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When the tipping revolution began last year the restaurant industry found itself at a fork in the road. Many restaurateurs sat back to watch the drama unfold and observe how the public would perceive such a European take on dining within the US; others jumped in head first and eliminated tips without a second thought. Now that ample time has passed and the world never ceased to spin as the no-tipping bandwagon grew larger, we’re understanding that revolution has turned into an evolution of sorts. Restaurant owners are now trying to determine how they can offer competitive wages against their peers in this tipless era that’s gaining momentum. Two distinct approaches have emerged from the fire for operators to best manage the loss of tip driven income: raising menu prices or introducing a surcharge.

In lieu of tipping, many restaurateurs are taking the most obvious route and increasing their menu prices with plans to somehow compensate their team for the loss of tips. We’re here to tell you first hand, for the independent restaurant, we don’t like it. There are glaring negatives accompanying menu price increases that are deterring us from willingly hopping on board and here’s why:

1.  SALES EXEMPTIONS:

Many restaurants are involved in percentage based lease agreements where their rent is tied directly to what their sales produce. Let’s say you increase your sales by 20% after the surge in menu prices to cover the cost of tips – now you’re tasked with trying to negotiate with your landlord that what he/she sees in your gross sales isn’t necessarily what’s eligible for him/her to take in increased percentage in rent.

2.  PRICE VALUE PERCEPTION:

Guests will feel sticker shock when they see that the price for a seemingly cheaper valued item (let’s say a sandwich in this example) has gone up by 20%. Bluntly speaking, there’s only a certain amount that people are willing to pay for any given item so why pay 20% more for the same sandwich that you can get around the corner? Keep in mind that while you may still find value in the sandwich because your guest no longer needs to tip, it will not be easy for them to understand that the 20% increase is a “fully burdened” price (i.e. takes care of what would have been their server’s tip).

3.  PRICE ELASTICITY:

By simply increasing your menu prices you lose all leverage with price elasticity. When commodity prices fluctuate, as they always do, you surrender your ability to make adjustments to preserve contributing margin on an item. Worse over, you’re no longer able to put price increases on high contributing margin items… a HUGE ding to your bottom line.

Should you decide that your restaurant would best operate without tips in play, we do like and highly recommend the addition of a surcharge. If you aren’t sure what a surcharge is think of it in the same way as an auto-gratuity. Surcharges, if done correctly, allow flexibility, transparency, and the opportunity to educate your guest. Stick around and check out our blogs this week and next where we’ll walk through the 3 strategies discussed in this month’s Podcast episode and Webcast, for operators to compensate their team when removing a tip and adding a surcharge.