Charging a Restaurant Service Fee? Fire Your Accountant!
If you order a steak and fries meal at your favorite local steakhouse, it might cost you $55.
But when your bill comes, you’ll be asked to pay $67.
That’s part of a service charge, which the menu says goes to the front of house, kitchen staff and managers. (Where it goes is a topic within itself that we don’t have time to address in this article.)
But you’ll still more than likely be expected to tip your waitstaff and pay sales tax – meaning you could easily end up spending well over $80, $30 more than the sticker price.
This additional cost is part of a growing, yet unpopular trend of the restaurant service fee.
It’s a confusing, miscellaneous, arbitrary fee that some restaurant owners are tacking on, and hiding in small print at the end of every bill.
And we strongly recommend that all restaurant business owners stop doing it.
Why The Restaurant Service Fee Is Terrible
As experienced restaurant accountants, we understand why restaurant owners have started to jump on board the service fee trend.
It usually goes like this:
As a restaurant owner, you start to see your margins slip away.
Instead of raising menu prices (and potentially deterring customers), you see the restaurant service fee as a better option to help recapture lost profits.
You add a harmless service fee to the end of the bill to help you pay your staff and close that profit gap, and voila! Your finances are fixed.
However, instead of being honest with your customers up front, you’re essentially now showing up at the end of the meal and saying, “Surprise! Here’s your bill, plus some extra stuff that we felt like charging you for.”
And customers are pissed about it.
And this is why.
When your customer is ordering food and drink, they are, in essence, engaging in a contract with you.
“You give me food and drink, and I will pay you the price that you’re telling me it costs.”
The service fees, i.e. extra charges, are a change to the original contract, and they are not something the customer agreed to.
It’s a surprise. It pisses them off, and it pisses us off as accountants to even talk about it. Did you know that Reddit users in major metropolitan areas like Chicago, L.A., and others have organized spreadsheets that are tracking restaurants and their fees? That is how much people are upset.
Whether a customer wants to pay $4 or $6 for a taco is their choice as a customer.
What they don’t want to do is to get lulled into paying $4 for a taco, and then pay for miscellaneous charges at the end of the bill because the restaurant is having trouble making a profit.
Why Your Restaurant Has an Accounting Problem
If we take our consumer hats off for a minute and look at the issue from a financial advisory point of view, we’re still not happy.
The price of a service/product has always been driven by its inputs. Direct inputs like materials and labor, and indirect inputs like overhead costs.
What are business owners supposed to do if their direct and indirect input costs increase?
Get ready now, we are going to blow you away with some cutting-edge advice, you ready? Increase your prices! That’s what your markups are for!!
Your markup is supposed to cover operating and overhead costs and thus provide you with profit. Not these random, silly charges.
If your markup is not achieving this, you have several issues.
- Either your operating and overhead costs are bloated (which is your fault) or,
- More likely, your markup is not high enough, hence, your pricing is not high enough.
We’ve written an entire blog post on how to adjust your restaurant pricing that we recommend checking out here.
But in essence, it’s much better business to simply raise your menu prices than implement a service fee.
Your customers don’t care if the steak entree is now $26 versus $25, as long as it is justifiable and comparable to the competition.
But they will get angry and furious if you charge a fee that they just don’t understand and isn’t relevant to them.
We strongly recommend getting in touch with an experienced restaurant accountant who can help you find ways to increase profit margins, without the need for pissing off your customers.
It’s simply poor business.
Get Help Ditching The Restaurant Service Fee
Here at U-Nique Accounting, we’re experienced restaurant accountants.
Out of anyone, we understand (and sympathize) with the struggle that restaurant owners have with rising costs and slipping profit margins, especially during an inflationary period.
But the service fee is not the answer.
We can help you find ways in your business to cover your costs, and provide a profit, without the extra charges.
You can get in touch with us by booking a complimentary chat below. We’re always happy to help.
If you’re not ready to jump on a call, make sure to check out our blog on restaurant pricing, where we go into strategies for increasing your margins a little more.
Until then, stay U-Nique!