On the complex psychology of pricing and tipping.
(Photo: Chris MacDonald)
Two months ago I blogged about the Ethics of Shoe-Shine Pricing, based on my experience at an airport shoe-shine stand. I was particularly interested in the relationship between base price and tipping behaviour. I noted that pricing decisions by businesses might well have a substantial impact on customers’ tipping behaviour, by making it more or less convenient, for example, simply to “round up” to the nearest dollar (or currency denomination). Case in point: I was charged $6.75 to have my shoes shined, and gave the guy a ten. It occurred to me that, had the price been $8.00 instead, I would have given the guy the same ten, but the resulting tip would have been substantially smaller.
Well, I’m back at the airport, and just had my shoes shined. And guess what: the price has gone up. I was charged $8.00, and, yes, as predicted I gave the guy a ten-dollar bill and told him to keep the change. In other words, rather than tipping on any principled basis, I did what was convenient. I suspect the vast majority of customers do the same.
Whoever decided to raise the price from $6.75 to $8.00 may not have thought about a couple of secondary effects of that decision (not that consciousness of these effects would necessarily have altered the decision). One secondary effect is that he or she reduced employees’ tips by $1.25 per shine (assuming most people tip roughly the way I do). That’s a big cut, big enough that it probably ought not to be made thoughtlessly.
The other effect of this pricing decision is of course the effect on the customer. The obvious effect is that a shoe-shine now puts a slightly larger dent in the customer’s wallet. But then, an airport shoe-shine is pretty clearly a luxury good (if a very minor one), and so it’s pretty easy to avoid the price change simply by forgoing the service. But less obviously, the customer now finds it slightly less easy to engage in a minor act of beneficence, namely the act of overtipping. Note that, back when the price was $6.75, my $10 payment amounted to nearly a 50% tip, which is crazy when compared to the 15-20% that most people aim at in response to good service at a restaurant. But shoe-shine customers who are anything like me are still going to do the easy thing (i.e., give the guy $10), even after the change in price. My evidence here is purely anecdotal, but I suspect that people generally value being handed the opportunity to engage in small, reasonably pain-free acts of kindness or generosity. I must admit that, back when I was charged just $6.75, I felt kind of good about having given the guy a “big” tip (percentage-wise) and it made me feel good about the whole shoe-shine experience. Today, the $8 shoe-shine cost me exactly the same (after tip), and the service was just as good, but I went away without that warm-and-fuzzy feeling, having given the guy a “mere” 25% tip.
It’s interesting to note that the ethics of pricing is virtually virgin territory, from an academic point of view. There’s practically nothing on the topic in the scholarly literature on business ethics, aside from a few journal articles on price gouging, a some stuff on price fixing in textbooks, and of course a bit of work on the pricing of executive talent. I’ve always assumed that the paucity of work on the topic has something to do with the fact that pricing is seldom seen (from the outside, at least) as a choice. In theory, at least, companies charge “what the market will bear,” and that tends to mean a number dictated by a combination of consumer demand and the availability of competing products. But for many products, pricing is in fact a choice, and I think the ethics of pricing is far more complex and interesting than most people realize.
Blogs & Comment
Shoe-shine ethics, again
On the complex psychology of pricing and tipping.
By Chris MacDonald
(Photo: Chris MacDonald)
Two months ago I blogged about the Ethics of Shoe-Shine Pricing, based on my experience at an airport shoe-shine stand. I was particularly interested in the relationship between base price and tipping behaviour. I noted that pricing decisions by businesses might well have a substantial impact on customers’ tipping behaviour, by making it more or less convenient, for example, simply to “round up” to the nearest dollar (or currency denomination). Case in point: I was charged $6.75 to have my shoes shined, and gave the guy a ten. It occurred to me that, had the price been $8.00 instead, I would have given the guy the same ten, but the resulting tip would have been substantially smaller.
Well, I’m back at the airport, and just had my shoes shined. And guess what: the price has gone up. I was charged $8.00, and, yes, as predicted I gave the guy a ten-dollar bill and told him to keep the change. In other words, rather than tipping on any principled basis, I did what was convenient. I suspect the vast majority of customers do the same.
Whoever decided to raise the price from $6.75 to $8.00 may not have thought about a couple of secondary effects of that decision (not that consciousness of these effects would necessarily have altered the decision). One secondary effect is that he or she reduced employees’ tips by $1.25 per shine (assuming most people tip roughly the way I do). That’s a big cut, big enough that it probably ought not to be made thoughtlessly.
The other effect of this pricing decision is of course the effect on the customer. The obvious effect is that a shoe-shine now puts a slightly larger dent in the customer’s wallet. But then, an airport shoe-shine is pretty clearly a luxury good (if a very minor one), and so it’s pretty easy to avoid the price change simply by forgoing the service. But less obviously, the customer now finds it slightly less easy to engage in a minor act of beneficence, namely the act of overtipping. Note that, back when the price was $6.75, my $10 payment amounted to nearly a 50% tip, which is crazy when compared to the 15-20% that most people aim at in response to good service at a restaurant. But shoe-shine customers who are anything like me are still going to do the easy thing (i.e., give the guy $10), even after the change in price. My evidence here is purely anecdotal, but I suspect that people generally value being handed the opportunity to engage in small, reasonably pain-free acts of kindness or generosity. I must admit that, back when I was charged just $6.75, I felt kind of good about having given the guy a “big” tip (percentage-wise) and it made me feel good about the whole shoe-shine experience. Today, the $8 shoe-shine cost me exactly the same (after tip), and the service was just as good, but I went away without that warm-and-fuzzy feeling, having given the guy a “mere” 25% tip.
It’s interesting to note that the ethics of pricing is virtually virgin territory, from an academic point of view. There’s practically nothing on the topic in the scholarly literature on business ethics, aside from a few journal articles on price gouging, a some stuff on price fixing in textbooks, and of course a bit of work on the pricing of executive talent. I’ve always assumed that the paucity of work on the topic has something to do with the fact that pricing is seldom seen (from the outside, at least) as a choice. In theory, at least, companies charge “what the market will bear,” and that tends to mean a number dictated by a combination of consumer demand and the availability of competing products. But for many products, pricing is in fact a choice, and I think the ethics of pricing is far more complex and interesting than most people realize.