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Surcharge or price increase? When a company needs to cover higher costs, which method is better for customer relations? Like many weighty questions, it may depend on particular circumstances. To us economists, what you call it doesn’t matter: A price increase is a price increase. But customers may respond emotionally to the language of a price increase, so what you call it does make a difference.

Most customers prefer simple, clear systems, meaning that it’s better to raise prices than to add surcharges. In a general inflationary environment, this is best. It’s also simpler for the company to implement.

However, when a company’s cost has increased in a widely understood way, and especially a temporary way, the surcharge goes over better. For example, rising gasoline and diesel prices have led trucking companies to add fuel surcharges. Everyone understands that. By clearly connecting the surcharge to the external factor behind it, the company fosters trust and understanding.

But what about a real cost that is not well understood? The state of Oregon added a corporate activity tax a few years ago, which acted like a sales tax. Some companies added a surcharge, while others simply passed it through to customers in price increases. It appears that the price increase was better, as many customers didn’t understand that such taxes are routinely passed on to customers.

Surcharges are also appropriate for higher levels of service. Expedited delivery is well understood to cost more. Some companies hold inventory for customers or guarantee availability; surcharges for such benefits make sense. These surcharges could well be called fees. But customers tend not to like to see fees add for routine purchases. In other words, if it’s an expense that everyone is going to pay, simply raise prices or add a surcharge. But if only some customers will pay it, call it a fee. This is what airlines do for checked bags and priority seating.

Surcharges may also be useful for giving preferential treatment to some customers. The surcharge can be waived for buyers perceived to be highly price sensitive. These might be large customers. Or they might be buyers for whom the product’s features are not too important or buyers who have other good choices. Like any discount, though, waiving surcharges should only be used if the company has a system in place to implement it easily and consistently. Promising a waiver but forgetting it on the invoice hurts customer relations. Before establishing a surcharge, the company should establish a waiver policy. That could be never waiving the fee, or waiving the fee under particular circumstances, which are spelled out.

Finally, in an inflationary environment, the entire price approach can be rethought. Maybe instead of charging by the unit, a monthly subscription could work. For a seasonal demand, a monthly rate can be charged based on average year-around cost, with an adjustment at year-end. A business team could blue sky alternative pricing frameworks.

Although a particular business may want to create its own path, the general default policy should be to raise prices when the motivation is general, economy-wide cost increases, or strong demand. Then add a surcharge for clearly recognized, specific cost increases, such as freight cost increases. Add fees for special services not provided to all buyers. Whatever approach a company chooses, it must be transparent. Advertising a good price in bright, bold letters and then noting a surcharge in fine print will alienate all customers.

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