Should You Implement A COVID Surcharge? 4 Ways To Manage Your Profitability During The Pandemic
The ongoing COVID-19 pandemic has created the worst economic disruption for small business owners in the last 90 years. Even in parts of the country where restrictions are being lifted and businesses are slowly starting to re-open, the need to invest in additional sanitation measures and protective equipment to comply with local and state public health requirements has raised costs at a time when incoming revenue is still drastically reduced. Critically important small business supply chains have been disrupted, further increasing the cost of doing business.
As a small business owner, you may feel that you have no choice but to pass as much of your increased expenditures onto your customers as possible if you want to avoid going out of business. In fact, some owners have already done so, implementing what has come to be called a “COVID surcharge.” This surcharge is a small amount – either a percentage or a fixed dollar amount – that’s tacked onto a customer’s bill and specifically designated to cover increased pandemic-related expenses.
In this article, we’ll discuss COVID surcharges and why some business owners around the country have implemented them. We’ll go over the likely response you’ll get from your customers if you choose this course of action (hint: it’s not positive). We’ll also give you several alternative strategies you can implement that will increase your incoming revenue without the need for a surcharge. Finally, we’ll show you how you can use business data (often automatically generated by your POS system) to manage your costs and improve your ability to keep up with the additional pandemic-related expenditures.
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As we’ve alluded to above, COVID surcharges are a direct response to the additional costs required to operate a business safely in the middle of a worldwide pandemic. Protecting your customers and your employees from a highly contagious, potentially deadly disease requires a lot of extra equipment and safety measures that weren’t necessary just a few months ago. Disposable gloves, masks, hand sanitizer, extra signage to encourage proper social distancing, regular fumigation of your business – it all adds up to a significant cost at a time when you’re likely to be severely limited in how many customers you can even allow into your shop or restaurant at a time. For businesses that operate on a very thin (e.g., 2-3%) margin in normal times, the cost can be too much to bear while still turning a profit.
So, how have COVID surcharges worked out for the business owners who’ve implemented them? To put it mildly, not very well. While some customers are willing to pay a little extra temporarily to support a favorite local business during hard times, many others have responded with anger and disgust.
Consider the unfortunate case of Kiko Japanese Steakhouse & Sushi Lounge in West Plains, Missouri, which has attracted a lot of attention nationally. Faced with rising COVID-related costs and not wanting to raise prices across the board, the owners decided to implement a 5% surcharge. They went out of their way to explain to customers why they were doing so through social media and signs posted at their restaurant. Despite their best efforts to be transparent about the surcharge, they received a tremendous amount of criticism for it, often from people out of the area who weren’t even patrons of their restaurant. They eventually were forced to discontinue the surcharge, and instead raised their prices to cover the extra expenses.
If reading horror stories like this one has you thinking that COVID surcharges are a bad idea, you’re probably right. However, there are some circumstances where they might work. A lot will depend on how your usual clientele has been impacted by the COVID-19 pandemic. If you’re located in a well-off area, and most of your customers are still gainfully employed (either at home or working in an “essential” industry), they probably won’t mind paying a little extra to support a favorite business.
On the other hand, if you’re in an area that has experienced a lot of job losses and your customers are struggling, hitting them up with a surcharge is probably not a good idea. You should also take a close look at what your primary competitors are doing. You probably don’t want to be the first business in your area to start implementing a surcharge. However, if other businesses are already imposing them and haven’t faced a significant backlash, it might be safe to add your own surcharge as well. Overall, we consider COVID surcharges as a last resort that should only be implemented if you have no other way of maintaining profitability and staying in business. Here are some other options you should consider first before implementing a surcharge:
Four Alternative Strategies For Boosting Profit Margins
Businesses that operate on tight margins have always had ways of reducing their costs as much as possible, and many of those tricks might have been effective in “normal” times. However, in the face of a worldwide pandemic, you’ll need to try some new strategies to keep your costs low and your profits high (or at least, high enough to stay in business). Here are a few things that you might not have considered before that can help you stay afloat until the economy recovers:
Modify Your Menu Items Or Goods That You Sell
If you’re running a restaurant, you already know that some menu items are more popular than others, and some cost more to make than others. By shifting your menu selection to emphasize popular items that have a high per-item profit margin, you can increase your incoming revenue and lower your overall ingredient costs at the same time. If you’re not quite sure how to do this, our restaurant food cost calculator can help you get started.
Of course, this technique isn’t limited to restaurants alone. Other types of businesses, especially retail stores, can apply the same principles to help improve their cash flow. We probably don’t need to tell you that certain items (e.g., toilet paper, soap, hand sanitizer, face masks, etc.) have become much more popular during the COVID-19 pandemic. Besides these obvious items, we’ve seen dramatically increased demand for just about anything related to working from home, including items like office chairs, desks, and even webcams for video conferencing.
Offer A Cash Discount
One strategy for improving profitability that was already gaining in popularity before the pandemic is to shift the costs associated with credit card processing onto your customers. Often advertised as free credit card processing, this technique can be implemented by either adding a surcharge for customers who pay with a credit card or providing a cash discount to those who pay in cash. With surcharging, a small fee to cover the cost of credit card processing is added to the bill if a customer pays with a credit card. With a cash discounting program, your advertised prices will include the cost of credit card processing, and these prices will be discounted at checkout for customers who don’t use a credit card.
While the distinction between these two programs may seem very subtle, there are important legal differences between them. Cash discounting is legal everywhere in the United States, but surcharging is currently still prohibited in four states and several US territories. Your merchant account provider can help you set up either of these programs (assuming there are no legal restrictions in your jurisdiction), including providing you with the required signage to notify your customers and reprogramming your terminal or POS system to apply a surcharge or cash discount automatically.
For more details on how these programs work and how to implement them in your business, check out our article, Your Complete Guide To Credit Card Surcharges.
Raise Your Prices
If the previous two strategies don’t produce the desired results, it might be time to simply raise your prices. You may have to do this anyway if the prices you have to pay for inventory or raw ingredients go up due to supply chain problems.
We recommend that you implement targeted price increases, focusing on high-demand menu items or products. However, raising your prices across the board by an equal amount can also be effective. Which option is better will depend on a variety of factors, so you’ll have to evaluate the unique circumstances of your business to determine the best course of action.
While most of your customers will be (grudgingly) understanding about the need to raise prices in the face of a national emergency, be careful that you don’t overdo it. Check your state’s anti-price gouging laws, if any, to ensure that you don’t get yourself in legal trouble. California, for example, makes it illegal to raise prices for basic goods and services by more than 10% above pre-pandemic levels.
Lastly, price increases should be temporary. Make an effort to communicate to your customers that you intend to bring your prices back down once you can resume normal operations without the need for additional protective measures.
Implement Surcharging As A Last Resort
If none of the above strategies – either individually or in combination – prove sufficient to turn things around and your ability to continue to operate is imperiled, you may find that you have no choice but to impose a COVID surcharge. Obviously, you’ll want to communicate this to your customers before making the change, and you should also set the surcharge as low as possible. Ideally, it should be just enough to recoup your additional COVID-related expenses. As we’ve seen from the real-world examples above, you will probably receive at least some blowback for the surcharge. However, it can still be effective if your actual customers are willing to support it.
We recommend an across-the-board percentage-based surcharge rather than a flat ‘convenience fee.’ The latter option will disproportionately affect low ticket sizes and could discourage some customers from making a purchase at all. Your merchant account provider can help you reprogram your processing equipment to apply the surcharge automatically. Again, it’s critically important that you communicate with your customers before you start adding a surcharge to their bills, and be sure to discontinue this extra fee as soon as it’s possible to do so.
How To Use Your Business Data To Track The Impact Of Pricing Decisions
You’ll need to be able to gauge how effectively any pricing changes or surcharges are helping (or hurting) your bottom line. Make sure that all additional fees are entered properly into your POS system, and keep accurate notes of when prices were changed or when surcharges were implemented or discontinued. Modern POS systems and online data analytics tools offered by your merchant account provider can prove invaluable in quickly analyzing the effect of any changes you make, and they can gather and analyze the data automatically for you.
You should also determine the effective rate you’re paying for credit card processing. If your effective rate is too high, it might be time to switch to a more affordable merchant account provider. While you might be reluctant to make this kind of significant change in the middle of a pandemic, doing so can potentially save you hundreds of dollars per month in credit card processing expenses. Take a look at our Merchant Account Comparison Chart for an overview of some of the providers who can save you the most money.
The Bottom Line: The Pandemic Will Affect Your Bottom Line For The Foreseeable Future
If you’ve been reading this far, you probably understand that we don’t think COVID surcharges are a good idea. They have a very high potential for hurting your online reputation and driving away customers. As we’ve shown, there are many other ways to generate the necessary income you’ll need to cover your COVID-related expenditures. Modifying your product or menu item lineup, imposing credit card surcharging (or a cash discount), and targeted price increases can all be used to cover these expenses without the need for a COVID surcharge.
For many businesses, switching to a more affordable merchant account provider can be the most effective strategy of all to improve your profitability and cover any additional expenses you incur during the COVID-19 pandemic.
Hopefully, the techniques we’ve discussed above can help you get through the current pandemic, especially if the much-anticipated second wave of infection becomes a reality in the near future. Thanks for reading, and good luck!