Lessons from a real-life behavioural experiment in banning tips from restaurants

A real-life behavioural experiment has been taking place in restaurants across America; an experiment that has broader implications for how we influence customer behaviour.

Tips have been banned.

The move behind banning tips … is now unraveling

In the 1960s, the US Government introduced a ‘tip credit’, lowering the minimum wage for tipped employees on the basis that customers would subsidise their income. If the tips do not bring the employee up to the real minimum wage then the employer makes up the difference.

However, at the end of last year a few high profile restaurateurs decided to reconfigure the wages of staff to resolve some issues relating to the tipping system.

Those issues included:

• Believing it was unfair to rely on customers to motivate staff performance;
• Inequity amongst staff. It is illegal to tip or share tips with non-customer facing staff (like chefs and kitchen staff), so despite their efforts being critical to the dining experience they did not receive any of the spoils, creating a ‘them’ and ‘us’ division; and
• Forfeiting the opportunity to use compensation as a management tool.

The restaurateurs decided to raise the hourly rate of all staff by raising menu prices.

But in a blow for the anti-tipping movement, a number of restaurants are now unwinding their commitment, re-instituting tipping on the grounds that:

1. Customers expressed displeasure; and
2. They couldn’t retain staff.

The confounding thing about this is that a no-tip policy makes sense on paper. So let’s look at both customer and staff issues from a behavioural perspective.

Customer behaviour around tipping

Tipping can make customers anxious

A few years ago I was being driven to a trail-head in Yosemite National Park. The transfer from my hotel was included in the cost of the hike, but what about the driver? What should I tip him? There was no meter so I couldn’t calculate a percentage of the drive and I had no frame of reference. I even asked him what was the done thing, but he deferred and said whatever I decided was fine.

To this day I don’t know whether I delighted or insulted him, and while he may not remember, such was my discomfort that I’m writing about the experience years later.

That’s the potential risk of tipping and of “Pay-What-You-Want” pricing, too. If your customers don’t have an idea of what is the ‘right’ amount, they may end up resenting the position you’ve put them in, or even avoiding the experience.

In theory then, banning tips is an obvious way to reduce anxiety. You’ve taken away the decision so the customer can know exactly what they are paying. In fact, early results were positive for the anti-tipping restaurants with an increase in business.

So why has it gone wrong?

Tipping is the prevailing social norm

While tipping has not always been enshrined in American culture (it was illegal in some states in the 1920s), it has been the prevailing social norm for many decades.

That means diners in these anti-tipping establishments are faced with breaching a societal expectation. It might feel okay when customers book the restaurant, but it’s awkward when they have to look their waiter in the eye and leave without compensating them directly.

 Tips buy you social approval

There’s an episode in Seinfeld where George places a tip for his calzone in the tip jar but the pizza maker happens to turn his back so doesn’t see him. A notorious spend thrift, George is then faced with a conundrum. He is happy to tip but only if it ‘buys’ him social approval. George therefore decides to retrieve his money from the jar, only for the pizza maker to see him, accuse him of theft and ban him from the shop.

George’s predicament gives a clue into why the tipping-ban may not have worked as expected. The prevailing societal norm for customer-waiter relationships means that customers need a way to communicate they are holding up their part of the deal. If their tip is baked into the price of the meal, this does not give them this opportunity.

Added to this, customers are used to mentally accounting for their ‘meal’ and ‘tip’ as separate items. While the tip is included in the cost of the meal, it doesn’t feel like they are paying for service.

How to change the norm

If you’ve grown up in that type of culture it can take time to change. Anti-tippers should take heart, however, that the US used to be tip-free, which proves that norms can be redefined.

In the immediate term, restaurants and businesses that want to adopt a tip-ban need to normalise the behaviour so that their customers feel comfortable.

That means they should look at:

• Communicating on their menu and/or bill that the prices include a component to support staff wages (something they currently do);
• Making sure the customers are thanked directly by staff when presented with the bill, reminding them that all tips are taken care of;
• Promoting their no-tip policy as one that is fairer for all staff, and any exception to this undermines team unity;
• Introducing an option to donate to a charity (they also do this);
• Posting pictures of happy staff and customers around the restaurant to normalise the behaviour; and
• Requesting a favour from customers instead. For example, ‘like us on Facebook’, ‘take our card’ or ‘refer a friend’.

Staff retention

The second reason cited for reigning in the tip-ban has been staff turnover. Again, on paper it makes sense that staff should be attracted to a higher hourly rate.

The problem is that while the hourly wage increased, some wait staff would have seen their individual earnings decrease. The no-tip policy caps their earnings potential and for those who are, or think they are, above average it will seem more attractive to work elsewhere for tips.

Resolving this is a difficult proposition because tip money and wages are, once again, subject to mental accounting. While the restaurants have promised staff they will be no worse off, staff who are used to getting direct compensation for their efforts will find this a big adjustment.

As a result I think no-tipping restaurants are going to attract a different type of staff member – one that is interested in team play and the security of an hourly rate rather than the roller-coaster of reliance on tips.

To help their cause, no-tip businesses need to:

• Be transparent about the allocation of revenue to staff so they don’t feel they are missing out. For example, document the week’s takings and break out the ‘tip’ component;
• Consider how they physically allocate the ‘tip’-fund. For example, distribute the money in a team meeting so that it is visible and salient rather than simply adding it to the pay cheque; and
• Promote the advantages of the system, such as never having to compete with colleagues or feel ripped off by an under-tipper.

Lessons for your business

Whether or not your business is one in which tipping is involved, the US experiment teaches us a number of things about behaviour:

1. Providing a frame of reference is important to reduce customer anxiety. Think about how you ‘anchor’ expectations about pricing and make your customer feel comfortable that what you are asking them to pay is fair and reasonable.
2. People have different mental accounts for money, so you need to understand what they are and help them spend from these buckets in a way that feels right.
3. Money is a social signal, so ensure your customer is given the opportunity to demonstrate they are doing the ‘right’ thing, and they are acknowledged for it.
4. If you are seeking to change a convention you will have to take steps to normalise the new desired behaviour.

Bri Williams runs People Patterns, a consultancy specialising in the application of behavioural economics to everyday business issues.