I’ve had frequent discussions on the emerging trend to get rid of tipping. Many people whose opinion I respect argue that the best approach is to simply raise prices. They cite Danny Meyers and his Union Square Hospitality Group’s announcement that tipping will disappear in their restaurants to be replaced by higher prices. My friend and colleague Bruce McAdams @rovingprofessor) asserts that Danny is smarter than both of us (I retorted he was half right)and that he must be taking the right approach.
While I think price increases alone may (emphasis on may) be the right approach for Union Square, I am not convinced its right for everyone. It may be a long term nightmare if everyone takes a different approach, but on an individual basis there may be an argument for a restaurant that wants to move away from tipping (see previous posts as to why) to go with a service charge or in fact, a combination of service charge and price increase.
There are several reasons:
Customers are used to tipping and a service charge lets them off the hook
It is a strong cultural norm to tip. We feel guilty if we don’t tip – even when service is bad. Even if a restaurant says the hospitality is included in the price, many diners may feel obliged to tip anyway. This has, in fact, been the case for some diners at the Union Square properties. Seeing a specific service charge may make it easier to let go of tipping. We also need to acknowledge that the size of the service charge may cause some issues with guests.
The impact on ordering patterns
An across the board price increase may induce sticker shock in diners. While a diner at the Modern is unlikely to be affected, there are definitely restaurants for which this will be an issue. A service charge, like a tip, comes after the meal and is likely have less impact on the specific ordering patterns of diners. An example may be a decline in appetizer or desert orders as entrée prices increase. Diners may also choose lower cost items which may generate less total margin. One of the objectives of the initiative is to raise funds to pay servers and kitchen staff. If diners buy less and average cheque does not increase as much as prices do then it becomes more difficult. The other objective, by the way, is to reduce some of the internal strife and challenges that arise from tipping (see previous posts).
I would highlight that a good revenue manager may be able to mitigate some of these impacts by varying the increase by menu item to try to reduce this phenomenon but that remains to be seen.
Fewer people entering the restaurant
This point is really a corollary to the one above. If people check a menu online or at the door and prices are higher than those of other restaurants in the choice set they may choose not to come in. This isn’t a problem if everyone is raising prices but as we transition it can be a source of lost business. The service charge is outside of the base price and much more intuitively linked to tipping.
Both approaches carry some risk and some benefits. In some cases, generating enough revenue to achieve a restaurant’s goals may require both. A hybrid approach may provide additional revenue without requiring onerous price increases or a service charge well beyond the tip range customers are accustomed to.
We are seeing some momentum on ending tipping. It is by no means a sure thing that it will keep up. Individual restaurant owners will make individual choices that fit best for them. I don’t think that one size fits all. In some cases, in fact in my opinion more than half, a service charge will be the more effective way to make the transition.