Taxicab drivers, hotel doorkeepers, and hairdressers are all tipped. More and more baristas have a tip jar, and payment screens in more establishments encourage customers to give a little more for their service, sometimes as much as 30%.
This growing list of places where consumers are required to leave a tip adds to the confusion. This creates confusion for customers and adds to the instability of employee earnings. It also leads to a worse level of service in businesses.
We should eliminate the tip.
What is a “standard” tip?
Many customers find tipping confusing because the rules are unclear, and payments are made arbitrarily. Most people agree that the “standard tip” is 15%. However, consumers are increasingly “asked” to give more.
What amount would you tip 15% on? Do you tip 15% on the total bill? Is the total bill without tax? Is the tip based on the full account of food, or is it a separate rate for expensive bottles?
Most people agree that tipping rates for large groups are often higher. But how many people make up a “large group”? Tipping is all about math. This can be a challenge for many people, especially after a few glasses of wine or pints.
Tipping is not only confusing and difficult for the customer, but it can also be problematic for workers who are being tipped. Other employees know their pay rates before they start work. The opposite is true for waiters, bartenders, and waitresses. They often don’t know how much money they can expect to earn in a single day.
Sometimes, servers get lucky and receive a huge tip. A server in Connecticut earned almost $25,000 for just a few hours’ work after a sports team bought a huge bottle of champagne.
It is more common for servers to receive little or no tips from customers who are unhappy with their dining experience. This also happens when foreigners are served, who are used to tipping without rules in their home country.
The economics of restaurant tipping
The economic nature of bars and restaurants, which are high-risk businesses with high rewards, was a major reason for the creation of tipping. In fact, most fail.
Fair Issac – the company that invented the FICO score – looked at fail rates in 89 industries and ranked bars and restaurants among the ten most risky. Meanwhile, Small Business Administration statistics show that only about half of restaurants and hotels last more than six years.
Restaurants that survive often have the highest gross profit margins in the retail sector. Only a handful of businesses can transform a few dollar’s worth of ingredients into a high-end product using knowledge, skill, and time. My server, for example, convinced me the other day to purchase a beautiful slice of chocolate cake as a dessert for only $5.99. This slice was made for around 25 cents, which is a very high price.
However, the industry is also very high risk. Eating out is an expensive and discretionary activity, which can be done for a cheaper price at home. Therefore, when the economy is in a slump, people tend to cut back on dining out.
There are also few barriers to entry into the restaurant industry, as opening a restaurant does not require a special degree or training. Anyone who has a good idea and is passionate about cooking can open a restaurant. It is not uncommon for highly successful restaurants to find that competitors are opening quickly in the vicinity, stealing away their customers and profits.
In order to reduce the risks, the restaurant managed to convince its customers that it is their responsibility to pay and evaluate the wages of the staff. This facilitates direct labor costs for the business, which lowers their risk of failure.
Instead of tipping as an incentive to pay workers, the business owner should shift this burden from them to the customers. The labor laws have incorporated this shift. As an example, federal regulations permit servers to earn only $2.13 an hour if tips cover the rest of the pay. This ensures that the more restaurant owners tip, the lower their costs.
Tipping is no longer a guarantee of ‘promptness.’
The tipping practice is a waste of money if it does not match the service. Historically, the tip was a token payment designed to encourage “promptness” or promptness.
But today’s tips do not motivate servers as they are only given at the end and not at the start of the meal. When servers don’t know how much incentive money they will be receiving, it isn’t easy to motivate them.
This is confirmed by research, which found that “tipping is not significantly related to the servers’ or third parties’ evaluations of service.”
Benefits of eliminating the tip
What are the alternatives to discretionary tipping? In certain countries, such as Japan, there is No tipping or Service Charge at restaurants. In Japan, for example, there is no tipping or service charge in restaurants. Instead, servers are paid directly by the restaurant, and the food and drinks prices are adjusted to reflect the additional labor costs.
It is beneficial to switch to a system where labor costs are included in the price of food and drinks. It shifts the risk away from employees by eliminating uncertainty, and it provides more stability to a server’s pay.
Restaurants and bars are more likely to hire servers who can tolerate or like the fluctuating compensation. By switching to a stable pay system, restaurants can attract more applicants who require greater income security.