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Should your restaurant levy a tip even before providing service?

Published June 17, 2022

With the hospitality sector moving online, almost every aspect of the interaction between business and customer has become digitized – from ordering food to leaving tips. As fewer and fewer people carry cash, restaurants have been updating the way in which they manage tips. Some provide an option for people to add a tip when making a payment while others simply add it on to the bill automatically. While that can provide a neat solution, it may also cause friction with customers, especially if they feel the service has not been good enough. The result – a whole lot of unnecessary bad blood between you and the customer and also, an increase in chargebacks being made after the event.

The growing problem of chargebacks

Over the last ten years or so, chargebacks have become a growing problem for restaurants. Back in 2013 the food and beverage industry had one of the lowest chargeback rates of any industry vertical at 0.01% of transactions. Today, rates of up to 1% are not uncommon.

During the pandemic, chargeback culture became increasingly widespread with almost half of customers who cancelled hospitality bookings admitting to using the chargeback route rather than refund.

The problem for hospitality companies is that chargebacks are much more expensive than the alternative of refunds. A refund occurs when the restaurant decides to approve a customer’s request for a refund. It is relatively straightforward and involves simply transferring money back to the customer.

A chargeback, however, is a type of forced refund in which the customer approaches their card issuer directly for a refund. It’s quicker and simpler for the customer but can be several times more expensive for the restaurant on the receiving end than a simple refund. Depending on a merchant’s deal, chargeback fees can be between $20 and $100.

A chargeback can be a legitimate mistake though it can sometimes be a fraudulent claim. A customer may experience buyer’s remorse after making a purchase or they may simple not recognize an entry in their bank statement. In a growing number of cases, customers actively commit chargeback fraud in which they demand repayment even if the service or product has been adequately delivered. The company then finds itself wrangling with the credit card company over the legitimacy of the chargeback.

The best way to reduce exposure to chargebacks is to prevent them in the first place with the tried and tested methods of being open and transparent and delivering excellent customer service. Unfortunately, another growing trend goes against both of those principles – the rise of automatic tipping.

The problem of automatic tipping

The practice of applying the tip before customers receive their service is one which is in keeping with the modern trend for making purchases. Partly thanks to the pandemic and the rise of digital payment options, the point at which customers make payments is changing from the end of the meal to before they have even arrived.

With many restaurants offering purchase online and pick up options, they face an important question about what happens with the service charge. Traditionally, of course, tipping is done using cash at the end of the meal. It’s a little gift to the waiter or waitress in return for good customer service. They have always been important with many staff relying on tips to make up for their traditionally lower hourly pay.  

Thanks to the pandemic and the rising cost of living, we are all dealing with, tipping has become even more important than ever. For the most part customers seem to acknowledge this. Restaurant owners report a significant increase in tips from before the pandemic, with rates rising from around 10 to 15% for pick up to 20 to 25%.

The pandemic highlighted the problems facing staff on working on hourly pay rates. Since then, of course, things have got even worse. Inflation is heading towards double digits but wages are not moving in tandem with it. Although staff shortages have seen hospitality upping the rates of pay they offer, it has not been enough to keep pace.

For small and medium sized outlets working on tight budgets there is very little they can do to push wages up, especially as their costs in other areas from food to fuel are rising at an alarming rate. Tipping, then, becomes even more vital for an overworked and underpaid workforce.

Related: The costs of chargebacks are anything but friendly

The rise of automatic tipping

In keeping with the trend towards pre and digital payment, many restaurants are automatically applying tips before the food is purchased. However, this comes at a price. Research suggests that restaurant customers tend to frown on automatic gratuities even after good service. It leaves a bad taste in the mouth and the impression that you are trying to wring a little bit of extra cash out of them.

In terms of building a positive customer relationship, tipping is not usually viewed as helpful. People like to be in control. By its nature, tipping is supposed to be a voluntary action to reward good service and show support for staff. However, a company automatically applying the tip before they have delivered the service can create friction. It may harm the customer relationship creating the suspicion that a company is trying to inflate prices by stealth.

News reports which suggest that in many cases tips are not making their way to the pockets of the service staff do nothing to enhance trust between the major parties involved.

Worse still, they can add to the problem of chargebacks. If customers are not happy with tips, the simplest option is often to raise a charge back and claim the money back directly from their credit card company.

Restaurants may bet on the quality of their customer service in reducing those chargebacks. As long as you consistently perform highly with the quality of food and customer service — so the thinking goes — charge backs will remain minimal. However, in many cases, anger at the automatic nature of the service charge can see customers claiming money back even if they have been happy with their service.

Reducing chargebacks

To ensure staff continues to receive tips, while also keeping customers happy, restaurants and other hospitality companies have to think about the way they apply chargebacks. As with so many things, a big part of the secret lies in transparency, communication and choice. Being open with customers and explaining what they are being charged for and how it is being applied avoids giving the impression that you are trying to sneak in added costs under the radar.

Having a sophisticated payment system which offers multiple ways to make payments can also give customers back the control they crave over the tipping process. A sophisticated payments platform allowing mobile payments, online and instore allows people to pay when they like, how they like and to add a tip when they like.

If customers do request a refund, having a capacity to make the payment quickly and easily without the need to go down the chargeback route will be simpler and less expensive for all parties.

Customer attitudes, buying behavior and expectations are evolving rapidly. Having a high-tech payments and customer relationship management software can help restaurants keep pace with the changing landscape. Most of all it will avoid anything which might erode the valuable customer relationships you have been working so hard to cultivate.

A better bottom line.

Payment processing tips every merchant should know.

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