(This column originally appeared in Entrepreneur)
Opinions expressed by Entrepreneur contributors are their own.
It seems like almost every retail shop and restaurant I visit are now warning me that they’re going to charge an extra 3% of the bill if I have the audacity to use a credit card. The nerve of me, right?
Then there was the recent dinner I had where a “service charge” was slipped onto the bill which caused me to mistakenly double the tip to my server, who was very good, but not 40% of the bill good. Yes, I should have paid more attention and yes I should’ve said no to that fourth glass of wine but come on — doesn’t this seem a little much — and a little underhanded?
Adding extra fees and charges is simply a bad pricing strategy. And yet small businesses around the country continue this practice and suffer backlash both online and in the media.
There’s the recent story of the pizza restaurant in Viera Florida which upset customers by adding a 20% charge to “retain workers and offset inflation.” And the restaurants in Memphis, Richmond, Charleston and Cincinnati, who pulled the same trick with equal consequences.
This is not limited to restaurants. Businesses in other industries are irking their customers by forcing them to “guilt tip” employees with added screens on their point-of-sale systems. According to a report in Business Insider, landlords have taken to TikTok to make a case for a gratuity to be added onto rent, while the first unionized Apple store in Maryland is fighting for the introduction of a tipping system.
“It’s emotional blackmail,” complained one customer when forced to pay an added service charge on a retail purchase.
There are better ways to make your profits without angering your customers. Try these three strategies for covering your costs without imposing additional fees and potentially angering your customers.
1. First, you need to spread your overhead costs across all of your products
Take credit card fees. According to the San Francisco Federal Reserve, consumers use cash about 20% of the time. So if you’re running a restaurant that grosses $500,000 in a year then it’s likely that $100,000 will be paid in cash and the remainder ($400,000) will be paid by credit card. Your credit card fees — assuming 3% — would be $12,000 for the year or 2.4% of revenues.
So what to do? Your added overhead should be spread across your products. Using the simple example above, a 2.4 percent increase means that a $30 menu item now costs $30.72. For goodness sake, don’t make a big issue of this by charging an additional fee. Just keep an eye on your overhead as a percentage of sales and quietly increase the price of your items. Will your customers slam the table, discard their napkins and throw a glass of wine in their server’s face because of this outrageous increase? Of course not. Why? Because they’ll barely notice.
2. Next, practice shrinkflation to protect your margins
Shrinkflation is charging the same price but providing a little less product. If you think that’s immoral just know that the biggest companies — from Walmart to Reynolds Consumer Products to Domino’s Pizza — are doing it. So why not you?
Maybe three meatballs instead of four in that pasta dish? Or how about shipping 10 units in a box of parts instead of 12? Or offering less services with the product? Or passing down more freight costs? It’s all about protecting margins and your cost of materials is always the biggest part of your margin. You have to analyze what can you shave from your offerings before simply raising prices.
3. Finally: encourage tipping, but don’t force it
By all means you should be updating your point-of-sale system and website so that customers are strongly “encouraged” to leave a tip. Most will. I do. But you have to give a choice. Don’t just add an arbitrary service fee to your bills. That just makes people annoyed and feel like they’re being fleeced.
Why do this? Because the more your people earn the happier they are at their jobs, therefore the less turnover you suffer and you might even be able to attract more workers. And the less you have to pay your employees the happier your accountant is at the end of the year. Of course, you should be paying a fair wage. But increasing wages puts pressure on your profits and will likely cause you to increase prices, which means the customer will have to pay more. Gently pushing the customer instead to tip more has pretty much the same effect, without the cash coming from your bank account.
Putting up signs demanding an extra charge when a credit card is used or slapping on a service fee on top of an invoice draws unnecessary attention to your pricing and potentially annoys your customers. You don’t want to do this. You want to maintain your profits without drawing attention to how you do it. By spreading your overhead across your products, practicing shrinkflation and strongly encouraging that your customers tip you can accomplish this without becoming a negative news story.