How Smart Merchants Use Surcharging to Boost Profits

Merchants are fed up with the cost of credit card acceptance. Surcharging is a smart alternative—if it’s done strategically.

In today’s business environment, merchants face increasing operational costs, fluctuating market conditions, and evolving consumer behaviors. As credit card usage continues to grow, so do the associated processing fees, which can significantly cut into profit margins.

While my article last month in Digital Transactions, “How to Surcharge Like a Pro,” explored how to implement surcharging within regulations, this article focuses on why surcharging is not just a cost-recovery tool. Indeed, it’s a strategic advantage for merchants looking to maintain profitability, transparency, and competitiveness.

Protecting Profit Margins

For many merchants, payment acceptance is already one of their largest operational costs. It keeps climbing, squeezing margins even further. Worse, the built-in obfuscation of interchange pricing makes it nearly impossible to track the actual cost. Three months of identical sales can produce three different fee summaries.

How is a merchant supposed to cut costs when the target keeps moving?

Surcharging offers a viable solution. It allows merchants to shift the cost of credit card transactions back to the consumer, preserving margins without increasing base prices across all customers. And it does this while making merchants’ cost of acceptance far more predictable.

If you’re seeking validation of the flat-pricing model, look no farther than Stripe or Square. Both of these companies built their strategies on a simple premise—make the ongoing cost predictable, and you win the sale. Never mind that a transaction fee of  2.9% plus 30 cents isn’t exactly a bargain.

When merchants counter the rising cost of acceptance by raising their prices, they risk pricing themselves out of the market. But that’s not inevitable. Merchants that astutely implement surcharging can maintain financial stability while continuing to offer competitive pricing.

Smart surcharging is all about clarity, confidence, and consumer choice. A common misconception about surcharging is that it negatively impacts the customer experience. However, when it’s conveyed effectively, surcharging can enhance price transparency.

Rather than embedding processing fees into overall pricing—where customers may not realize they are indirectly paying higher costs—surcharging clearly itemizes credit card fees at the point of sale. This allows customers to make informed choices about their preferred payment methods.

By distinguishing between credit card payments and alternative options, such as debit cards, automated clearing house, account-to-account transfers, or cash, businesses provide customers with flexibility while also demonstrating the real cost of card acceptance. Many consumers appreciate this transparency, particularly in high-ticket transactions where processing fees can be substantial.

Lower-Cost Payment Methods

For merchants, the goal is not necessarily to penalize credit card users, but to create a payment ecosystem that balances cost efficiency and customer convenience.

When a surcharge is applied, customers are more likely to consider alternative payment methods that do not carry the additional fee. This is particularly relevant in sectors such as health care, home services, and business-to-business transactions, where the ticket size is higher and the difference in fees can be significant.

Many businesses that implement surcharging see an increase in ACH payments or debit card usage, both of which have lower processing costs. This shift not only reduces overall fees but also diversifies the payment mix, making the business less reliant on costly credit card transactions.

Not only that, but for merchants offering recurring services such as subscriptions or financing plans, encouraging lower-cost methods can lead to more predictable cash flow and reduced processing expenses over time.

Maintaining Competitive Pricing

In highly competitive markets, pricing is often a key differentiator. Without surcharging, merchants are left with two primary options when dealing with rising processing costs: either absorb the fees, which erodes profit margins, or increase prices for all customers, which can reduce competitiveness.

Surcharging allows businesses to maintain their advertised pricing while only passing fees to those who choose to pay with credit cards. This approach ensures that customers who pay with lower-cost methods are not subsidizing the expenses of those who use credit cards. It also saves merchants from having to raise prices across the board, a move that could make them less attractive compared to competitors.

For example, a business that sells high-end electronics or services that cater to both cash-paying and credit card-paying customers can implement a surcharge to recoup processing fees without altering its base pricing strategy.

This ensures that customers who prefer to use credit cards for rewards or financing benefits do so at their own expense rather than at the business’s cost.

Capitalizing on Credit Trends

Credit card usage continues to rise as consumers take advantage of rewards programs, installment plans, and cashback incentives. While these features benefit consumers, they come at a cost to merchants who must cover the interchange fees.

But there’s an alternative. Rather than viewing credit card acceptance as an unavoidable expense, merchants that surcharge strategically can turn it into an opportunity.

By incorporating surcharging into their pricing model, businesses can continue accepting credit cards without sacrificing profitability. This approach is especially effective in industries such as travel, luxury goods, and online services, where customers expect credit card options and are often less price-sensitive.

In these cases, surcharging allows merchants to maintain revenue while catering to a credit-reliant customer base.

Conclusion

Surcharging is more than just a method for offsetting processing fees. It is a strategic tool that helps businesses protect their margins, improve pricing transparency, encourage cost-effective payment methods, and remain competitive in price-sensitive markets.

As consumer behavior continues to evolve and credit card usage remains prevalent, merchants that leverage surcharging effectively will be well-positioned to maintain profitability without resorting to broad price increases.

As with any pricing strategy, proper execution and compliance with regulatory guidelines are essential. But for many merchants, the benefits of surcharging far outweigh the risks. When done right, surcharging is not just about covering costs. It’s about making smarter financial decisions that sustain long-term success.

—Cliff Gray is principle at Gray Consulting Ventures, a payments advisory.