Competition Marketing Restaurants

A tip for restaurant owners: Royally ticking off the customer-facing employees is a bad idea.

Last week, it was reported that several restaurant chains are getting ready to charge their wait staff when a customer leaves a tip on a credit card. Specifically, they will charge the employee for the merchant fee portion of the tip.

Here’s how it works: When a restaurant takes your card to pay for your $100 meal, they pay the credit card company somewhere between $1.50 and $3.00 (a percentage, usually between 1.5% and 3%) for the ability to let you charge the meal to your card, validate the charge electronically and pay later. This amount is called a merchant fee.

It’s a good deal for the restaurant for what I hope are obvious reasons. If you add a tip to that meal, that raises the amount of the merchant fee, since the amount charged was higher than the price of the meal.

Even in states like Montana where employer tip credit is illegal, it’ll be interesting to see how this plays out.

It’s far more clear how it might impact wait staff (financially). That’ll get analyzed to death by someone, but as a business coach I’m thinking that these owners are nuts.

Clearly, this is going to tick off the wait staff in these restaurants. While the staff is obviously motivated to provide outstanding service in order to increase their tips, there are some people who might not be so motivated. That’s going to roll downhill. Some quality waiters are likely to look elsewhere for work, raising the service level at competitors’ restaurants.

The Fox News article quoted Joe Kadow, VP of OSI Restaurant Partners, who noted that “there are too many extra costs in the restaurant business”.

What is an “extra” cost? It’s either a cost or it isn’t. More importantly, it’s an easily predictable cost.

Kadow continued by noting that dinging the wait staff for the merchant fee portion of their tip is “preferable to raising prices”.

Horse hockey. Let’s look at the math.

On a $100 meal, a tip for really good service might be $18-$25.

Even if you have the worst merchant account vendor imaginable, the card-present rate on a card might be 4% on a downgraded rewards card. Believe me, that’s pushing it.

4% of $25 is .04 * 25.00 = $1.00. A more reasonable card-present transaction rate (ie: “swipe” rate) is more like 1.8-2.2%, which reduces the $1 to about 50 cents on a hundred dollar meal.

Now back to the client who just bought a $100 meal and dropped a $25 tip on the table. Think they’ll care or notice if their medium rare Ruth’s Chris New York Strip is $40.45 instead of $39.95? Or worst case, $40.95 vs $39.95.

I doubt it.

Even at Outback, where a ticket for 4 seat table is typically $40-50. A 20% tip on a $50 ticket is ten bucks. 2% of that (a reasonable merchant fee) is TWENTY cents.

Is annoying your wait staff “preferable” to a 20 cent increase on a $50 ticket? Puleeze.

Kadow closed his comments by noting that “it’s a legal option and his company is taking advantage of it.”

Not sure this is much of an advantage, Mr. Kadow, but hey, knock yourself out.

For the rest of you: Take care of your people. They take care of your clients. If you don’t get this, please give my phone number to your competitor and ask them to call me.

UPDATE (Feb 7, 2008): It has gotten back to me that the publicity of this has prompted OSI Restaurant Partners to change their tune about dinging their staff for merchant fees. I’m convinced that if it hadn’t made the news and the blog world, they’d still be moving forward on it. Thanks to HR wizard Tom McGuire for the update.

One reply on “A tip for restaurant owners: Royally ticking off the customer-facing employees is a bad idea.”

You’re right about the wait staff are going to get mad about this. I don’t know what the percentage of their income is tips compared to low, low hourly rates, but this will put a dent in morale.

I just had a case yesterday, not about tips but about customer service. I asked the assistant manager of a Wendy’s to make something right and she just shrugged her shoulders like she didn’t care. Morale continues to decline.

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