Ask any small business owner if COVID-19 has impacted his or her business and the answer is bound to be a resounding “Yes!” Capacity limits and the recession have decreased revenue for many, while expenses related to COVID-19—both temporary and permanent—have soared.
Some costs, such as masks and plexiglass, hand sanitation stations, and temperature screening equipment, may disappear when the pandemic ends. Yet other expenses, such as digital tools implemented to enable online ordering, contactless payment, and delivery services, are here to stay.
So how should a small business handle these pandemic-related expenses? Depending on your situation, you could absorb the cost, add a surcharge, or raise your prices.
Absorb the Costs
If your profit margin gives you wiggle room or your customers have a high sensitivity to price changes, it may be best to absorb the costs resulting from COVID-19 as long as you can.
To help bridge the gap until COVID-19 costs decrease or revenue increases, you could apply for a business loan to get a bump in cash on hand.
Another option is to apply for an adaptation grant. While these grants aren’t available in all areas, some municipalities have helped partially reimburse expenses stemming from COVID-19 for qualified small businesses. For example, Pierce County of Washington, the Downtown Neighborhood Association of Elgin in Illinois, and the Montana Department of Commerce have all offered various adaptation grants. Each program differs in the amounts awarded, but Montana offered up to $8000 per business to cover 50% of the cost of related safety practices. Check regularly for adaptation grants in your area as new funding might reopen a previously-closed grant application period.
Don’t forget to talk to your tax advisor to learn about what COVID-19 tax credits might be available. It’s possible that under the right circumstances and with the guidance of your tax preparer, you may be able to receive a check for the credit related to COVID-19 sick leave.
And more 2020 tax changes are anticipated. Congress has introduced the bipartisan HR7216 bill “to provide a tax credit for personal protective equipment to small businesses, nonprofits, independent contractors, veterans’ organizations, and farmers, among other entities, in any year in which the president declares a national emergency relating to COVID-19.” So keep the lines of communication open with your tax advisor.
Add a COVID-19 Surcharge
If you need to recoup your COVID-19 costs, there are some advantages to adding a surcharge to your customers’ bills.
As businesses reopen, COVID-19 surcharges are appearing across industries—from restaurants to hair salons to dentists. Amounts range from a flat fee to a percentage of the bill. So you wouldn’t be a lone wolf if you add a surcharge.
A surcharge may be the least expensive option for recovering costs. It requires a single change to the billing process, whereas raising prices means spending money to update prices everywhere—on your website, in your point of sale system, and on your signs or menus.
You can market it as a temporary fix. When the need for PPE or extra handwashing stations disappears, so does the surcharge.
But be leery of customer backlash over surcharges. An Insights West survey of British Columbia residents showed that “the majority (62%) of British Columbians are opposed to businesses charging a COVID-19 surcharge.”
And it’s not just your customers that may protest. According to a Wall Street Journal article, Kiko Japanese Steakhouse & Sushi Lounge added a surcharge that their regular customers supported. But a negative viral twitter post from a non-customer convinced owner Billy Yuzar to remove the surcharge and increase menu prices instead.
Customers might assume your business doesn’t always follow safety protocols if they see a surcharge. The Points Guy said, “Requiring a COVID-19 surcharge suggests sanitation and keeping customers safe is only included in a product if I’m willing to pay an additional, not-advertised fee.”
Additionally, consumers may not believe that your COVID-19 costs and the corresponding surcharge are in line. A surcharge labeled PPE-expenses may seem excessive to a customer if they only consider the cost of a disposable mask and not the amount you’ve spent on deep cleaning your store each night.
Worse yet, customers may wonder if the fee is actually used to cover the cost of the related expenses based on historical experiences with surcharges. Remember the 2002 government-mandated September 11 Security Fee implemented by airlines to help fund the Transportation Security Administration (TSA)? That airline ticket fee remains in place (and has increased over the years), and yet Congress redirects billions of dollars of the amount collected every year for expenses not related to TSA.
If you decide to add a surcharge, first check that it is legal in your state. Then be up front with your customers and let them know about the fee before they do business with you—this transparency may help protect you from violating consumer protection laws.
If the potential of a customer revolt over a surcharge makes you cringe, are you better off raising prices instead? Maybe.
Depending on the amount of the price increase, customers may not even notice. Do you actually know the price of a loaf of bread, or do you only notice food prices if your grocery bill increases every week?
Your customers might expect a price increase. Based on the Federal Reserve Bank of Cleveland’s weekly survey, consumers anticipate COVID-19 will impact inflation anywhere between 2% and 14.5%. Those numbers have varied since the survey started in early March 2020.
While raising your prices may cost you more to implement, customers may feel less slighted than having extra non-negotiable fees appear on their bill.
But don’t raise your prices without careful evaluation. Are you aiming to recoup costs related to COVID-19 or to cover future costs as well? Use a pricing guide to ensure you’ve thought through both short-term and long-term needs. And for commodity products, you may appear more expensive during comparison shopping than your competitor if they keep their prices low by tacking on a COVID-19 surcharge.
Whichever way you choose to cover your additional costs associated with COVID-19, don’t try to sneak it past your customers. Be transparent and vocal about both the change you are making and what expenses you are facing. Have a plan for handling any complaints that warrant a response. Above all, continue to build your loyal customer base and give your customers what they need and want for quality and service.