Comment by 9rx
2 days ago
> Tips subsidize profits, plain and simple.
Nah. Profitability for the business would be higher without tips. I take x% of gross income as profit. No tips means I can charge the customer more, which means a higher gross income, which means more profit. When tipping is involved, the money slips through without allowing the business to take its cut. Good for the server, but not good for the business.
However, as theoretically great as it sounds, you are ultimately beholden to what the customer wants. There is good reason why every restaurant that has tried a "no tips" policy has failed. Nobody shows up to dine. They go somewhere else where they can tip instead. Regular people actually enjoy tipping, as hard as it may be to believe for those who are staring at screens rather than enjoying the ambiance of a restaurant.
It's not that simple. Restaurant owners don't pay payroll taxes on tips, but they do pay it on regular wages. Raising restaurant menu prices by 20% (or the average tip amount) will not result in 20% (or the average tip amount) more going to the workers. Some restaurants have tried this out, and it's backfired. Restaurants already run on very thin margins; a loss of a few percent can kill them.
Also consider that customers will get sticker shock: even though they are ultimately paying the same price, seeing 20% higher prices on the menu will make them spend less. Yes, it's dumb, but human psychology is dumb, so there we are.
(Folks in Europe are used to the listed price being what they pay. In the US businesses don't generally list tax-included prices, but businesses that do include tax in their prices end up looking -- in the eyes of customers -- as more expensive than those that don't, even when the final prices are identical.)
"Some restaurants have tried this out, and it's backfired. "
Where I live, many restaurants have the "required 18% gratuity" thing and ask that you not tip beyond that. Maybe this is a PNW hippie specific thing, but a movement against tipping exists and is being ran by some good, successful, restaurants.
Making the tip required isn't a movement against tipping, it reenforces the idea.
Try increasing the posted food prices by 18%, or add a "18% owner boat fund", instead and see what happens. You won't last the week before you are bankrupt. The amount is exactly the same, so from a financial point of view there is absolutely no difference, but the experience of "helping out the little guy" is lost, and that will chase clientele away. For all the huffing and puffing we hear, actions speak louder than words. The reality is that customers like tipping!
2 replies →
> Restaurant owners don't pay payroll taxes on tips, but they do pay it on regular wages.
Payroll taxes in most jurisdictions are based on wages, not profitability of the business. A non-issue, well, except maybe for the server who has grown accustomed to making $50/hr. No tips and those days are long gone.
> Some restaurants have tried this out, and it's backfired.
Yup. Hard to win customers when tipping is part of the experience. I mean, it can be done where it isn't — McDonalds survives, thrives even, without tips — but if you are trying to run the type of restaurant where the customer comes to tip it doesn't fly. You have to give the customer what they want at the end of the day, else they'll go somewhere else. This is the challenge businesses face.
> Restaurants already run on very thin margins
Exactly, and if you increase the volume then the product of the margin gets bigger. Remember, Walmart and your average restaurant have the same profit margin! Walmart's advantage is that they handle way more money, so the total amount that margin represents is huge. If a restaurant can also handle more money...
> seeing 20% higher prices on the menu will make them spend less.
Even just, say, 1% higher still means more cashflow through the business, which means more cash to take a cut from. You are right that the full 20% would unlikely ever be realized, certainly not right away, but it doesn't need to be to still be advantageous. But until you figure out how to convince the customer to change their preferences about tipping, good luck.
There is absolutely no obligation to leave a tip. One only does so because they want to!
> Also consider that customers will get sticker shock: even though they are ultimately paying the same price, seeing 20% higher prices on the menu will make them spend less. Yes, it's dumb, but human psychology is dumb, so there we are.
It's not dumb; it's just that paying that 20% to the waiter is a lot easier to stomach than a 20% increase to the restaurant owner.
https://www.pewresearch.org/2023/11/09/how-americans-feel-ab...
Why do you take a fixed profit. Why don’t you charge the amount which maximises profit?
Because x% is the maximum profit. Not even places like Walmart, for all their might, have figured out how to exceed the same x% (somewhere around 2-3%).