1 post tagged “cost-to-value”

Yesterday's Linden blog entry over foreign transaction fees seems to have generated a bit of bruhaha, too. Most of the comments seem to be variations on a theme: why does a US company use a UK bank to process its electronic transactions? My initial take on this was to relegate it to the realm of trivialities. Aside from my bank flagging a couple of L$ purchases as possible fraud until I contacted them (they apparently paid Linden, but wanted verification from me), this is not something that even came close to pinging on my radar. I'm more concerned with other issues, such as the problems of voice chat in conjunction with streaming media in a client application that already seems to think that it rules the roost. Talk about bandwidth hogging.... Oh, and don't get me started on the fact that this is going to come as a forced update rather than an optional plug-in.

I'm generally the kind of guy that likes to call a spade a spade, so here it is for what it's worth. Folks, Linden Labs is a business. The objective of any business is to maximize profits for the stockholders. In Linden's case, it is a privately held company (its stock is not traded on public exchanges), but the stockholders still expect a return on their investment. There are basically two components of profit: revenues and expenses. You want the greatest possible profit? Then maximize your revenues and minimize your expenses.

There is only so much a company can do to maximize revenues. Leaving aside shadier enterprises where it's a case of your money or your kneecaps, a company must entice potential customers into parting with their hard-earned lucre. The enticement is always a cost-to-value judgment on the part of the customer, so there is a limit to what a company can charge its customers before they decide that the value they are receiving does not equal or exceed the cost of obtaining it. In the case of LInden Labs, consider how many of their customers they would retain if they did not offer freebie accounts or significantly raised the fees for land owners. That leaves minimizing expenses.

In today's financial environment, a large chunk of financial transactions are processed electronically. Banking institutions are also businesses and they do not do this out of charity; they expect to make money off it. So electronic transactions are accompanied by fees. My bank, for example, charges me a monthly fee to use ATMs. This is in lieu of a per-transaction fee as is the case with other banks. It's not much (a couple or three dollars per month), but that couple or three dollars multiplied by many thousands of customers translates into some serious money. Credit card transactions are also accompanied by fees, but those fees are almost always charged to the merchant. You can still see this in action at those gas stations that offer a lower price to customers who pay cash. The merchant is passing along the cost of the credit card processing fee to the customers who generate the fee.

It has been a few years since I've had to deal with these fees, but American Express used to charge about 4% (and took forever and a day to send the remaining 96%), Discover was about 6%, and I forget what Diners Club/Carte Blanche charged (or whether they are even still around). Visa and Mastercard were handled in much the same way, but the fee was assessed by the merchant's bank on a monthly rather than on a per-batch basis. Now consider a merchant whose business relies almost exclusively on electronic transactions. If a bank comes to you and says that they will knock a half percent (or whatever) off of the processing fees for electronic transactions if you'll give them your business, you'd probably jump at the chance to cut that expense provided the there was no significant difference in any other area. After all, that's a half-percent more going into your pocket. On a single $5 transaction, it's not much, but if your electronic transactions run into the millions of dollars, that's some serious money (OK, it's chump change for the Lord Reverend Gates, but for the rest of us ...).

Linden's statement that they have no control over the fees that your bank charges is absolutely correct. I'm a bit disappointed that it took an off-shore company to come up with the testicular fortitude to make the offer, but I can't fault Linden for taking reasonable steps to reduce the cost of doing business. But any additional fees are an issue between you and your bank. If that significantly impacts the cost-to-value ratio from your perspective, you're welcome to use a different method of payment that doesn't incur the transaction fee.

Disclaimer: I'm not one of Linden's stockholders, I don't work for Linden and I don't know that the foregoing is actually the case. It's reasonable conjecture based upon a single premise: if you want to know why a business does something, follow the money. Linden Labs is a business, after all.