Episode #0092 - Dangers of surcharges and breaking down pricing too much.

In today's episode, we want to cover. I suppose we just passed Black Friday last week and I believe Cyber Monday was Monday. I'm sure of my age but I was never aware of these concepts when I was younger but now in retail and especially online retail, they are extremely prominent. So today we want to look at the pros and cons, the good things and the bad things about adding surcharges and segmenting or compartmentalising the costs in services, so that when you go online to buy a product or service, you see the price and then in the box or in the cart there's a huge number of add ons or takeaways that can alter the price.

 

We've seen a lot of businesses from B2C and B2B even recently introducing surcharges like for freight on the final invoice and I'm thinking to myself, why is that happening? Is it always a good thing? Yes, we know B2C have been doing this quite for a long time but at the same time, there has been a lot of kickback from consumers about surcharges. But I suppose in terms of like cost, companies think it's almost a good thing because they're separating costs from the pricing and there's a view here that if you keep the price stable or you reduce price and then add a surcharge on top like for freight that is in some way fair and reasonable for consumers and at the same time, they can maintain a sort of a considerable margin but it goes back to this thing again, do companies really know their costs? Are they able to calculate the surcharge correctly? To be able to do this and to ensure that they’re going to get the margin, Do customers want to go through the whole process, especially B2B, a very long sales process to then suddenly be hit with a surcharge on their final invoice price without even a commitment of the B2C sort of next day delivery, B2B still not committing to that often they can't. So, what is that surcharge? Is it actually a value add for the customers?  It’s more punitive. 

 

I think probably the experience most people have in this regard is probably from airlines back when we could travel, especially  Ryanair and Southwest Airlines in the United States. It was almost like you'd see a very cheap headline price, your seat from A to B cost $10 and then you can add priority boarding, better legroom, you can add better food, you can add more luggage, all this sort of stuff can be added on and I suppose the pro of that from a business perspective is you're giving value to customers for what they're willing to pay for and there's no point in giving people value if they don't value it. I suppose this is what we talk about in a podcast a lot, this is positive. The positives of value-based pricing, you're using that to segment your market, you're providing people with what they value and they're paying you for it so you're able to hyper-segment the market which is very positive. I'd say you also see this in postage where you're checking out on  Amazon. I suppose Amazon was famous for one-click shopping, but more and more recently especially in Australia, you will have options about service or delivery days. If you want it on a certain day you pay extra, if you want it on this day you pay extra, that segmentation is good but what I suppose my personal view is, that's positive but this can sometimes make it seem to a customer that they're being taken advantage of that they're being a bit of a bait and switch is going on that they're being presented with a fake artificial low price and then when they actually get the product or service it's much higher. I would put a quick and hard-fast rule here that you shouldn't be charging extra for the product if the base price that you should see should give you the base service so I'm very against charging for it on top if it's not a specific day so the basic freight should be included in the price because, in theory, there's no point in saying a price for a product if that price does not include you getting it or accessing it. In my view, it should be that the price you see should be the base price because anything else could be or possibly could be perceived as bait and switch or misrepresentation.

 

Yeah, I think I agree with that Aidan, with BAU freight that's just an expectation you shouldn't be charging additional for that. If you understand that a value driver for your customers is convenience and like next day delivery and that requires an additional service on top of the BAU freighting service and shipping service you provide then it makes sense to them pull that out, but then to be quite upfront with customers at the beginning of the sales process that is going to happen because you got to remember in B2B the surcharges are not common. Customers aren't in the habit of seeing surcharges on their invoices for B2B. Yes, more so for postal and even airlines pulling out these additional value ads in their service and pricing but B2B customers are not familiar with that and so as I say it's a very long and complex sales process. You have to go through procurement and the whole bit, talk to many different stakeholders, you get alignment, you get agreement, it can be a tough negotiation along the path and then you hit them with this surprise surcharge. From my experience with clients, it doesn't go down well and not only for those big customers, but I’m also talking about those medium to small customers. You've got to be very upfront and clear about the value that you provide and not charge an additional for BAU freight and things like that in B2B. It doesn't work well and ends up damaging your reputation and brand if done incorrectly.

 

I think this is probably one of the real cracks of the issue of pricing, when you get into value-based pricing we've talked about in this podcast, segmenting markets, differentiating customer bases, providing added value where people are willing to pay for it. When people can I suppose drink the Kool-Aid on that and view it from a selling perspective, but as we always say in pricing, pricing is a technical aspect but it's also very much human, customer-focused. You have to understand your customer and the last thing you want to do is alienate a customer base by stripping away services that they see as their right or their need to enjoy the product or service. The example I'll give is that you could check in to a five-star hotel and of course, people appreciate that if you want the suite or the presidential suite you pay more than you do for a standard bedroom and that's a sensible accepted differentiation, value, add etc. If you want breakfast you pay more but if you started differentiating every little thing and stopped being helpful if the concierge refused to help people who hadn't paid an extra fee, people would start to get their back up about that and that's an extreme example but there's a human element that people expect certain baseline services to be delivered and then the additional they're happy to pay for that extra but you need to understand the product you're selling who is buying it, the reasons they're purchasing it. I personally think if you're starting to charge extra for something that is in the baseline enjoyment of the product or service that you're selling, that if you're not selling that extra piece, it almost defeats the point. If you're trying to sell a car and taking the wheels off that sort of concept, that sort of strips away and that's the point of trying to make if the if you're trying to charge extra for what people perceive to be necessary and vital part of the enjoyment, then you've gone too far and that's the place where you should step back.

 

I suppose my view here is you can't use surcharges to cover up poor pricing and poor cost calculations or even a cost-plus culture.  I do think that a lot of B2B businesses are introducing surcharges because they haven't done the fundamental work of improving their pricing and understanding their costs and often they don't even have a pricing team in place to look at pricing, let alone calculate surcharges. So a lot of businesses are doing this to cover up what I call pricing and cost chaos and it's not going to help and even in the short term I honestly believe it doesn't cover costs or increase margin even though on paper or in a model it does, it seems so I think you've got to go back, do the hard work, address the problem rather than putting band-aids over a poor pricing capability. Do the hard work, invest in your pricing, get accountants to look closely at costs, get a pricing team to think about pricing and the market and customer value and when that's established and only then when you've understood your pricing, you understand that each of your customer segments and price segments can you think about applying surcharges and legitimate they use value-based principles to start teasing out surcharges based on like freight, additional convenience, etc. because you can't just assume it, you've got to test it, you've got to track it and monitor that before you even introduce those types of surcharges into the market.

 

I think we'll leave it there today. I think it all stems back to the mantra, Know Your Customer, segment them properly, don't overly segment, never try to exploit customers. If you're ever getting into the realms of bait and switch, exploitation, manipulation, you've gone way too far and customers remember that they don't like it and if you leave a bad taste in somebody’s mouth the chance of them becoming a repeat purchaser is massively decreased. So, if you're confident in the value that you provide, charge a price commensurate with that value, charge it in a fair, understandable and easy method and, fundamentally if customers aren't willing to pay for that value either you haven't communicated the value correctly, or maybe your value is not high enough or maybe that customer is not right for you, trying to slice and dice how you present the pricing maybe once or twice, it will work but over the long term. I think it's a mistake.

 

I agree. It's a very tactical move and I don't think companies do it intentionally to coerce or manipulate customers to make more profit. I don't think it's often used to cover up a deeper problem that requires hard work to fix which is actually improving pricing and understanding and segmenting based on value, which is the harder piece of work but I think what we're both trying to communicate here is that it's a necessary piece of work. It will provide you with not only long term gains but short term gains so you won't have to do these sorts of tactical and quite reckless moves that are only going to hurt you in the end. So just bear that in mind when you think about surcharges, it may seem good on paper and a model, but realistically, they're out there in the market. It often isn't a good idea if you don't know your pricing. If you haven't looked at your pricing you don't understand your customer base.