The Impact of Prix Fixe Menu Price Formats on Deal Perception
By Rohit Verma Founding Provost, VinUniversity and Professor, School of Hotel Administration, Cornell University, VinUniversity & Cornell University | December 05, 2010
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.