Business strategy and the social norm of tipping

Tipping is an important economic phenomenon, involving about $47 billion a year in the US food industry alone, and trillions of dollars across different occupations and countries over the years. Moreover, tipping is a major source of income for millions of workers. This article discusses the implications of tipping for business strategy in the relevant industries. For example, firms can choose to impose a compulsory service charge in lieu of tipping – what are the advantages and disadvantages of doing so? How does tipping change the profit-maximizing level of investing in screening job applicants, training workers, monitoring them, and providing performance-based incentives by the firm? Can industries such as the music industry use tips (i.e., prices being voluntary and determined by the customers) as an alternative business model?

► Tipping involves about $47 billion a year in the US food industry alone.
► Tips may serve as an alternative business model in the music industry and others.
► Tipping has many implications for business strategy, such as:
► The choice between tipping and service charges.
► How much to invest in screening, training, monitoring and incentivizing workers.