Tipping Rears Its Ugly Head… Again

I have written about my issues with tipping before, nearly a year ago. This week, the New Republic is taking a different approach on the issue: how to game the system (for the tippee, if such a word exists, not the tipper).  Apparently, blondes get higher tips than brunettes, drawing a smiley face on the bill (for women only), crouching next to the table, among other things, all helps get bigger tips.

The New Republic’s point, however, isn’t to help waiters and waitresses get more money, although that may be a side effect; it is to show how much the system of tipping itself is irrational.

Some of their arguments make sense, some do not.

On the one hand, if tipping really is discretionary, i.e. you as a customer decide how much to tip based on the pleasure you received in the experience beyond the food itself, then there is nothing unreasonable or unethical in tipping a waitress more because she wore a flower in her hair, which made her look better, you enjoyed it more, and you gave an extra dollar in tips for the more pleasurable experience. There is nothing irrational in the tipping system if it works this way.

Of course, one needs to be careful where the borders of discrimination and vice laws are drawn. Could it be illegal to tip a Caucasian waiter more than an Asian one, or vice-versa? These are a slippery slope which will, hopefully, remain in the purview of the free customer and not the subject of enforcement or lawsuits.

On the other hand, if tipping is structured to encourage better service, then is this system effective?

The real challenge to tipping is that companies in most industries are able to differentiate themselves on service, if they so choose – sometimes at a premium price for that service – without relying on transaction-by-transaction tipping. If you pay $95/year for an AmEx Green Card, or $450/year for the AmEx Platinum Card, you may be doing it for the benefits or cachet, but a core element is its service. It is really nice to have a representative answer in clear English, in under 2 minutes, and solve your issues to your benefit. Yet no AmEx representative gets a tip from you at the end of the call. Similarly, you do not tip the flight crew, whether you fly coach domestic American or Suites Class on Singapore.

These companies compete on their service levels and know how to compensate their employees based on those levels. In many cases, the real difference is not just the compensation level, but a combination of compensation structure – pay your employees for happy customers and you will get happy customers – and the all-crucial company culture; look in the dictionary under Singapore Airlines.

So why is tipping necessary in just the food service industry (and hotel and taxi industries in some locales)? For the consumer, it isn’t; for the serviceperson (waiter or waitress), it isn’t. Where it is, however, is for the restaurant business. Lower salaries plus tips, or the promise (and sometimes threat) of tips, can bring in employees at lower cost for restaurants, who historically operate on tight operating margins. Restaurant recurring salary costs can thus be kept lower, even allowing for hourly employees and seasonality of the industry, and give them greater flexibility in managing their cash flow.

Is it good for the customer? That depends on the definition of good. Without tips, restaurant prices would undoubtedly be higher to allow the restaurant to pay higher wages to serving staff, compensating for the lost tips. Would the increase in price be roughly equivalent to what you would pay at the old price plus tip? That actually depends on the company itself.

What would most likely happen is that you would have a further split in the food service industry. Currently, there are 2 key categories:

  • Low-cost / low-quality: the food is lower quality, the service is lower quality.
  • High-cost / high-quality: the food is higher quality, the service is higher quality.

Eliminating tipping while raising prices would create 4 options:

  • Low-cost / low-quality: as before
  • High-cost / high-quality: as before
  • Middle-cost / lower-quality food, higher-quality service: these would choose to charge a middle level of price for moderate food but much better service.
  • Middle-cost / higher-quality food, lower-quality service: these would choose to offer moderate service but higher-quality food.

The creation of 2 new middle tiers would allow customers to choose, at the same price, between better quality or better service, if they did not wish to spend the premium prices for the best of both.

Last, there is an interesting development that could eliminate the bottom tier entirely: the burger robot. Although starting only with burgers, one company has invented a machine to produce fresher cooked food at a cheaper cost and more reliably and quicker than humans. It can take an automated order and prepare a burger as requested – meat size, cooking level, condiments, vegetables, buns – in a fully automated fashion. Not only is this faster than a human, making 360 burgers/hour, but it is so much more cost-efficient, that a McDonalds-type fast-food place could use high-quality ingredients for the same operating margin is it could when using the low-quality food it currently uses with human workers.

Over time, then, the lowest-tier may disappear entirely, itself creating a new dynamic. What do you tip a robot, a can of WD-40?

About Avi Deitcher

Avi Deitcher is a technology business consultant who lives to dramatically improve fast-moving and fast-growing companies. He writes regularly on this blog, and can be reached via Facebook, Twitter and avi@atomicinc.com.
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