Don’t forget it’s taxable income in most states!
Dual pricing and surcharges can help businesses offset credit card processing fees, but often at the cost of customer trust and loyalty. Additionally, in most states in the US, these practices are considered taxable income. Lisa Samuel, President of Your Pay Buddy, delves into the complexities and risks of these strategies.
Over the past 12 months, many customers have asked for my thoughts regarding businesses passing credit card processing fees to their customers. The short answer is it’s not good for business but allow me to explain.
When asked what type of business PayBuddy is, I tend to pause to answer thoughtfully. Although we provide payment solutions for businesses to reduce chargebacks, our real business is creating solutions that serve our customers. To go deeper, we are in the business of maintaining trust, as our partners depend on us to protect their reputation and cash flow.
Tactics like dual pricing or surcharging may optimize revenue streams in the short term, but trust tends to erode, which affects the long-term viability of a business.
A recent study conducted by PYMNTS and Payroc found that nearly two-thirds of consumers who paid a surcharge say it negatively impacted their impression of the merchant. 56% stated they would switch merchants to avoid surcharges.
Passing costs on to consumers signifies that a business is under economic strain when most successful businesses make payments almost frictionless. Customers want to make purchases at fair prices they feel good about.
If a customer uses credit because cash is short, how does a surcharge serve the customer well? In most cases, customers have options for where they spend, and another business with a simpler payment model could win.
I also advise anyone thinking about these programs to first consult with your CPA. Surcharging and dual pricing are considered taxable income in most states. Credit card processing, conversely, is considered deductible. Passing the cost to the customer may end up costing you more.
What is Dual Pricing?
Dual pricing involves charging different prices for the same product or service based on factors such as payment method (cash vs. credit). While attractive for businesses seeking to offset transaction fees associated with credit card payments, this practice can pose risks to consumer perception and trust.
One of the primary concerns with dual pricing is the potential for consumer backlash. Pricing discrepancies based on payment method or membership status can create feelings of unfairness or deception among customers. This may lead to decreased customer loyalty and negative word-of-mouth, ultimately impacting the business’s reputation and bottom line.
Furthermore, managing and enforcing dual pricing structures can introduce operational complexities. Businesses must ensure transparent communication of pricing policies to avoid confusion or misinterpretation by customers. Failure to do so can result in consumer dissatisfaction and may even lead to regulatory scrutiny if pricing practices are deemed misleading or discriminatory.
What are the risks of surcharging?
Surcharging, on the other hand, involves adding an additional fee to cover credit card processing costs. While surcharging may seem like a straightforward way to offset expenses associated with credit card transactions, it can have detrimental effects on consumer perception and brand reputation.
To mitigate the risks associated with dual pricing and surcharging, businesses should prioritize transparency, fairness, and customer-centricity in their pricing strategies. Transparent communication of pricing policies is essential to building and maintaining consumer trust. Businesses should clearly articulate the reasons behind pricing discrepancies and ensure that all customers feel valued and respected regardless of their payment preferences.
Instead of relying solely on dual pricing or surcharging, businesses can explore alternative strategies to enhance profitability while maintaining consumer satisfaction. Implementing value-added services, optimizing operational efficiency, or exploring innovative revenue streams can diversify revenue sources and reduce reliance on pricing tactics that may alienate certain customer segments.
Ultimately, businesses must recognize that consumer trust and loyalty are invaluable assets in today’s competitive marketplace. Pricing strategies should align with broader efforts to cultivate positive consumer relationships and enhance brand reputation. By prioritizing transparency, fairness, and inclusivity in pricing practices, businesses can foster long-term customer loyalty and sustainably drive growth.
The total cost of card acceptance for a business in this industry should be roughly 2.5%. If a business is paying significantly more, then it may be wise to find a different payment processor. To be fair, surcharging or dual pricing payment models are not unlawful. They may not be good for a brand or revenue boosters that are assumed. Those customers who feel overcharged do and will talk to others.
In conclusion, while dual pricing and surcharging may offer short-term financial benefits, they carry inherent risks that can undermine consumer trust and brand reputation over time. Businesses must approach pricing strategies with caution and prioritize transparency and fairness to build enduring relationships with their customers. By adopting sustainable pricing practices and focusing on customer-centricity, businesses can navigate financial challenges while fostering a loyal and satisfied customer base.
Check out Lisa’s previous article on Auto Recycling World.
To get in touch with Lisa, please email lisa@yourpaybuddy.com, text 1-888-79PAYMENTS, or Call 813-422-2739.
