Mr. Verma

Food & Beverage

The Impact of Prix Fixe Menu Price Formats on Deal Perception

By Rohit Verma, Executive Director, Cornell Center for Hospitality Research

Co-authored by Glenn Withiam, Executive Editor, Cornell Hospitality Quarterly

Restaurant operators who offer prix fixe meals need to make a determination regarding how to present the associated service charges. The choice essentially involves whether to state the service charge outright (either as a percentage or dollar amount) or whether to include an unstated service charge as part of the overall meal price. Underlying this decision is the science of consumer psychology as it relates to how people determine whether a particular price is reasonable or expensive.

The argument for a single price is that the restaurant includes all of its services in a single amount, and customers know what they are going to pay ahead of time. But the argument against that practice is that many research studies have shown that many consumers are reluctant to pay what they consider to be a high price—specifically, a price that appears higher than one offered by a restaurant that imposes a separate service charge. In that regard, the argument for stating the service charge as a separate amount (whether as a percentage or dollar figure) is that the cost of the meal will appear to be lower. Although consumers know intellectually that they must add the service charge, that lower amount seems somehow less expensive. The argument against the separate service charge is that it may appear to be “too much,” if it exceeds consumers’ tipping benchmark, which in the United States is generally 15 percent of the check.

If the restaurateur does state a separate service charge, another dilemma arises regarding whether to present that added charge as a percentage or as a specific monetary amount. If you present the service charge as a percentage, that allows an instant comparison to the 15-percent tipping norm. Presenting the service charge as a monetary figure would at least slow customers’ mental calculation, but they can, of course, do the arithmetic to convert the monetary amount to a percentage for comparison. Moreover, several studies in the U.S. have shown that restaurant customers react differently to prices stated with a dollar sign (or other currency sign) than they do to a price with no such sign.

We should point out that this decision with regard to a prix fixe meal is not the same decision as occurs when an á la carte restaurant adds a service charge to a large party’s check, although there are points in common. For the large-party gratuity, the á la carte restaurant is setting a different rule for a particular set of guests. Consumers undoubtedly assess that distinctive treatment in a different way than they would the prix fixe service charge, since the latter is applied evenhandedly to all patrons.

Two researchers at Cornell University, Shuo Wang and Michael Lynn, investigated the question of how consumers react to the presentation of service charges at prix fixe restaurants. Wang is a graduate student at the Cornell School of Hotel Administration, where Lynn is the Burton M. Sack ’61 Professor in Food and Beverage Management. They conducted a web-based survey of a diverse group of nearly 500 respondents, based in the U.S. They used the 15-percent tipping norm as the benchmark in their study because that is a common expectation in most of the United States. The numbers may be different in other parts of the world, but the principles of consumers’ mental calculus are similar.

Wang and Lynn first compared the inclusive price to what they call a partitioned price. The partitioned price stated the service charge separately, using either a flat dollar service charge or one of the following three percentage levels: 12, 18, or 23 percent. The question to the respondents was whether one or another of these “meals” represented a good deal to them. In fact, the respondents viewed a menu, ordered a virtual meal, and then were presented the check—all as part of the web survey. Some checks were inclusive, some had the dollar charge, and others had one or another level of percentage service charge. Let’s first look at the results for add-on percentage charges.

The respondents saw a definite difference between the stated percentages, but only insofar as they were under 15 percent or over 15 percent of the meal cost. That is, the respondents saw no significant difference in whether the service charge was 18 percent or 23 percent. Compared to the all-inclusive price, the respondents thought that the 12-percent added charge was a good deal, but either of the higher percentages were viewed as expensive compared to the meal with the service charge included. Wang and Lynn conclude therefore that, in the U.S. at least, restaurant guests are, indeed, using the 15-percent tip level as a benchmark.

They tested that notion more directly by simply asking the respondents who had the all-inclusive menu how what percentage service charge they thought was included. Respondents estimated a mean just over 13 percent, which is reasonably close to the 15-percent norm.

Let’s turn now to the dollar-denominated service charge. The results here were more complicated, although the lesson is essentially the same. Wang and Lynn expected that the respondents who were presented with a flat-dollar service charge would compare that fee to the full cost of the meal so that they would determine a rough percentage amount for the service charge. Then the researchers anticipated that the respondents would compare that calculated percentage to the 15-percent norm. Then, due to the different psychology involved in a dollar-based presentation, they expected guests to accept a higher percentage charge when that fee was stated as a dollar amount.

While the data pointed in that direction, the researchers could find no significant effect. Presenting the service charge as a dollar amount generally resulted in similar responses—and the 15-percent benchmark seemed to hold. However, it’s possible that some of the respondents skipped any kind of calculation and that the dollar-based service charge had some effect in blurring the effect of the service charge. It’s also possible that the respondents who received the test with the dollar-denominated service charge were using some benchmark other than 15 percent for their comparison, but there is no way to know that. There also remains the finding that we mentioned above, namely, that seeing the dollar sign may cause different reactions than seeing a percentage sign. The basic theory is that seeing a dollar sign reminds people more sharply of the “pain” of spending their money.

The chief implication for restaurateurs is that even with a prix fixe menu, your guests are making value calculations at all times, and the service charge is one of those value issues—one that seems to stick out in customers’ minds. Chances are that most restaurants would find a 12-percent service charge to be untenable, even though it would apparently represent a “deal” compared to the unspoken 15-percent benchmark. Given the economics of the situation, restaurateurs will probably have to impose a service charge higher than 15 percent—but that could meet with customer resistance. For a situation where the service charge would be relatively high, the all-inclusive price might be the best approach.

There is one final point to consider, and that is price positioning. We know that most consumers use price as a potential indicator of service quality, given that you can’t inspect a service before you receive it. Thus, imposing a lowball service charge may call into question the level of service. While it’s unlikely that offering a 12-percent service charge would undermine perceptions of service quality, it’s still a possibility. This last point emphasizes a key issue, which is the need to maintain your restaurant’s value perception. Pricing is one critical element in that perception.

Co-author Glenn Withiam is a graduate of Cornell University, and is executive editor of the Cornell Hospitality Quarterly (CQ) as well as director of publications for the Cornell Center for Hospitality Research (CHR). In addition to producing the CQ and numerous reports, Mr. Withiam has edited books on hotel management contracts, internal control, hospitality training, quality service, and the forthcoming Cornell School of Hotel Administration on Hospitality: Cutting Edge Thinking and Practice, published by John Wiley and Sons.

Rohit Verma, Ph.D., is Professor of Operations Management and Executive Director for The Cornell Center for Hospitality Research. Prior to joining Cornell faculty, Mr. Verma was the George Eccles Professor of Management, David Eccles School of Business at the University of Utah. He has also taught MBA and executive development classes at several universities around the world including DePaul University, Chicago, IL, University of Sydney, Australia, Norwegian School of Logistics, Norway, Helsinki School of Economics, Finland, and Indian School of Business, India. Mr. Verma can be contacted at 607-255-2688 or rv54@cornell.edu Extended Bio...

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