Restaurant’s New Pricing Strategy: The Surcharge Fee

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on Nov 15, 2018 9:00:00 AM
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I recently received an email from a colleague who shared a first-time experience she’d had when dining out. Her check included the following message:

“In response to the substantial increase in restaurant operational costs in California, in lieu of raising our prices, an optional 3% surcharge will be applied to all checks. Please inform your server if you would like this charge removed. Thank you for your patronage.”

Really? An optional surcharge? I had to investigate. Here is what I discovered:

Whether due to minimum wage increases, rising health insurance costs, labor shortages, or rising food costs, about three years ago, some restaurants started imposing surcharges. About one year ago, the number of restaurants using these charges to increase or sustain profit margins increased dramatically. What started in cities such as San Francisco and Los Angeles, has now spread to Boston, Minneapolis, Colorado, Arizona, and beyond. In many cities, it is illegal to add a surcharge to a diner’s bill, unless the charges are clearly displayed in writing.

The Problem with Restaurant Surcharges

The problem with these hidden charges is, just that, they are hidden, or at least not expected. Even restaurants that have signs posted informing patrons of the added charge are experiencing push backs.

And this is why: It feels a little sneaky. Why not just increase the prices on the menu? Isn’t that the basis of a healthy market? Increasing costs correspond to price increases, right? Or did I miss too many classes in Business 101? That’s a lot of questions, and ones that your customers are asking.

Don’t underestimate your guests who often have a pulse on the changing times—they know minimum wage hikes are affecting your bottom line, that you need to compete with the other 50 restaurants in your area for the small labor pool, and that your profit margin is shrinking with each threat of a trade war tweet…we know!

Restaurateurs that have imposed these fees argue that they are optional. Let’s take a poll: How many of you would be comfortable asking your server to remove the optional surcharge? “Um, excuse me, you just gave me exceptional service, but, could you take this extra fee off that may be paying for your health insurance?” Lovely. On the other hand, while customers may complain about increasing prices, most understand. Your New York steak costs a dollar more to make? I’ll pay a dollar more to eat it.

Some customers have become so angered that they have actually sued restaurants in an attempt to stop the surcharges. Lawsuits allege that restaurants are deceiving customers by applying a surcharge instead of increasing the price of individual menu items. Other lawsuits are based on the fact that some restaurants did not tell diners that they were going to be charged an extra fee.

States such as Washington have developed websites that list the restaurants that are adding surcharges in an attempt to get businesses to drop the charge.

Service Fee Versus Surcharge

Keep in mind, this is very different than the service fee that many restaurants are turning to in order to help equalize pay between the front and back of the house. These types of fees, we, as customers, can understand. We were planning on tipping anyway. Of course, there are those guests who feel it’s important to be able to tip according to the service received, but that’s a subject for another blog. At least we know where these fees are going—to the hard-working employees.

Clientele Makes a Difference

I, and many other consumers, feel the same way—we are happy to pay extra for quality. I would rather see my favorite entree go up $1 than be disappointed and left to go in search of a different establishment. It’s like starting over in a relationship—new and different, but not quite as comfortable. I do not, however, want to be charged a standard surcharge fee.

On the other hand, quality is a matter of taste. If your customer base is such that a raise in menu pricing will leave many opting for the cheaper fast-food establishment down the street, consider alternative ingredients. Can you replace your Red Snapper fish tacos with a nice Pacific Rockfish? With plant-based diets on the rise, can you offer some dishes that are vegetable-centric, using animal protein as an accent? Is there local opportunities for food sourcing? Forbes reported that Farm Spirit in Portland Oregon was able to keep food costs to an average of only 16.5 percent of the restaurant’s total costs by “strictly sourcing from nearby farms and farmers markets.”

If you do decide to raise prices or tack on a surcharge fee, keep a steady eye on the affects and if you are actually boosting profits or experiencing fewer new and returning guests. Several restaurants have implemented the surcharge only to withdraw it after receiving customer complaints. A few of these include Tom Douglas Restaurants and Kickin Boot in Seattle. The W Hotel in Seattle dropped the added surcharge when a tweet complaining about the extra fee went viral.

We understand, the restaurant business is not for the faint of heart. Many operators describe it as a high-wire act requiring death-defying precision. As you navigate through the changing times, listening to your loyal customers and remaining mindful of your competitors pricing strategies will help you make the voyage, if not more successful, at least a little less painful.

 Download Now: 10 Strategies to Make Commodity Pricing Work for Your Restaurant

Topics: Capital

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