Pricing often seems like a dry, quantitative human activity subject to universal forces. That’s why it’s fascinating to see what happens when cultural traditions – not mathematical rules – influence how a company chooses its pricing model, and how that choice can have significant social consequences. Witness the practice of tipping, as this article in today’s Wall Street Journal describes. Tipping is a two-tiered pricing model that keeps service prices artificially low, while shifting much of the burden for labor costs onto the customers. Companies can keep the price for a meal, a haircut, or a trip to the airport competitively low, because they pay their labor a lower basic wage. Customers offset this wage difference with their tips, which can often exceed 25% of the bill for exceptional service. Is the practice of tipping in the United States “too big to fail” or can service businesses find new pricing models that keep themselves competitive and profitable while paying their staff attractive wages? The practice of tipping 15% or more on a bill is culturally entrenched in the United States and other countries in the Americas, but it is far less common in continental Europe and may even be considered insulting in some countries, such as Japan. In other words, other countries already maintain the same kinds of industries without the tip-driven pricing model. The argument in favor of tipping is that it creates incentives in service industries with a wide variation in quality, such as restaurants, hair stylists, taxi cabs, or ride shares. But in the United States, as the article shows, self-service kiosks now have their imaginary hands out – in the form of automated prompts for tips – even if the purchaser had no human interaction whatsoever. How does this make sense? There is no easy answer for a pricing model to replace tipping, but I’d like to get the debate started. What do you think?
Tipping at Self-Checkout Has Customers Crying ‘Emotional Blackmail’