Surcharges: new revenue source vs. cause of failure

Dear Friends,

Ryanair is a best practice when it comes to surcharges. Prices for tickets where elasticity is high are relatively low, but services where elasticity is low like checking in luggage or reserving seats are relatively highly priced with corresponding surcharges.

When is it appropriate to apply surcharges and when not? How to proceed when introducing surcharges? Let’s deep dive this with a case below.

Always great to find pictures of readers with pricing books on social media as in this case. Thanks a lot for the great book review of Magda M. M. posted here who writes:

‘I was introduced to two books written by Danilo Zatta, and they were a true game-changer in how I view and work in this field. Every page offers valuable insights. Danilo Zatta provides a strategic and profound perspective on pricing, while also sharing practical tools that can be applied immediately. These books are essential, both for those considering implementing pricing and for those already working in the field, as they seamlessly connect theory and practice. For anyone, like me, who works with costs and pricing, these books are a must-read. They go beyond theory and become practical guides that make all the difference in our professional reality. I highly recommend them to all professionals who want not just to understand but to master pricing. I’m sharing this recommendation because receiving it was a stroke of luck for me. And thank you for sharing so much knowledge, Danilo Zatta’.

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Surcharges: new revenue source vs. cause of failure

Smart surcharges are a great way to generate new revenue streams. But when is a surcharge becoming a boomerang for a company generating exactly the opposite effect: revenue loss and customers walking away?

Here the case of a restaurant next to the beautiful town of Ortisei located in a picturesque Alpine scenery, where Italian, German, and Ladin cultures meet.

“For each extra empty plate you pay 3 euros.” This is the policy for lunches at Malga Cason Rascesia, above Ortisei, at 2,100 meters above sea level, communicated to customers through a postscript added by hand at the bottom of the menu.

Manager Fabio Farinelli explained his reasons to the newspapers: the decision was made last year, and would serve to counterbalance the offer of free cover charge (bread, however, is priced separately for those who want it). But it did not convince many customers, who protested, “It is not possible to charge three euros for an empty plate.”

Defense

“It often happens to us,” Farinelli explained, ”that a family orders a single course and then shares it using empty plates. We don't think we are doing anything wrong by charging for washing, cutlery, napkins and still water. These are all services that do not come to us for free. The price of the empty plate is clearly written on the menu, those who are against it may not ask for it.” Indeed, it is not only in establishments overlooking the Valgardena that such a controversial policy has been adopted.

Former case

Already last year, at the height of summer, a similar episode inside a Ligurian restaurant took place. A photo of the receipt with the two euros for the “saucer share” began circulating on the web, triggering a wave of polemical comments and negative reviews below the restaurant's Google page. “We are a small venue with five tables. It often happens that three or more people sit down to share courses,” the owners' son explained, defending the saucer surcharge.

6-step approach to introduce surcharges

Introducing a surcharge can be a sensitive process, as it involves charging customers an additional fee for your products or services. The key is to be transparent, communicative, and fair. Here's a step-by-step guide to introducing a surcharge effectively:

1. Determine the Need for a Surcharge

• Identify the Reason: Understand why a surcharge is necessary (e.g., increased operational costs, inflation, credit card processing fees, or special circumstances like environmental fees).
• Calculate the Surcharge: Determine the appropriate amount or percentage that needs to be added to cover the costs without overburdening your customers.

2. Communicate Clearly and Transparently

• Notify Customers in Advance: Inform your customers well before implementing the surcharge. This can be done via email, social media, signage in-store, or on your website.
• Explain the Reason: Be transparent about why the surcharge is being introduced. Customers are more likely to accept a surcharge if they understand the reason behind it.
• Provide Specifics: Clarify how much the surcharge will be and when it will be implemented.

3. Consider the Customer Experience

• Be Honest and Fair: Ensure that the surcharge is reasonable and justifiable. An excessive surcharge can alienate customers.
• Offer Alternatives: If applicable, provide customers with options to avoid the surcharge (e.g., paying with cash instead of a credit card).

4. Update Your Pricing Materials

• Update Receipts and Invoices: Clearly show the surcharge as a separate line item on receipts and invoices to avoid confusion.
• Adjust Advertising and Promotions: Ensure that any advertised prices reflect the inclusion of the surcharge where necessary.

5. Train Your Staff

• Educate Your Team: Make sure your employees understand the surcharge, the reasons for it, and how to explain it to customers. This will help in managing customer inquiries and objections.

6. Monitor and Review the Impact

• Assess Customer Feedback: Pay attention to how customers are reacting to the surcharge and be prepared to make adjustments if necessary.
• Evaluate Financial Impact: Regularly review whether the surcharge is achieving its intended purpose or if it needs to be revised.

This approach should help you implement a surcharge in a way that maintains customer trust and minimizes negative impact on your business.

What is your view on the Malga Cason Rascesia case?

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You are most welcome to share your views, feedbacks and own pricing experiences. Thanks a lot for your interest and support!