People have been tipping for 500 years.
It began with wealthy landlords in Tudor England paying their servants.
By the 17th century it had became the practice to tip in coffee houses and guest houses.
Tipping spread to the US in the 1850s as a fashionable aristocratic gesture.
By the turn of the 20th century a strong anti-tipping movement, seeing tipping as a holdover of serfdom, abolished customary tipping across Europe and even in six American states.
Then when the effects of prohibition hit, any concerns were swept aside and tipping became a core part of servers compensation in the US.
In other word: tipping evolved, it was not designed.
On the face of it tipping is perfectly logical. It aligns the guest and the server by rewarding good experiences and is often cited as the perfect solution to the principal–agent problem in economics. However, like lots of nice, clean economic models, real life gets in the way.
Tipping is not an incentive, it is a custom, and because it is now an expected duty, it does not actually reward good performance.
Yumpingo's research shows that guests will tip almost the same amount whatever experience they had. Very satisfied guests tip on average 19.4%, satisfied guests will pay the same and unsatisfied guests will still tip 19.0%.
Other research confirms this. Michael Lynn, a tipping expert and professor at the Cornell Hotel School says, “A consistent finding is that there is a relationship, people do tip more the better the service they get. But that relationship is very weak. The average correlation is 0.2. That means about four percent of the variability of the differences in the percentage tips left by different dining parties can be explained by their service ratings. It’s astonishingly low.”
A good incentive plan should be linked with the business success. It’s in the interest of restaurants to link the incentives to guest satisfaction and long-term revenues.
Here’s how different servers perform across one of our restaurant groups. Each dot is a different person. The closer to the top of the chart the better the experience for guests, and the closer to the right, the greater the sales revenue.
The servers fall into four groups with different characteristics.
Tipping doesn’t drive a better customer experience. Because it is an expected duty what it does do is incentivise servers to increase their gratuities, by selling the most food and drink in each visit.
As a result two groups are rewarded; the ‘Efficient Promotors’ and the ‘Efficient Detractors’. The Efficient Detractors look great in the sales data, but this is short term revenue - these are guests that are not going to return.
Servers are not incentivised to build loyalty for the restaurant and deliver lifetime value (LTV), but success here is essential for the business. The difference in value to the business between these two groups is stark:
By avoiding customer churn and increasing both loyalty and return rates the highly satisfied guests on the top right are worth 16 times more than the unsatisfied guests in the bottom right ($3,169 compared to $199*). It’s a huge difference!
The Efficient Promotors are the people that drive the majority of success and profits of the business.
Restauranteurs have always focused on upselling as a route to increased profitability, but 1/2 of that activity is being wasted and it can actually deliver negative financial results!
In the chart you can see that the lowest customer satisfaction scores, and the highest guest churn, comes from the group that have been upsold in a negative way by the Efficient Detractors.
To align incentives to business success restaurants need measures of guest satisfaction to a server level, to identify and reward their true top performers.
These measures of success also enable businesses to provide the training and incentives needed to turn other groups into top performers.
With soft skills training and the right incentives Efficient Detractors can be converted into Efficient Promotors, significantly improving the heath of the business and customer experience.
Starting to recognise the potential of the Inefficient Promotors and focusing on their hard skills will also deliver significant business value.
Introducing an incentive scheme that builds on tipping by adding experience measures, and then providing targeted training will focus the front of house teams on business success.
Transforming more servers into Efficient Promoters has a dramatic effect on profitability.
It's a system that benefits all parties; restauranteurs, guests and top performing staff.
*Moon, Youngme, John Quelch. "Starbucks: Delivering Customer Service." Harvard Business School