March 5, 2007

Restaurant-Goers Fail to Consider Tip

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Consider the cost of the exact same chicken marsala in two different restaurants: one is $15, the other $16. But the first restaurant is not actually cheaper — the second restaurant just includes a $2 tip in the original cost. Knowing this, where would you choose to dine? Rationale would dictate that you eat at the cheaper second restaurant. However, research suggests that restaurant-goers will go to the $15 chicken marsala restaurant, even if the final bill is the more expensive.

A report conducted by the Center for Hospitality Research at Cornell entitled “The Effects on Perceived Restaurant Expensiveness of Tipping and Its Alternatives” found that customers perceive restaurants that have costs of service built into the menu price as more expensive than restaurants that have a separate tipping policy, even when the former is actually cheaper than the latter.

“Drawing on the recent advances in behavioral pricing research, we wanted to explain why and under what conditions tipping or automatic gratuity may reduce perceived restaurant expensiveness as compared to service-included prices,” said Shuo Wang grad, a co-compiler of the report.

The findings of the report were based on a web-based survey of 317 volunteers who were asked to rate the cost of restaurants that employed different gratuity policies.

The volunteers were given information about the tipping policies of four hypothetical restaurants, and were then asked to place a food and beverage order. Finally, the volunteers were asked to rate the cost of the restaurants.

The report found that customers showed such a strong preference towards voluntary tipping that even when they became fully aware of the total cost of a more expensive meal, there was no change in the way they perceived the expense. For example, the study found that customers perceived restaurants that had an added service charge as high as 18 percent no more expensive than restaurants that levied a 15 percent service charge built-in to the menu.
The reason for this unique phenomenon, the report suggests, is that patrons who are busy enjoying themselves do not take the trouble to calculate the exact value of the added service charge. Rather, they make an estimate that tends to be lower than the actual charge.

Nitish Bansal ’07, a student in the School of Hotel Administration, agreed with the report’s finding and said that even in his personal experience working in restaurants, he saw that customers paid more attention to the menu prices and not the total bill when judging the cost of a restaurant.

“If the competitive price of the restaurant in comparison to other restaurants in the same class goes up due to the built-in service charge, then consumers’ perception of restaurant expensiveness would definitely increase,” he said.

Bansal added that restaurant patronage may further decrease because customers sometimes leave tips on the basis of the quality of service they receive, and might be irked if their discretionary powers are revoked.

The study also found that, because of an increase in perceived cost, customers ordered relatively less expensive dishes in restaurants that used service-included pricing. This direct impact on demand makes tipping policies vitally important considerations for restaurant managers.

Prof. David Lynn, co-author of the report, said that his findings suggest that only upscale restaurants, catering to customers that are relatively insensitive to price, could use the built-in pricing policy without noticing a reduction in business. Although the study was a virtual simulation and no actual money was involved, Lynn said it confirmed the prudence of a long-standing restaurant industry practice of separating menu prices from service charges.