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Service Charge

The fee collected to pay for services related to the product or service being purchased

What is a Service Charge?

A service charge, also called a service fee, refers to the fee collected to pay for services that relate to the product or service that is being purchased. In other words, a service charge is an additional charge for service provided for the purchase of a product or service. For example, a service charge is typically added to your bill in a restaurant to pay for the waiter or waitress that comes and services your table.

 

Service Charge Image

 

Service Charges in Different Industries

Service charges come in different names depending on the industry concerned. For example:

 

Banking industry

A monthly fee is charged to the account holder for maintaining a checking or savings account with the associated bank. For example, TD Canada charges different monthly maintenance fees for their different checking accounts.

 

Hospitality industry

A service fee as a percentage of the total bill for restaurants and hotels are common. For example, in British Columbia, there is an unspoken rule to tip (service fee) at least 10% for restaurant dine-ins or deliveries.

 

Airline industry

A number of service charges are collected when purchasing a plane ticket. Service charges by the airline industry are to pay for services such as entertainment, baggage fees, seat selection fees, travel commissions, etc.

 

Utilities industry

In addition to the electricity, some utilities providers impose service charges in addition to the electricity used. For example, Hydro Quebec imposes a number of service charges such as initial installation charge, monthly meter reading charge, etc.

 

Example of a Service Charge

John is celebrating his second anniversary with his girlfriend. He decides to choose the most romantic restaurant in downtown Vancouver. Upon arriving at the destination, the couple was greeted by a number of servers and seated promptly.

The meal itself came to a total of $120, including taxes. John realizes the exceptional and additional services provided by the waiters at the restaurant and decides to pay a gratuity (service charge) of 15% on top of his bill.

 

Airbnb Service Charges

Airbnb is an example of an online rental platform that imposes service charges to cover company costs. Airbnb has separate service fees for hosts and guests.

 

For Hosts

Airbnb charges a 3% fee, which is taken out of the total reservation amount. In addition, taxes such as value-added tax (VAT) may be added on top of the service charge depending on the location of the listing.

 

For Guests

Airbnb charges a 5%-15% fee that varies depending on the cost of the subtotal. The more expensive the subtotal, the lower the service charge percentage.

 

Key Takeaways

A service charge refers to an additional fee collected for providing the initial product or service. It is typically collected when there are interactions between a consumer and the company involved. Depending on the industry, service charges have different names – booking fees (hotels), maintenance fees (banking), and security fees (travel).

 

Additional Resources

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:c

  • Cost Driver
  • Economic Value Added (EVA)
  • Expenditure
  • Valuation Methods

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes and training program!