If you want a lesson in the power of custom and pricing psychology winning over objectively better options, check out this New Yorker piece on failed attempts by restaurants to eliminate tipping.
Research conducted by Michael Lynn, at Cornell University, who is the foremost academic authority on tipping, has shown that people of color receive lower tips than their white colleagues, which arguably qualifies tipping as a discriminatory pay practice. The system perpetuates sexual misconduct, because service workers feel compelled to tolerate inappropriate behavior from customers who hold financial power over them. As restaurant prices have risen, gratuities—which are tied to sales, as a percentage—have too, so that there is now a substantial and hard-to-defend disparity between the pay of the kitchen workers who prepare food and the servers who deliver it.
A statistical model created by Ofer Azar…found only a small correlation between tip size and service quality, leading him to conclude that servers were motivated mainly by other factors …Another study by Lynn showed that perceived service quality affected tip size by less than two percentage points. A female server, by contrast, can expect to hike her tips by an average of seventeen per cent if she wears a flower in her hair.
A number of restaurant groups and owners have tried to eliminate tipping to help resolve this issues. Some have decided to eliminate tipping and set their prices higher in order to provide health and leave benefits in addition to a living wage.
While there have been some difficulties finding people who are willing to work in a no-tipping environment, the bigger problem is resistance from customers.
New research by Lynn shows that when restaurants move to a no-tipping policy, their online customer ratings fall. One factor that explains that dissatisfaction is how we, as consumers, respond to “partitioned” prices versus “bundled” prices. A partitioned price divides the total cost of an item into smaller components—say, a television listed for a hundred and ninety dollars that has a ten-dollar shipping fee. A bundled price would list the television, shipping included, for two hundred dollars. Consumers tend to perceive partitioned prices as cheaper than bundled ones.
Later the article notes people have an aversion to service charges. Even though people will typically tip 20%, if a 15% surcharge is automatically added in the place of tipping, people perceive it as a “gotcha” even though it means they will pay less. People also believe that service will suffer in the absence of tips.
There is a lot in this article that speaks to the value of using psychology in pricing strategy and providing the perception of the consumer being in control.
If you have ever shopped on sites like Amazon where there are multiple sellers of an item, if you pay attention you will often see items that are offered a few dollars cheaper than the rest of the group—until you get half way through the transaction and you realize that with the shipping and handling it is much more expensive than the sellers who offered free or included shipping. I often wonder if they are counting on people not noticing or deciding it is more trouble to back out of the transaction and starting anew with another vendor.
Surcharges on ticket sales would likely disappear immediately if the sales weren’t restricted to a single service. (Ticket prices rarely fall below face value on re-seller sites.)
Speaking about the ethics and motivations behind your pricing does gain traction with certain demographics and may make them more willing to pay a higher price if they know people are being taken care of. But this New Yorker story seems to suggest tricks like ending a price with a 9 rather than a 0 will still be a significant motivator of purchasing behavior.
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