How COVID-19 Surcharges Can Benefit Consumers

“We are not making money off this. This is just to sustain us so we are not bleeding out cash.”
—Rishi Desai, Director of Operations, Swish Dental.

Around the world, as restaurants, bars, dentists, and other small businesses have reopened, one common pricing issue that is annoying many consumers is the use of COVID-19 surcharges. A surcharge is an amount that the seller adds on to the base price of a product or a service for a specific reason. During uncertain times, when input costs are unstable or rising, surcharges are quite common.

As one example, when the price of aviation fuel increases significantly, many airlines maintain their base ticket prices but add a fuel surcharge to each ticket’s price to account for higher fuel costs. A fuel surcharge allows the airline to recover the higher cost of operation temporarily without revamping its pricing policies. The idea is that when the airline is able to purchase its fuel at a lower cost, it will discontinue the fuel surcharge.

The logic behind COVID-19 surcharges

COVID-19 surcharges rely on similar reasoning. Operating a small business, particularly a service business, has become more expensive during the pandemic. For the business’ survival, its operator passes on the (hopefully short-lived) increased costs to customers using an appropriate surcharge. Here are some examples of recent COVID-19 surcharges reported by the media:

• A Japanese Steakhouse and Sushi Lounge in southern Missouri added a 5 percent COVID-19 surcharge (e.g., $2.19 on a $43.85 bill).
• Gleam Salon in Manhattan adds a $3 “Personal Protective Equipment” fee to its services.
• A dentist in Austin, Texas, added a $20 “infection control fee” to each client’s tab. Dentists nationwide have adopted infection control fees of varying amounts.
• Bill Miller Bar-B-Q in San Antonio added a “COVID meat surcharge” of $1 per quarter pound of brisket ordered by customers. Meat during the COVID-19 pandemic is pricier!

The reasons for introducing COVID-19 surcharges vary. For some businesses, particularly restaurants, the costs of ingredients such as steak, pork, and certain vegetables went up significantly during the pandemic. For many others, offering their services safely to customers requires significant additional cleaning and sanitation along with the need to purchase protective gear like face masks and face shields for employees, sneeze guards, and social distancing signage. The additional equipment and cleaning procedures add significant costs to operate the business.

Another reason for higher costs is that many service businesses have had to endure a significant reduction in capacity. In Texas, for example, restaurants were only allowed to operate at 25 percent capacity for several weeks in the spring, which then increased to 50 percent. During this time, while the fixed costs remained unchanged or even increased, the opportunity to earn revenue was diminished. High-margin sales of alcohol plummeted, and costs of carry-out supplies increased.

My main point is that most small businesses have a legitimate reason to levy COVID-19 surcharges during the pandemic: their survival.

Many consumers react to COVID-19 surcharges with outrage

While some consumers were understanding, taking the new COVID-19 surcharges in stride, a significant number were outraged. Many stopped purchasing. Others expressed anger in hurtful, and even violent, ways through social media, tweets, negative reviews, and phone calls threatening bodily harm. Media stories about COVID-19 surcharges may have helped to amplify this outrage. As the owner of one Missouri restaurant implementing COVID-19 surcharges explained,

“Unfortunately, with the story going viral, I have received death threats, threats to burn our restaurant down, people verbally abusing staff on the phone. None of the phone calls came from our area, only two were even from Missouri, the rest were from out of state.”

Why COVID-19 surcharges may benefit consumers

These knee-jerk reactions of consumers may be missing the mark. To deal with the challenges of the pandemic, small business operators have only two pricing choices. They can add surcharges to base prices, or they can raise their base prices. With significantly higher operating costs and less money coming in, maintaining the status quo is not sustainable.

Coronavirus Disease 2019 Essential Reads

Update on COVID-19 and How It Changes the Brain

How Political Partisanship Can Be Deadly

Source: Tim Mossholder/ Unsplash/ Licensed Under CC BY 2.0

When talking to businesses about pricing strategy, I have advised operators to increase prices because surcharges can hurt the company’s brand and are divorced from how customers value the offering. However, through the lens of someone deeply interested in consumer welfare, the opposite is true. In the long-run, beyond the pandemic, COVID-19 surcharges will likely turn out to be more beneficial for consumers’ wallets than price increases. There are at least three reasons for this:

1. Because they are visible and need to be explained, COVID-19 surcharges will be more likely to remain in force only as long as they are economically warranted. For example, when jet fuel prices decreased, airlines had no choice but to withdraw their fuel surcharges because of the visibility. When PPE is no longer needed to serve food, restaurants will have no justification for the surcharge. On the other hand, once the business increases prices, the new prices can be maintained because they do not need to be justified.
2. It costs money to raise prices, which can be a significant expense for small businesses. If a restaurant operator is forced to increase prices, they have to discard their old menus and print new ones. The price increase factors in these additional costs. A surcharge, on the other hand, can be programmed into the cash register and explained to customers verbally or with a sign, costing almost nothing extra. Because of the cost difference, patrons may end up paying more when the restaurant raises prices than if it uses a COVID-19 surcharge.
3. Because it is costly to change prices, price changes tend to be rigid. Surcharges can be altered and ratcheted down faster and more incrementally as economic conditions improve. A 5 percent surcharge can be lowered to 3 percent, then 2 percent, and so on. This is difficult to do for price increases.

All pricing decisions depend on the context. The right thing to do in one situation is often the wrong decision, and even unethical, in another. I have written before on this blog about a different type of surcharge: resort fees charged by hotels. There, I argued that resort fees hurt consumers by leading them to underestimate prices and by creating an illusion of transparency. The resort fee surcharge harms consumer welfare. COVID-19 surcharges don’t; they may be good for consumer welfare. COVID-19-surcharge-fueled outrage, social media flaming, threats, and boycotts of small businesses that are just trying to survive do not seem either smart or ethical things for consumers to do.