As a business owner, you're constantly faced with various costs and expenses that can eat into your profits, like credit card processing fees.
And while you might have heard about credit card surcharges as a way to offset credit card processing fees, you probably haven’t heard about commodity surcharges, even if your business could benefit from charging them.
But what exactly is a commodity surcharge? How does it affect your business?
In this article, we'll demystify commodity surcharges and provide you with the knowledge you need to navigate this little-known surcharge that could help you improve your bottom line.
What’s a surcharge?
Before we dive into commodity surcharges specifically, let's first understand the broader concept of surcharges in general.
Surcharges are additional fees or charges that businesses may apply to their products or services to offset certain costs of doing business. Note that surcharges are not the same as convenience fees legally speaking, and it’s important to know the difference between the two types of fees.
Surcharges are typically implemented to cover specific costs that are incurred by the business due to its unique nature (e.g., accepting credit cards, selling seasonal goods, etc.). By applying surcharges, businesses can offset these variable costs and ensure that they remain profitable.
Why businesses use surcharges
Now that we have a general understanding of surcharges, let's explore why businesses choose to implement them. There are several reasons why surcharges are used in business:
- Cost recovery: Surcharges allow businesses to recover costs associated with specific expenses such as raw materials, transportation, or taxes. Passing these costs onto consumers allows businesses to maintain their profit margins (which are already tight).
- Price stability: Surcharges can help businesses maintain stable prices for their products or services even in the face of fluctuating market conditions. Rather than constantly adjusting the base price, which might annoy customers even more, businesses can apply surcharges to account for changes without disrupting their overall pricing structure.
- Transparency: Surcharges provide transparency to customers by clearly indicating the additional costs associated with a product or service. This transparency can help build trust and ensure that customers have a clear understanding of what they are paying for.
Common types of surcharges in business
Before we focus specifically on commodity surcharges, it's important to note that there are various types of surcharges that businesses utilize. Some common types include:
- Credit card surcharges: Many businesses accept credit card payments, but processing these payments comes with fees. To cover these fees, businesses may apply credit card surcharges to customer transactions.
- Fuel surcharges: These surcharges are commonly used in industries that heavily rely on transportation, such as logistics or shipping. Fuel surcharges help businesses offset the costs of fuel, which can fluctuate significantly.
- Environmental surcharges: With increasing concerns about sustainability, some businesses may implement environmental surcharges to fund eco-friendly initiatives or offset their carbon footprint.
Now that we have a foundation of understanding regarding surcharges, let's dive into the specifics of commodity surcharges.
What is a commodity surcharge?
Commodities are raw materials or primary agricultural products that are traded in bulk, such as oil, metals, or crops. Fuel and utility surcharges, which you’ve probably seen on your gas station receipts and utility bills, are an example of commodity surcharges.
The prices of these commodities can vary greatly due to factors like supply and demand, supply chain snarls, geopolitical events, or even natural disasters. Then there are seasonal commodities, like foodstuffs, which are subject to the same price factors.
And according to Investopedia, which provides one of the more unbiased definitions of surcharges on the Internet, a surcharge “may be imposed because of a governing body's need for additional revenue or to defray the cost of increased commodity pricing.”
That’s what a commodity surcharge is. This specific type of surcharge applies to goods or services that are directly influenced by the fluctuating prices of commodities.
Long story short, if a business is heavily reliant on commodities as inputs for their products or services, they may implement a commodity surcharge to account for the volatility in commodity prices.
Commodity surcharges help these businesses cover the additional, often unexpected costs incurred when commodity prices increase, ensuring that they can maintain profitability.
Factors that influence commodity surcharges
To understand how commodity surcharges are calculated and applied, it's crucial to be aware of the factors that influence these surcharges:
- Commodity price fluctuations: As mentioned earlier, the prices of commodities can be highly volatile. Businesses need to closely monitor these price fluctuations to determine when and how much to apply in terms of surcharges.
- Supply chain dynamics: The complexity of a business's supply chain can also impact commodity surcharges. Businesses that rely on a global supply chain may face additional costs due to factors like transportation, tariffs, or exchange rates.
- Market demand: The level of demand for a particular commodity can also influence commodity surcharges. When demand is high and supply is low, the cost of doing business goes up drastically for businesses selling goods that require that commodity.
To effectively calculate and apply commodity surcharges, it's crucial to understand the factors that influence them.
Fluctuations in supply and demand, geopolitical tensions, and weather conditions can all contribute to significant price changes in commodities. Additionally, transportation costs, currency exchange rates, and government regulations can also impact commodity surcharges.
By staying informed about these factors and monitoring market trends, you can better anticipate and manage commodity surcharges for your business.
How to calculate and apply commodity surcharges
Calculating and applying commodity surcharges can seem daunting, but with the right approach, it can be a manageable process with just a few, simple steps:
- Pricing research: Determine the base price of your product or service, excluding any surcharges.
- Expense calculation: Next, identify the specific commodity or commodities your products or services depend on that are directly influencing your cost of doing business.
- Commodity market research: Monitor the price fluctuations of these commodities and establish a method for calculating the surcharge based on price changes.
- Communicate the surcharge: Include signage that lets customers know about your surcharges and add them as a line item on your receipts (you’ll need a proper point-of-sale payment processor for that). It's very important to be transparent and communicate your surcharge methodology clearly to your customers.
- Stay on the straight and narrow: Regularly review and adjust your surcharges to ensure they remain fair and actually reflect market conditions. If you continue charging them long after the need has passed, customers will eventually take notice.
How to effectively communicate surcharges to customers
Implementing surcharges, including commodity surcharges, can sometimes lead to customer dissatisfaction or confusion. To effectively manage customer expectations, it's essential to communicate the rationale behind the surcharges clearly and transparently.
Clearly explain how the surcharges are tied to specific cost factors, such as commodity price fluctuations, and emphasize the benefits of maintaining fair pricing and quality products or services.
Providing this context can help customers understand and accept the surcharges as necessary for the sustainability of your business.
To clearly communicate surcharges to your customers, consider the following strategies:
- Be upfront: Clearly state the existence of surcharges upfront, preferably before customers make a purchase or engage with your business.
- Provide context: Explain the reasons behind the surcharges, such as rising commodity costs, and how they impact your business.
- Offer alternatives: Whenever possible, provide customers with alternative options, such as different payment methods or package deals, that can help mitigate the impact of surcharges.
- Be transparent: Clearly outline the methodology used to calculate surcharges and make this information easily accessible to your customers.
- Listen and respond: Be open to feedback and address any customer concerns or questions regarding surcharges promptly and professionally.
Alternatives to commodity surcharges
While commodity surcharges can be an effective tool for managing costs, it's important to explore alternative strategies as well. Some alternatives to consider include:
- Cost optimization: Look for opportunities to optimize your business processes and reduce costs without relying solely on surcharges.
- Negotiating contracts: Explore the possibility of negotiating favorable contracts with suppliers to minimize the impact of commodity price fluctuations.
- Diversification: Consider diversifying your product or service offerings to reduce reliance on commodities that are subject to significant price volatility.
- Hedging strategies: Investigate hedging options that can help mitigate the risks associated with commodity price fluctuations. (After all, that’s why commodities trading exists in the first place.)
Navigating surcharges as a business owner
Commodity surcharges are an essential aspect of managing costs and maintaining profitability for many businesses. By understanding the concept of surcharges, including commodity surcharges, and staying informed about the factors that influence them, you can effectively calculate, apply, and communicate these surcharges to your customers.
Remember to consider legal implications by looking into regulations, manage customer expectations, and explore alternative strategies as part of your overall approach to surcharges.
With the right knowledge and strategies in place, you can navigate surcharges as a business owner and ensure the financial health and sustainability of your business—no matter what the economy is doing.
Nadapayments can help you set up your business with all kinds of surcharges so that you keep more of your hard-earned money in your bank account, where it belongs.