The purpose of this paper is to outline the business issues surrounding tipping and its alternatives, to summarize what is known about those issues, and to identify questions in need of further research.
Objectives are achieved via conceptual analysis and review of relevant literature.
The paper finds that voluntary tipping, service charges, and service‐inclusive pricing offer different sets of costs and benefits, so that no one policy is always the best. The principal benefits to service firms of voluntary tipping are that it lowers nominal prices, increases profits through price discrimination, motivates up‐selling and service, attracts talented workers, and lowers FICA tax payments. However, tipping also motivates discrimination in service delivery, gives servers surplus income that could go the firms' bottom line, increases the risk of income tax audits, and opens firms up to adverse impact lawsuits.
No one tipping policy is always the best. Service industry executives and managers should carefully weigh each of eight different issues (outlined together for the first time here) to identify the best tipping policy for their circumstances.
Tipping has received little attention in service marketing. Furthermore, there is no good, published source of guidance to help service industry executives and managers make decisions about tipping policies. This paper addresses these voids by providing and discussing a comprehensive list of the pros and cons of tipping and its alternatives from a business perspective.
