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Apparently almost every store and restaurant I go to now warns me that if I dare to use a credit card, they will charge me an additional 3% of the bill. Nerve of mine, right?
Then there was the last dinner where a “service charge” was added to the bill which resulted in me accidentally doubling the tip for my waiter who was very good but not 40% of the bill good. Yes, I should have been more careful, and yes, I should have said no to the fourth glass of wine, but come on – doesn’t that seem a bit much to you – and a bit sneaky?
Related: “These Fees Are Getting Out of Control”: Diner claims she was charged a 5% fee at the restaurant to support her employees’ healthcare
Adding additional fees and charges is just a bad pricing strategy. And yet small businesses across the country continue this practice and suffer backlash both online and in the media.
There is the current history of the pizza restaurant Believe Florida which irked customers by adding a 20% fee to “retain workers and offset inflation.” And the restaurants in memphis, richmond, Charleston And cincinnatiwho used the same trick with the same consequences.
This is not limited to restaurants. Companies in other industries annoy their customers by forcing them to blame their employees with extra screens on their POS systems. According to a Business Insider report, landlords are has taken to TikTok to advocate for tipping count toward rent while Maryland’s first unionized Apple store fights to introduce a tipping system.
“This is emotional blackmail,” complained one customer after being forced to pay an additional service fee on a retail purchase.
There are better ways to make a profit without upsetting your customers. Try these three strategies to cover your costs without charging additional fees and potentially upsetting your customers.
1. First, you need to spread your overhead across all of your products
Accept credit card fees. According to the San Francisco Federal ReserveAbout 20% of the time, consumers use cash. So if you run a restaurant that makes $500,000 a year, it’s likely that $100,000 will be paid in cash and the rest ($400,000) by credit card. Assuming 3%, your credit card fees would be $12,000 per year, or 2.4% of sales.
So what to do? Your extra overhead should be spread across your products. Using the simple example above, a 2.4 percent increase means a $30 menu item is now $30.72. For heaven’s sake, don’t make this a big deal by charging an extra fee. Just keep track of your overhead as a percentage of sales and quietly increase the price of your items. Will your customers slam the table, throw away their napkins, and throw a glass of wine in their waiter’s face because of this outrageous increase? Of course not. Why? Because they will hardly notice.
2. Next, practice shrinking to protect your margins
Shrinkflation charges the same price but delivers slightly less product. If you think that’s immoral, just know that the biggest companies – by Walmart to Reynolds Consumer Products To Domino’s Pizza – do it. So why not you?
Maybe three meatballs instead of four in this pasta dish? Or how about shipping 10 units in a box of parts instead of 12? Or offer fewer services with the product? Or pass on more freight costs? It’s all about protecting your margins, and your cost of materials always accounts for the largest part of your margin. You need to analyze what you can save from your offer before simply raising prices.
Related: A unionized Apple store wants customers to start tipping employees
3. Finally, encourage tipping, but don’t force it
In any case, you should update your POS system and website to strongly “encourage” customers to leave a tip. Most will. I do. But you have to make a choice. Don’t just add an arbitrary service charge to your bills. It just pisses people off and makes them feel like they’re being exploited.
Why do this? Because the more your employees earn, the happier they are in their jobs, the lower the turnover and you may even be able to attract more workers. And the less you have to pay your employees, the happier your accountant will be at the end of the year. Of course you should pay a fair wage. But rising wages put pressure on your profits and will likely cause you to raise prices, meaning the customer has to pay more. Instead, gently urging the customer to tip more has broadly the same effect without taking the money out of your bank account.
Posting signs asking for an additional fee when using a credit card or adding a service charge to a bill draws unnecessary attention to your pricing and may annoy your customers. You don’t want to do this. You want to maintain your profits without drawing attention to your operations. By spreading your overhead across your products, practicing shrinkflation, and strongly encouraging your customers to tip, you can achieve this without becoming a negative headline.