It has been a time of unrest for our country, our allies and the world in general. The payment processing industry is engaged in its own conflict...the ongoing battle for market share. Nowhere is it more clearly defined than in the trenches of terminal pricing.
   In this first installment of a two-part series, Transaction World will showcase one side of the battlefield�the manufacturers. While some organizations politely declined to reveal battle strategies, such as Hypercom, a number of leading companies�did weigh in on strategies, policies and predictions. The second installment, which will appear in next month's issue, will focus on the other side, namely the ISOs. It is supplier versus purchaser with both sides showing firm resolve to achieve their mission. They share a common mission directive�to provide the best possible product in the most cost effective manner. It is their tactics that are different.
   One of the strongest and most impressive of the manufacturers is Verifone. Through its 21-year history, it has experienced dramatic changes, shift in strategies and major wins as well as humbling defeats.
   In the beginning, Verifone concentrated on selling to processors rather than ISOs. Pricing models were volume-centric with VeriFone committed to doing whatever was necessary to get the best deal. However, they were pretty opposed to being a lowest price alternative. Within the last five years, battle plans have been restructured.
   "Five years ago, VeriFone maintained a dominant position," says Jessie Adams, Senior Vice President, North America. "We were able to have a price-driven, volume-based product that was reliable and worked. We focused on processors, letting them take product through their channels. Now, our strategy is changing. VeriFone has connected back with ISOs within the last year. The model in place five years ago didn't have the connection from the ISO perspective. Now we are closer to the ISO community. They still may buy through acquirers and processors but there is more of a pricing integrity now. We can quote a price and believe that price is fair."
   VeriFone is shrewd in its approach. It has closely examined the battlefield. Traditionally in this marketplace, their distributors would sell to ISOs with mark-ups anywhere from 50% to 150%. In some cases, the terminal was the tool, a utility for processors to drive transactions.
   "If we weren't providing them with a cost effective tool, comparative wise, there wasn't a whole lot of loyalty," says Adams. "We were ignoring the ISOs and concentrating on processors to get the word out and sell inventory. That has now changed. Yes, we have had to fight to protect our market share. Rather than rely on processors to take our story to the ISOs, we now go straight to the source. It is a push-pull model. Push from the top and pull from the ISO to understand the value price ratio of our terminals"
   Another trend that VeriFone and other manufactures are observing and reacting to is the move towards establishing value rather than a lower priced terminal. The terminal battlefield is starting to resemble the fierce PC marketplace. Manufacturers are making changes to stay competitive but also reshaping what a terminal has become�profit at the point of entry rather than just a device that collects payments.
   "The applications that go in our terminals are creative as they are brought to market," says Adams. "Like buying a PC, ISOs are getting a bundled price with new value adds. There is new pricing. If you want to add a game or software to your PC, you have to pay extra. ISOs are now willing to pay extra for those added values. And merchants will pay for that software because they need it to run their businesses."
   Is it possible as the industry moves into models with value adds that the price point of a terminal isn't as much of a stake in the battle as a decision point for ISOs? Are they seeing the advantage of paying more upfront to insure a continual revenue stream not just from a credit/debit portfolio but also from gift, loyalty and prepaid applications? VeriFone is banking on that belief.
   "ISOs are becoming more educated," says Adams. "They are trying to find ways to differentiate themselves so we are going out there and helping them understand cheap is not what it is all about. The education process is about components, infrastructure. It may be a bit technical, but at the end of the day they are going to have more revenue opportunities rather than running into a wall."
   One of the biggest challenges facing manufacturers in the price wars is price versus quality of product. How does one counterbalance lower cost with higher demand for functionality?
   "The good news at VeriFone is that we have always built a high quality product," says Adams. "We went out and talked to processors and ISOs and merchants. For us to be able to compete and change the paradigm, we had to bring value back to the product.
   It's not about how cheap the terminal is. It's about how it will be used today and how it will be used tomorrow to maintain customer loyalty. When you add multiple revenue streams, you have to be able to support it and protect everyone's investment."
   Towards that end, VeriFone has made huge research and development investments in its platform to prepare ISOs for the future. That preparation includes education and validation of their pricing structure.
   "We have to educate the ISO market," says Adams. "If you're going to sell value adds, you need a 32 byte processor, more memory to support it. You need a strong infrastructure. Otherwise, they're going to buy a legacy terminal at a low price that doesn't have the room and can't support value adds. In order to have long term value in the solution, there might need to be a little more investment up front."
   What is VeriFone's biggest challenge when it comes to pricing? According to Adams, it's all about standards.
   "No one has set a suggested manufacturers retail price," says Adams. "When you walk into a merchant, they don't know what it is supposed to be. There is an understanding in the industry that the payment terminal is nothing more than an on-ramp to transactions. It can be perceived as a commodity, like the auto industry. Whether it's a Yugo or a Lexus, it will drive. The biggest challenge is raising the bar and raising dialog of what is going to be needed in a terminal and proving the pricing ratio."
   Across battle lines, the conflict can be intense, but how fierce is the price battle between competitors on the same field?
   "There are a couple of players we compete against that are very driven to get market share, and to get market share you have to be extremely competitive," says Adams. "We all want to get as much out of a deal we can, but those players are driven by different pricing factors. At Verifone, we try to make sure we are priced competitively within our market guidelines. We will give up a couple of points that will deliver a solid deal in the long run but we are not going to lower our costs to sacrifice our integrity and value. We do have a lot of traction and momentum because we do offer something a little bit different and better than Joe average. That translates into a price that can deliver higher margins and more revenue. We are not chasing deals to stay in business next week. On a regular basis, our strategy is to make life as difficult as possible for our competitors to steal our business."
   Adams explains that strategy, "Everybody at VeriFone understands that not every deal on the table is good business. If we are in a price war at the top, there's going to be a price war down the line and ISOs will find their margins shrinking. Everyone along the chain can differentiate services and demand more price value as well as more revenue stream. The chain needs not to look for the cheapest. It's not about who offers the lowest price but who can offer the total solution."
   VeriFone sees itself as a good price model to strengthen that chain. VeriFone sees itself not providing a commodity but rather a value add proposition�and sets its prices accordingly.
   "Our proposition becomes everyone's," says Adams. "If ISOs have a tool to improve merchant retention, that value proposition goes way up. Then they are not just a commodity. They are a provider of value added services and not always just looking at pricing. By putting a model like this in place, VeriFone is leading the charge to change the paradigm of the market. It's no longer about a price-driven on ramp."
   Where will that charge take VeriFone? Will merchants dictate future pricing or will it be ISOs who call the shots? And what of VeriFone's fellow combatants. How will it all play out? Here's one executive's prediction.
   "Some of these small ankle biters who have been giving away terminals to buy market share, will they be around? Can they be sustained? It would be nice to get back to a level of value and integrity of price versus margin erosion," says Adams. "There is still a shake out coming with lower priced companies. I don't see merchants dictating price. They have one thing in mind�they want a terminal that works. If at the end of the day, they have money in the bank, they're happy. Our goal is to make sure they stay happy. As for ISOs affecting future pricing, it's hard to say. There is different motivation between ISOs. It's about how they can convince their merchants that what they are selling them is worth the money they're asking. The better way to make their merchants stick becomes less dependent on how cheap the terminal is and more on what they ultimately offer."
   At another leading manufacturer's camp, their battle strategy is all about keeping their customers profitable. Comfortable with their pricing, Schlumberger Sema appears to have a more dove-like approach to the price wars.
   "For us, everything is geared toward profitability of customers, not just pricing but all difference aspects of cost of ownership, cost of terminal and architecture," says Michel Leger, Vice President/General Manager, Epayment and Systems at Schlumberger. "Even today, it is the core value of the company."
   Responding to one of the most heated debates in the industry, namely price versus quality of product, Leger doesn't see a serious challenge for Schlumberger.
   "Just look at the price structure," says Leger. "75% comes from raw materials. Labor accounts for 25% of the cost. Because of that ratio, we can maintain high quality of product and never be impacted by price reduction. For example, all functionality of our POS equipment is designed for one component platform. That is unique to our company. We can always improve quality while not increasing cost."
   What Leger does see as a major challenge when it comes to pricing is attitude...and awareness.
   "It's all about convincing people to look at cost of ownership versus price," says Leger. "You can get a cheap terminal but it may come with high costs of support, software and infrastructure. In our architecture, we can deliver a whole range of products within one system at a cost-effective price. Landline, wireless, multiple applications and value adds�we have a true multi-app platform that includes support and infrastructure in one system for all. Part of our challenge is making people understand they need to look at cost as an asset investment. Cheapest is a short-term view."
   Leger is seeing that short-term view translate into a battle tactic that can backfire.
   "Some ISOs are looking at the refurbish market but if they do that, their competition will come and steal business with better functionality through value added terminals," says Leger. "Look at the market closely. Most lower priced terminals are refurbishes. This is not good for business. The more sophisticated the terminal, the better the marketplace."
   How does Schlumberger counterattack this tactic? The answer lies in their technology.
   "Due to our investment in technology, we offer all features at the same price," says Leger. "We keep our investment in technology high so we can stay more competitive. With a single platform for all products we can maintain our price. We look long term."
   Speaking of competition, Schlumberger is in a unique position in the terminal trenches in that it fights two distinct market share fronts � Canada and the United States. Their overall approach is the same with both, while their sales positions are different.
   "People look at total volume of terminals sold but we should look at terminals per platform sold," says Leger. "That will give a clear and truer picture of market share. We don't have a problem with price in North America. The people battling over lower pricing are in the refurbish market. We don't service that market. We deal with customers who see value in our technology. We don't sell our product as a commodity."
   Because Schlumberger's selling strategy reflects a non-commodity tactic, it doesn't see the ISO community nor merchants having a major influence on its pricing.
   "We don't want to get into a commodity-driven business," says Leger. "We want to stay competitive in the marketplace and we feel our prices are just that. Most of our business is through resellers. While we don't sell directly to ISOs in the United States, we do in Canada and our prices are competitive in both markets because of our investment in technology."
   Observing the current battlefield, Leger sees certain strategies changing while others will remain constant.
   "There is still room for reduction in pricing," says Leger. "It will probably reflect what happened in the PC market. More functionality will be tied to terminals for the same price. But there is a limit in what you can do in terms of price. We are already responding as we did in the past with wireless, smart card and the other innovative solutions we were among the first to bring. And as in the past, we will do it for a very reasonable price."
   When it comes to one very formidable manufacturer, the price war appears to be front and center in their line of sight. Like others in the same position, Lipman USA fiercely defends its market share with cunning cost strategies and solid pricing policy.
   In the past decade, for the most part, Lipman hasn't changed pricing. Five years ago, pricing was reduced to efficiencies in the factory, according to Mony Zenou, President/CEO of Lipman USA.
   "Our pricing has always been competitive and customer driven," says Zenou. "We had not greatly reduced pricing because our main policy was to protect our distributors. Pricing integrity towards those distributors was behind our prices. It wasn't till the end of February of this year that we slightly adjusted down our prices in response to competition. Prices have been dropping. We decided to reduce prices for new Nurit products. We also introduced an awards incentive program rather than dramatic price drops. Price drops have no value because the market quickly picks up and catches up. The value never stays."
   Zenou believes this is the main issue all manufactures have to deal with. It is the instability of the market that poses the biggest threat.
   "We hope that prices will stabilize but we specifically hope that competitors will stop their mission to try to kill each other...and us," says Zenou. "Price is not the tool that needs to be used for competitiveness. It should be performance, added features and value that you put into your product."
   Zenou admits Lipman is a bit more expensive than its competitors but he is quick to point out it has not affected their bottom line.
   "Lipman has been consistently the most profitable company in the industry worldwide and possessing the best gross margins," says Zenou. "We are publicly held so anyone can look at our margins. The issue is not that we aren't selling the cheapest. The point is Lipman's pricing policy and integrity towards distributors has proven to be the key factor towards maintaining pricing. We don't see it as having slightly higher prices for same product categories. We believe pricing is not directly linked to sales."
   Lipman's battle strategy is based on the belief that the merits of the terminal found in features, value adds, flexibility, reliability and merit of ownership all come together to provide substantial value as opposed to price emphasis. Notwithstanding, price adjustments have been made, but Lipman perceives this as strengthening its arsenal. Like other combatants, they've found another strength in its technology.
   "Our technology has allowed pricing to benefit from efficiency," says Zenou. "We are producing products in a more efficient way so the cost of manufacturing is coming down. This has enabled us to pass savings along to our customers. It's not just competition demanding it, but technology allowing it."
   While its production line and terminal components have become more efficient, there is still the challenge of needing to add more components while not adding costs. To meet this challenge, Lipman uses a multi-tier pricing structure with certain categories requiring certain prices while standard products engage standard prices.
   "The gap between high end and standard products should not be unreasonable," says Zenou. "Our competitors' gaps are way too wide. We must allow customers to offer both types of products and not build a lot of marketing and hype into pricing. Our customers are better served and more happy if we show them a smaller gap."
   Zenou sees a tendency in the worldwide marketplace for products to exhibit more aggressive prices. He believes that tactic is filtering into the U.S. market with damaging results.
   "There are about 20 players worldwide trying to sell product to the same people. Here in the United States, there's about 10," says Zenou. "I see the battle among them worse then ever. It's never been so bad as it is today. Hypercom and VeriFone are bleeding each other. Lipman is trying to stay away from the battle but we have had to make adjustments. At times, it is unreasonable what is happening and there's not a lot one can do about it. What we can do is provide new features and values for terminals. Our own customers like the added value we provide. The market is realizing this and imitating Lipman. We're continuing to innovate on both the terminal and back end solutions so we can keep our pricing at a value and level that will keep us going."
   How does Zenou see ISOs involved in this bloody battle for market share?
   "Many ISOs are in bed with large processors, and companies like VeriFone and Hypercom need to get to them to keep their sales going," says Zenou. "I am not going to tell them how to do it, but stealing sales people from each other and putting them on the street is not what is going to make ISOs buy a specific product. It is features, added values, commitment to supporting ISOs after they've chosen a product that will be the determining factor."
   When it comes to the future of pricing, where does Zenou see the price war heading?
   "I see pricing going down," says Zenou. "The way to maintain is to insure the value keeps going up to justify pricing staying as close as possible to where they are today. The market won't support big sales between standard and high-end terminals. The ISO-driven market won't be giving out any opportunities for prices to increase. For every account out there, there are eight to ten vendors trying to beat each other to it. If they can't beat on features, they will beat on price. It is regretful that the market has become such a battleground."
   Like many other impassioned payment-processing professionals, Zenou has definite viewpoints on the current rank and file and what it could encounter in future skirmishes.
   "People tend to think the terminal is a commodity," says Zenou. "A terminal with value and features is not a commodity. Software is not a commodity. The ability to write proper software and enable a platform to support that terminal is a very costly process. The market is not allowing us that process because we are constantly beating each other up. The market may be calling for consolidation but because this is a free market and at the end of the day the industry wants cost reductions, it unfortunately falls on the manufacturer."
   Zenou admits no one can dictate to ISOs how much to sell terminals but suggests that when one looks at the differentiation between manufacturers' margins and what the ISOs ultimately sell terminals for, it is regretful that manufacturers are allowing the market to push them to slimmer margins. He predicts it could end in manufacturers not being able to provide added value.
   "The ISOs are not at fault, as a rule," says Zenou. "Manufacturers need to realize that the push for retention and price competition is shaking up companies like Hypercom and VeriFone. It's getting bloody. This price war is definitely not the direction Lipman chooses to go. Yes, you can buy cheaper than Lipman but hopefully people will see our value. I do not see the link that if I drop my price 25%, I'll get a lot more business. I've never believed that. The way to get more business is to provide better tools, better technology and added value."