COPQ by Utilizing Bitcoin

to Avoid Fees

The “real opportunity” in accepting bitcoin transactions lies in the impact that reduced transaction fees will have on the bottom line.!

As displayed in Chart 6.A, a reduction in transaction fees from 3% to 1% will add 2% directly to the profit margin of the sale. !

In a world where many high volume business operate with razor thin profit margins of as low as 1%, an additional 2% in profit margin would represent a 200% increase in profits.!

Section 4: Case Study “Overstock.com”

12

In January 2014, Overstock CEO Patrick Byrne announced that his organization had partnered with bitcoin-based service Coinbase to integrate Bitcoin as a means of payment to U.S. customers.!

This news was well received and the organization made over $127,000 in sales within the first 24 hours. Byrne projects Bitcoin sales to account for 1% of their sales in 2014. This represents $13 million in revenue.!

For Overstock, the expected margin on sales is 2%. Reducing their transaction fees will dramatically add to this margin and increase profits. As displayed by Chart 7.A, this could increase profits by 75% (from 2% of revenue to 3.5%) for all related bitcoin sales.

Overstock Now Accepting Bitcoin

13

Chart 7.A: Estimated Sale Margin for Overstock.com

$90

$93

$95

$98

$100

Profit (2%)

Transaction Fee (2.5%)

True Cost!(95.5%)

$90

$93

$95

$98

$100

True Cost!(95.5%)

Transaction Fee (1%)

Profit (3.5%)

Sales Incurring Historical

Transaction Fees

Sales Utilizing Bitcoin and Coinbase

For Overstock.com, all sales made by customers using bitcoin

As of March 4th, 2014 Overstock had announced that it had surpassed $1 million in bitcoin related sales revenue. Chart 8.A displays the increased profit for these sales in terms of realized dollars.!

It is worth noting that many merchants experience bumps in sales volumes of upwards of 11% after choosing to accept bitcoin as a method of payment.!

!Potential Impact:!Overstock had revenue of $1.3 billion in 2013. If over the course of 2013 10% of these sales were transacted in Bitcoin, Overstock would have realized $2 million in reduced transaction fees. If 50% of sales were transacted with Bitcoin, Overstock would experience a reduction in transaction fees of $9.75 million.!

Overstock Now Accepting Bitcoin

14

Chart 8.A: Estimated Bitcoin Sale Margins for Overstock.com

$90

$93

$95

$98

$100

Profit!($20,000)

Transaction Fees ($25,000)

True Cost!($955,000)

$90

$93

$95

$98

$100

True Cost!($955,000)

Transaction Fees!($10,000)

Profit ($35,000)

Sales Incurring Historical

Transaction Fees

Sales Utilizing Bitcoin and Coinbase

Bitcoin is a disruptive technology whose impact is only beginning to be realized. One of the earliest use-cases for this technology is as a means of transaction. In the short term, as adoption of bitcoin or alternative cryptocurrencies gains wider acceptance, merchants and businesses would be wise to incorporate this technology as a competitive advantage.!

In the long term this will prove to be a requirement to maintain profit margins as it will allow other merchants within the market to provide their goods and services at discounted cost.

Conclusion

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!About the Author:!Ryan Walker is an entrepreneur, freelance writer, and quality consultant. !For business inquiries or referrals please contact via Twitter or LinkedIn.!!Twitter: @RyanMWalker!LinkedIn: http://lnkd.in/bgMH5kh!Blockchain Wallet: 153Cpm4vxGTKyUXyVWLQkx5s8fLwcb24mD!

Figure 1: Bitcoin Accepted Here icon