Understanding How Your Pricing Projections Tie to Your Term Sheet: A Clear Explanation
When you, as a client, approach us for a solution provider, you provide projected business volumes. Based on these projections, we negotiate with various providers to find the best fit for your needs. It’s crucial to understand that these projections directly impact your commercial rates or fees.
Here’s how it works: Let’s say you project a monthly volume of $50 million. Based on this, the solution provider sets their fees. If you commit to this volume but later only achieve $5 million, this discrepancy can cause significant financial losses for the provider. It’s essentially a breach of the initial agreement where you promised $50 million in transactions but only delivered $5 million.
To prevent such issues, solution providers now include a clause in the contract to accommodate a margin of error in projections, typically plus or minus 5% to 10%. For instance, if you commit to $50 million, the minimum guaranteed transaction volume might be set at $45 million (10% less than the committed volume). Your fees will be calculated on this minimum guaranteed volume.
So, if you transact $45 million or more, the fees align with the actual transactions. However, if your transactions fall drastically, say to $5 million, the provider still charges fees as if you were transacting $45 million. These fees are often charged quarterly in advance and then adjusted against your balance.
This approach ensures fairness. High projected volumes lead to lower per-transaction fees based on economies of scale. However, to ensure a fair deal for both parties, you must commit to these projections within a specified margin.
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This page was last updated on December 11, 2023.
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