Nov 16 2011

How Apple Saves Millions on Transaction Fees

I’ve joked before that Apple has more revenue sources than they do products. In addition to having great profit margins on hardware they also do well on the Apple iTunes music and app store. In addition to these, Apple brings millions with it’s developer program, with costs $99/year. Since Apple has been doing well with it’s traditional business and because Apple is so private about it’s business I feel business analysts have not had the spotlight on other aspects Apple’s finances, such as how they save millions of dollars a year on transaction fees.

Have you ever notice that when you buy a $0.99 song on the iTunes music store you may be charged two or three days later? I’ve noticed that when if I purchase a movie on a Friday and a song on a Saturday, I often don’t get charged until the following Sunday or Monday and when I do both items are charged together. How does this save Apple millions? Typically, when you have to process a customer’s credit card to charge for goods or services, the bank or merchant account that processes the credit card will charge around $0.20-0.30 per transaction and an additional percentage of the total cost after a certain amount. This is why some small business don’t accept credit cards for less than some amount, like $5-10 dollars. If you are processing credit cards for your digital goods online store, PayPal charges a transaction fee of $0.30 plus 2.9% of the total price.

I’ve positive that Apple has negotiated the transaction cost to less what a brink and mortar business would have to pay, but as an example let’s say they pay $.10 per transaction. If you buy a $0.99 song on iTunes Apple still has to pay a transaction fee for charging your card, in this case $0.10 or 10% of the total charged. If you buy two songs over a span of two days and Apple bills you for the both of the $0.99 songs together, Apple will still only pay the $0.10 transaction cost to process the credit card, or just 5% of the total price.

This is why when you purchase items from iTunes it maybe be several days before you are charged, because it is better for Apple to charge you for multiple items than to charge you for individual songs separately.