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The Cost of a Price Hike

When it's time to add fees, be clear about what and why.

Nickels and dimes add up fast, and while consumers might not be aware of the extra charges at first, they're sure to feel it in their pocketbooks later. Bob Sullivan coins it "gotcha capitalism" in his book, Gotcha Capitalism: How Hidden Fees Rip You Off Every Day and What You Can Do About It. Whatever you call it, tacking on hidden fees is an exploding trend, says Sullivan. "Companies under intense price pressure have figured out that they can soak consumers by giving them a teaser price, hiding the real price of things and tacking on fees later."

Adding fees may be inevitable for entrepreneurs
doing business in today's economy.

But with rising costs, how do entrepreneurs stay afloat without passing along the fees to customers? Monique Hayward, founder of Dessert Noir Café & Bar in Beaverton, Oregon, is feeling the pinch as her own costs go up. The price of a 5-pound bag of chicken has increased from $8.65 to $10.07 in less than a year, and the Dungeness crab, an irreplaceable ingredient for her crab dish, increased by $10. Unable to swallow the price increases any longer, she has started charging for extras, such as baguette slices, pita toasts and refills on select beverages and has increased the prices for adding meat. Says Hayward, 38, "I felt I could differentiate from my competitors who were raising prices across the board if I could just simply target the items that were extras and that truly did cost me a heck of a lot more money than before."

Adding fees may be inevitable for entrepreneurs doing business in today's economy, but gotcha capitalism can be avoided by removing the "gotcha" from the formula. Be clear about the extra fees, recommends Sullivan.

Hayward's servers are trained how to explain the price increases to customers, and most of the time, they find that customers are very understanding. Hayward hasn't noticed a decrease in business as a direct result of her shift, in pricing and she still rang in sales of about $325,000 in 2008. "Have a good explanation for your customers as to why you're doing it," she says. "Most customers are feeling the same pain in the marketplace with the increasing cost of food and energy, and I think they'll be sympathetic."

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This article was originally published in the January 2009 print edition of Entrepreneur with the headline: The Cost of a Price Hike.

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