Should We Abandon Tipping? Here’s What Would Happen.

A question that has been on the minds of many in the restaurant business of late is whether or not eateries should abandon the concept of tipping.

To discuss the arguments for and against dropping this long-entrenched practice, we invited Michael Lynn, a professor of consumer behavior and marketing at Cornell University’s Hotel School, to join eCornell’s Chris Wofford as part of our Hospitality WebCast series.

Wofford: Michael, thanks for joining us. Restaurants have been around forever, tipping has been around forever. Why is this suddenly such a hot topic now?

Lynn: Well, the debate over whether we should tip has also been going on forever. There’s a guy named William Scott who wrote a book in 1916 called The Itching Palm: A Study of the Habit of Tipping in America. All the way back then, he was saying that Americans should get rid of tipping and that it was undemocratic.

In the 1980s there was a bunch of interest within the industry in getting rid of tipping because the tax law made restaurants more liable for paying taxes on cheap income. Today, the increased interest in raising the minimum wage is creating price pressures on restaurants. So it’s a perennial kind of debate.

Wofford: Let’s get right to it: should restaurants abandon tipping?

Lynn: If I had to give a quick answer, I would say that if you’re a mid-priced or lower-priced restaurant then no, not yet. But if you’re a really upscale high-priced restaurant, you should consider it.

Wofford: You and I have both worked in restaurants for years. Something that always comes up is that there’s a big disparity between the money that servers make compared to those working in back. So as you talk about the minimum wage thing, is the idea to ultimately bring the wages of these groups a little bit closer?

Lynn: Well, let’s just take New York City as an example. Servers there are making about $25 to $30 an hour. Cooks are making $13 to $15 an hour. Yet the skill sets are not that different. There might be an appearance of difference in the kind of language used to describe the minimum requirements to be a server – you have look a certain way, you’ve got to be able to speak properly, etc – but serving is not a skilled job. Cooking is perhaps more skilled, but those people are making less money.

If restaurants, through higher prices or through service charges, were able to pay servers more than $15 an hour but less than the $30 they’re currently making, they could take that money and redistribute it to the back of house or keep some of it for themselves for more profit. Servers are making upwards of 25 percent of a restaurant’s gross sales while the owners don’t make anywhere near that level of profit despite taking all the risks. It’s a model that people need to start thinking about.

Wofford: Michael, you wrote ‘The Business Case for (and Against) Restaurant Tipping’. Let’s talk about the years-long research behind that: how do you go about it, who did you talk to and what were you hoping to learn?

Lynn: My very first study was standing outside of an IHOP restaurant interviewing customers and asking them to rate their service experience and tell me what their tipping point was. I was simply interested in whether or not tips really are affected by the service quality. And the answer is that people do tip more for better service but not a whole lot more. To give you some sense of the magnitude, if someone rates the service at 3 out of 5, they’re likely to leave on average a 14 percent tip. If they rated the service a 5, they might leave a 16 percent tip.

Wofford: When we talk about the idea that maybe we should eliminate tipping, what kind of behavioral changes might take place within a within a staff?

Lynn: Theoretically, if servers start making less money, they’re going to leave and go elsewhere to make the money that they’re accustomed to making. So you might lose your top-level employees. On the other hand you ought to be able to replace them with equally competent people. I’ve done a lot of research that shows that experience is not that strongly correlated with the quality of service. It doesn’t take that long to learn how to be a good waiter, and a lot of it has to do with disposition, not skill set.

So restaurants could expect to lose some current employees, but you ought to be able to replace them with equally competent people. You’d pay your back of house more, making it easier to attract higher quality back of house people, and you should be able to keep them.

Wofford: Let’s say tipping’s gone. What happens?

Lynn: You’re either going to replace tipping with higher services, including menu prices, or you’re going to add on an automatic service charge. The advantages of an automatic service charge is that it separates the paying of services from the payment for food, and it keeps your menu prices low.

Wofford: Would the charge be related to the overall cost of the meal?

Lynn: Sure. Let’s say I’m going to charge an 18 percent service charge. I have a choice: I could add the charge to every bill or I could increase my menu prices by 18 percent. Functionally it’s the same thing from the standpoint of the total expenditures by the consumer, but consumers won’t perceive them the same. Because when consumers judge the expensiveness of a restaurant, they’re looking at the menu prices. And when they see 18 percent higher menu prices, all they know is that their burger now costs a lot more than what it used to. But if there is an 18 percent service charge, they’re still seeing a normally priced burger. So, the perceptions of expensiveness are not going to be harmed by adding a service charge.

Wofford: Ok, but might customers’ perceptions of that service charge have a negative effect on them? You’ve basically mandated an 18 percent tip, which might rub people the wrong way.

Lynn: I have just completed two studies looking at the impact that moving away from tipping has on restaurants’ online service ratings. In one study, I looked at Joe’s Crab Shack, which recently replaced tipping with higher prices at 12 of its restaurants. I looked at the Yelp reviews and found that their service ratings declined when they abandoned tipping. In another study, I looked at a bunch of restaurants across a variety of states, mostly upscale, that replaced tipping either with service charges or by raising the menu pricing. What I found was that their declines in online service ratings were stronger if they replaced tipping with service charges than if they replaced it with service-inclusive menu pricing, and it was stronger for downscale restaurants than upscale restaurants. The only group that was able to do this without suffering a decline in online service ratings were the upscale restaurants that replaced tipping with higher menu prices. Why? I don’t know for sure, but I think it’s because customers hate service charges and that hatred translates to lower service ratings.

Replacing tipping with higher menu prices makes things seem more expensive, but that’s not so bad if you’re already a super expensive restaurant catering to a pretty wealthy, not price-sensitive clientele. But if you are a restaurant with customers who are a little bit more price sensitive, then the extra expensiveness that’s perceived when you raise menu prices will lower your ratings.

Wofford:So we are back to where we started – if you’re a downscale restaurant, you probably shouldn’t abandon tipping just yet. What about the fact that customers actually seem to prefer tipping? Tipping is empowering in a strange way.

Lynn: Absolutely. You get all kinds of perceived benefits from tipping. There’s assurance that I’m going to be treated well, otherwise I can withhold payment. There’s status and power that some people get off on. There are a lot of benefits to the consumer psyche from tipping.

Want to hear more? This interview is based on Michael Lynn’s live eCornell WebSeries event, Should Restaurants Abandon Tipping?. Subscribe now to gain access to a recording of this event and other Hospitality topics.