Today we’re going to talk about the pros and cons of surcharges.
1. Understand that Surcharges are a Rate Increase
There is a pro to surcharges just like there are to raising prices. If you raise prices, mathematically you’re going to make more money. Of course, profit is significant to the company and moreover, it’s typically better to make more money.
In the lawn care industry, it’s somewhat reasonable to apply a fuel surcharge to a customer’s bill. Sometimes we do this because the cost of gas has gone up. Right now it’s historically low, and that’s good, but if it takes a spike, things can change. We’ve talked about it here on the blog.
2. Recognize the Variables
Let’s say something happens in the Middle East. The cost of gas doubles, from $1.80 to $3.60 then, we’re all tempted to put a fuel surcharge onto our bills. It makes sense because it’s something that your customers have seen and they’re they’re conscious of it. They can see it every time they fill up their car with gas. They see that the price of gas has gone up and they know that you use gas to service their properties.
However, if you look at your company’s P&Ls, you’ll likely find that your gas only amounts to about 8% or 9% of your total sales. If that doubles from 8% to 16%, then you have an increase of 8% that will come off your bottom line.
That’s painful but it is only 8%, and there are other places that you might be able to cut to make up for the loss. Even though it doubles the cost of the gas, it doesn’t double the expenses in your company. Finding another place to cut or create a surcharge is the next step.
3. Why Knowing Your Most Significant Cost is Important
The most significant loss in your company is likely not gas. I’m willing to bet you spend more on labor. Right now the U.S. is enjoying an unusually high unemployment rate. The lack of good labor, however, is what’s killing lawn care companies.
If you need to charge a bit more, I would almost recommend a labor surcharge onto your bill. It’s easily justified by explaining that you’re not getting H-2B workers. You have to go out and find the labor that’s available, and that’s costly. Nobody’s working for minimum wage these days. We, as an industry need to pay a lot more to get our jobs done.
The con to that is; if you put in a lot of surcharges it might create disloyalty on the part of your customers.
4. Putting yourself in your customer’s shoes
If your insurance company sends you a bill explaining that it’s gone up an extra $13, what do you do? If UPS adds extra shipping costs onto your invoice, how does that make you feel? A company that you’re spending hundreds or even thousands of dollars with per month wants to charge a surcharge? Personally, it makes me feel like they’re trying to nickel and dime me.
Everything isn’t about dollars and cents. It’s about agreements between you and the customer. You get the lawn done, and you’re not going to charge more in the spring and less in the summertime. It’s the best way to build loyalty with your customers.
5. How we recommend handling surcharges
My recommendation is don’t add surcharges to your services. It’s going to hurt the loyalty of your customers.
Last year we didn’t get our H-2B workers for CLIP Lawn Care. We had to go out and pay a lot more for our labor, and it forced us to raise our rates. When we increased our prices, we didn’t care if people dropped us. By using the reporting in CLIP, we knew that we were only raising them on the ones that were paying us the least dollars per hour. We needed to cull out our clientele because we needed to shrink the company. There’s no way we could keep up with the lawns that we had in the previous year.
6. When it comes to surcharges, there is a lot to consider
Considering the pros and cons of surcharges; yes, you make more money, especially with something like fuel. It’s obvious, it’s public, people drive past the gas station, and they see the price. It’s an understandable expense that you could probably get away with adding to a bill.
On the other hand, engendering customer loyalty can’t be undervalued. Creating a nice, even, and boring business has a lot to be said for it.
Hopefully, we’ve given you plenty to consider.