A few days ago at the airport I stopped to have my shoes shined professionally, something I rarely do. The service was excellent. The guy doing the work was pleasant and knowledgeable, and the results were beautiful. The price, revealed at the end of the process: $6.75. I gave the guy a ten, and told him to keep the change. Now, that’s not exactly enough to make me think I’m a big spender, but it’s pretty good, percentage-wise (nearly a 50% tip). The guy sitting next to me did the same thing, by the way, and I’m betting that’s actually a pretty common pattern.
This got me thinking about the relationship between pricing, tipping, and currency denominations. If the price of the shoe-shine were $8.00, most people likely would still give the guy the same $10, resulting in a substantially smaller tip. But if the price were closer to $5, I bet most people would pull out a $5 bill and then looked for some change to add as a tip. So whoever sets the basic price for the shoe-shine has enormous power to influence the size of tips.
Now, the guy who shined my shoes was wearing a shirt bearing the logo of a chain of shoe care-and-repair stores, so I’m guessing he wasn’t setting his own prices. This implies that the company he works for, in addition to making a decision about his base pay, is also, through its pricing policies, making a decision that likely has an even bigger impact on his income. Of course, that decision is not entirely unrestricted. The company in question has to cover its costs. But presumably it has different pricing strategies open to it. Crudely, it can set prices high, which will likely keep demand down but will result in a big per-sale profit margin; or the company can set its prices low, and rely on volume. Either strategy might make economic sense. If (and that might be a big “if”) both strategies have the potential to work out equally well for the company, that means the choice is open, and the potential is there to base pricing on whichever strategy will do the most for employees in terms of providing customers an incentive for large tips.
(Another example: any bar manager that sets the price of a beer at $4.50 is pretty much ensuring that wait-staff are going to get lousy tips — the temptation for many people is going to be to plunk $5 onto the bar, resulting in a tip of 50 cents or 11%.)
But the factual foundation of this question, beyond my own anecdote, is all speculation on my part. I’ve never had a job where I relied on tips. Can anyone shed any light on the relevant facts, here? And does anyone know whether incentivizing tipping is something companies ever take into consideration in their pricing decisions?