Here is a Tip, Don’t Tip!

As a customer I do not like tipping. As a decision maker I think tipping is the wrong approach to ser582004_587142238008969_1579320363_nving customers. As a business consultant I do not recommend a business adopt what I call Partitioned Pricing unless your business is a market maker (a platform).

Customers not only incur an additional cost over the price of the product but also incur high cognitive cost at the time of tipping. Prospect theory tell us we suffer more pain from multiple smaller payments than from a single higher payment. Then there is the social pressure of tipping the suggested percentages despite the quality of service received. In such cases essential the customer is paying beyond their consumer surplus or paying for negative value. Some want to add guilt to this on wages of employees not matching up to living expenses and hence making it a customer’s job to offset it. Sum of all these is a huge cognitive cost to customers.

Businesses that adopt tipping are offloading a key customer experience aspect to incentives rather than making end to end customer experience integral part of their brand. Customer experience begins long before they walk into your business. It begins when customers find about your business and add it to their consideration set. Customer experience is measured at every touch point, with every product aspect, every service interaction and every employee they come in contact with. When you implement tipping you carved the employee interaction part and made it individual incentive driven rather than a reflection of your brand. If the employees dial their service delivery based on tips received it breaks the continuity in customer experience. It is far better for the business to have employee output and service delivery tied to your brand and customer experience  than based on percentage of tips received. Take out the bad kind of variability in customer experience.

As a business consultant tipping is an awful kind of pricing. You are unbundling your costs and asking customers to offset those costs. As an extreme case imagine a business asking customers to pay for silverware, cleaning, rent etc. You want customers to willingly pay for value received and not to help you reduce your employee wages. Your costs are just your costs.

Simplest of the business model is set pricing as share of value you create for your customers. If you are a market maker it is different and tipping in those cases the service provider owns the customer relation and tipping becomes a value based pricing. Your business is just a platform that brings in providers and consumers. Most businesses we all use do not fall in this platform category.

Let us get rid of tipping, tip jars and the Apps forcing us to pay at least 20% tips.

There is a far more rigorous economic argument I can make against practice of tipping but the margin is too small to contain it.