Although voluntary tipping seems to be the rule for service businesses, several operators have shaken up their industries by dropping voluntary tipping. For instance, the restaurant business took notice last year when Thomas Keller instituted an automatic 20-percent service charge at his Per Se restaurant in New York. One year earlier, Holland America rocked the boat by eliminating its longstanding tipping policy in favor of daily service charges.
“The lesson from those decisions is that tipping should not automatically be the default policy for service businesses,” suggests Michael Lynn, a professor at the Cornell University School of Hotel Administration. In a new report from the Center for Hospitality Research, Lynn compares the advantages and disadvantages of voluntary tipping with those of service charges and service-inclusive pricing.
The report is available at no charge at http://www.hotelschool.cornell.edu/chr/research/centerreports.html.
“Tipping may not be as advantageous as managers seem to believe,” Lynn said. “What I’ve done is to identify nine factors to consider in determining what is the best way to cover the cost of service employees. I cannot advise an operator which policy is best, but I can frame the analysis.”
The report suggests that the principal benefits to hospitality firms of voluntary tipping are that it lowers nominal prices, increases profits through price discrimination, motivates up-selling and service, and lowers FICA tax payments. However, tipping also motivates discrimination in service delivery, gives servers surplus income that could go to the firms’ bottom line, increases the risk of income-tax audits, and opens firms up to adverse-impact lawsuits. The alternatives to tipping (i.e., service charges and service-inclusive pricing) have their own sets of costs and benefits.
Lynn suggests that the decision of whether to permit tipping or not is worthy of reconsideration, contrary to what hospitality operators might believe. “Consumers say that they prefer guaranteed server wages over tipping, and that they prefer tipping over added mandatory service charges,” he said. “But those preferences do not always seem to translate into actions. In other words, operators should not worry that their customers will end their patronage due to one policy or another. Instead, they can base their tipping policies on considerations of the issues discussed in this report.”
About Me
- Jeffrey Summers
- I am the expert you call when you need to learn how to increase top line sales, lower your operating costs, increase your profit margin, hire and train better managers and staff, evolve your operation into more and better ways of doing business, buy or sell a restaurant, improve your service, engineer (or re-engineer!) your menu, market your business better and less expensively, keep yourself from going nuts because you have no life anymore, open more and better restaurants, don't want to have to give up your first born child to pay a consultant and have more fun! My mission is to enhance the quality of life for my clients by providing the best products and services to help them achieve their personal and professional goals. I take great pride in my clients, my company, my commitment to service and the products I sell. I am a recognized expert in the hospitality industry with over 24 years of success at planning and executing strategies for delivering dramatic results, a former "GM of the Year" for 2 major, full-service, franchises, an Award winning Multi-Unit Executive with 2 of the largest restaurant chains in the U.S., published author, husband and father of two.