Introduction

The transactional business model is generally used for goods and services that are integrated with payment processing systems. This business model is important for companies that function as links in a chain connecting different vendors and purchasers. These companies collect transaction fees from either the buyer, the seller, or from both parties involved in the transaction. 

In general, there are many different businesses that are facilitated via the “transactional business model”. As transactions are inherent in any business activity, any firm that is facilitating these transactions will be implementing different transactional models. For example, a firm powering digital payments will utilize transactional business models. It facilitates monetary exchange between different parties involved. 

This type of business model works extremely well in situations in which the profitability of the enterprise is dependent on the transactions. In the field of digital payments, which includes businesses such as payment gateways and mobile wallets, amongst others, the primary focus of the company is on expanding its client base. Customers in this context might be consumers, merchants, etc. Some examples of transaction-based business models may include payment gateway providers, POS devices, etc. 

Working of transactional business model

In a transaction based business model, the earnings from a customer are calculated based on the customer’s transactions. The initial investment is high, which is needed irrespective of any number of customers.  Since a huge number of customers utilize the same service, the provider is able to cover the overall cost of the investment. Because of this, the costs associated with each transaction are reduced, and economies of scale are improved.

The level of consumer engagement is measured in terms of the percentage of customers that make transactions utilising the company’s platform. It is a challenge for these organisations. The normal 80:20 rule is followed in the operation of the business. This rule, also known as the Pareto Principle, highlights that 80% of impact comes with 20% of the tasks. In this context, 80% of the business comes from 20% of the client base. Companies can concentrate on this 20% of clients and can build a robust business. 

In the transactional business model, the frequency and ticket size of transactions also plays an important role. In other terms, some consumers transact a lot, but their average ticket size is very little, while other customers only transact once or twice a month and might have a large ticket size. Both of these are important aspects that need to be considered while building the business model.

To grow the business and ensure customer retention, the companies follow different approaches. One of them is relationship selling, in which an individual works on creating a relationship with the client by offering high-quality service, listening to what the customer has to say, and giving a personal touch by making the consumer aware that someone in the company is there for assistance. Many other different techniques are followed depending on the industry and size of the business in context.

Benefits of transactional business model

Due to low upfront financial commitments, transactional pricing gives a huge advantage to customers. The client is only required to pay for the finished job, as opposed to paying for the entirety of the contract or a significant portion of it. It has other advantages too, some of which are listed below:

• Customers are charged using transactional pricing models depending on the number of transactions completed in a specified time.
• Customers can be flexible with the scope of services required, and vendors can be flexible with their resources.

Transactional Business Model Related Metrics 

1. Gross Transaction Volume (GTV) : Total sales or payment money volume transacted in a given period. But the volume of payments that goes through the company platform isn’t revenue. The real revenue is Net Revenue, which is explained below.
2. Net Revenue: It refers to the money that one takes out of the transactions flowing through the platform. In other terms, the money that goes into the payment provider’s bank accounts for each transaction.
3. User Retention on a Monthly Basis: User retention rate measures the percentage of users that are staying with the service from month to month basis. In general, since the startup’s services enable the customers to generate money, there should be no reason for them to stop utilising their platform.

One of the core aspects of businesses operating in the transaction domain is, instead of luxury, it is now considered as an essential need by consumers. Payment systems have come a long way since its early stages, and the customers expectations have also increased a lot. Seamless transactions would mean that the customer’s needs are addressed as usual, but any small hiccup, or delay, would lead to customer’s dissatisfaction. It means that the business has to constantly focus on efficiency, and quick response. Otherwise, attrition can be higher than expected. Businesses should try to create metrics that can capture such consumer’s behaviour and address accordingly. 

Challenges Related to the Transaction Based Business Model

While there are various benefits of the Transaction Based Business Model there are a few challenges discussed below that one needs to be aware of:

1. Fraud Prevention: One of the major challenges for organizations lies in preventing fraudulent activity in transactions. An absence of a unified payment gateway can lead to unwarranted authorities and subsequently falling prey to elaborate scams in the process.
2. Technological Integration: In this rapid age of digitization, one of the key challenges for organizations involves integrating their payment gateways effectively into a technological platform. The reason behind doing so lies in facilitating effective automation for all financial transactions that concern revenues. 
3. Privacy and Security: Every financial transaction involves some user level information, which is highly sensitive in nature. If the payment channel isn’t following standard security protocols and unable to provide security of customer data, it could create a huge problem for both the customers and the business. The businesses will lose the trust and loyalty of customers, might even face litigation issues, and will have a hard time recouping its losses. 

Conclusion

In this article, we have discussed some of the essential aspects of transaction-based business models, different pricing techniques, key metrics, and how these are useful for businesses. Transaction based business models have always stood the test of time. They are the essential fuel for every engagement, irrespective of its size, volume, and industry in context. However, for a business to stay relevant, it’s important for them to constantly stay up to date with the recent user behaviour, keep developing new channels to handle emerging demands, and always maintain robust security protocols. 

Transaction based business models need to constantly stay ahead of the technological curve to avoid becoming irrelevant. Startups should constantly be on the lookout for new opportunities in this domain and build new models accordingly.