Tip Included – Smart or Foolish?

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In New York City some restaurants are going to start bundling in the tip at the end of your meal. In other words, they will raise their prices by some percent and include the tip as part of the price. What predictions do you have? Here are mine.

For high end restaurants, including the tip in the price will have no effect on sales, mostly because these buyers are not price sensitive. It’s fun to work in high quality, high priced companies.

However, for family restaurants, including the tip will have an impact. The restaurants will work hard to make sure the diners know that tip is included, but will they really remember this when they are choose their restaurant for dinner? Think of the advertising campaign for Southwest of Bags Fly Free. Even though most of us know that Southwest doesn’t charge for luggage, do we really think of that when choosing airlines?

Restaurant operations will also be effected. Over time, restaurant owners will stop giving the entire tip to the wait staff. It’s probably going to be split with the kitchen staff, meaning the wait staff will take a pay cut. When this happens the best wait staff will find new jobs where they can make more money, and only average or poor wait staff will work there. Service will decline. Of course, the quality of the kitchen help may increase for the same reason.

If restaurant owners asked, I would recommend against this new practice. A tip is like adding on sales tax, or shipping costs. They are afterthoughts. They are not considered as part of the diners decisions. By adding them into the price, restauranteurs force them to become part of the decision process.

It’s always fascinating when companies try new pricing models. We get to test our hypotheses and see what really works.  What do you think will happen?

Photo by Natalia Balcerska