Forbes India – Marketing, Service: The Tipping Point: The Subtle Psychology and Economics of Taxi Fares

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Some studies indicate that people tip to increase the likelihood of better service in the future. But in New York, where there were more than 11,000 yellow cabs before the pandemic, the chances of having the same driver twice are very low Image: Shutterstock

FFrom 2009 to 2013, Kwabena Donkor drove a taxi through the heart of New York to pay for her studies. It was a perfect pass during his studies, he recalls, because he wasn’t tied to a 9 to 5 that might prevent him from taking an economics exam. It was during these trips that a seed for his recent scholarship was planted. “Personal experience has helped me ask questions beyond what one might just sit down and think about abstractly,” he says.

It has always fascinated Donkor that even an uncomfortable or negative interaction with a passenger doesn’t seem to affect whether and how much they tip him. Why was that? He also began to wonder: why do people even tip to begin with?

“Tipping behavior in New York taxis is not rational according to traditional economic models,” says Donkor, now an assistant professor of marketing at the Stanford Graduate School of Business. Classical economics assumes that customers are rational and interested. Yet the choice to pay for a service and then give something more to the service provider is not exactly that. Some studies indicate that people tip to increase the likelihood of better service in the future. But in New York, where there were more than 11,000 yellow cabs before the pandemic, the chances of having the same driver twice are very low.

Seeking another way to explain passengers’ decision to tip, Donkor turned to behavioral economics and its focus on social norms. “Tipping is not mandatory but optional. But because this norm exists, people don’t avoid it,” says Donkor. In a recent working paper, Donkor uses theoretical and empirical analysis to quantify the economic value of tipping. tipping in yellow cabs in New York “We know that standards matter, but to what extent? How can we understand how restrictive it is? “he asks.

A tariff share

This helped to have a data set of one billion taxi rides in New York paid for with credit cards, which allowed Donkor to track the distance passengers traveled and how much they tipped at the one-year course. He observed that a striking 97% of customers left a tip, which strongly suggested the presence of a norm. The “social norm tip” was about 20% of the total fare.

Donkor added another layer of analysis by looking at how passengers interact with touchscreen payment devices in taxis. The screens presented passengers with a menu of tip options: 20%, 25%, or 30%. There was also a button to disable the default tip menu and enter a custom amount. Donkor found that around 60% of people chose a tip from the menu, indicating that most passengers preferred not to have to calculate a tip in their head.

The most popular tip menu option was 20%. However, as taxi fares increased, passengers drifted away from the usual fare. “Twenty percent of five dollars isn’t that much. But then when the rate is $50, it’s like, ‘Oh, I don’t want to stick to 20%. Now I’m going to step away from the menu. Because it’s worth me doing the math, compared to giving 20% ​​of $50 to the driver,” says Donkor.

He found that the share of people opting for default menus decreased as prices increased. And more than 80% of passengers who skipped the menu tipped less than 20%.

To better understand how people tip, Donkor designed a model suggesting that when a passenger tips, they not only pay the driver, but also avoid the psychological cost of leaving a small tip or do not tip at all. “You have something on your mind that you think is the norm or the right thing to do. And deviating from this results in a feeling of shame or guilt. And so I call it a cost of deviation from the norm,” he says. This cost increases as passengers deviate from the norm: when a customer tips 10% instead of 20%, this cost is approximately $1.30.

“There is a compromise,” says Donkor. “How much will I save compared to adhering to this standard?” So it’s this context that allowed me to quantify these unobservable behavioral fundamentals that we know are important but are really hard to measure.

His model also quantifies the cost of a passenger who disregards menu suggestions and calculates their own tip. “It’s the cognitive cost of your own exercise,” says Donkor. The average cost of this calculation – aka the cost of disabling the menu – is around 90 cents. “People prefer to avoid calculating 17% of $13.75 and prefer to pay $1 to avoid this situation,” says Donkor.

Tips for Better Tips

These results demonstrate the benefits of on-screen guidance menus for drivers and customers. As Donkor explains, “If you don’t give them any menu options, you can force the passenger to do the math themselves. But then if you give them the right options, it will increase the tips, so it will increase the profits that the drivers will make. And it also increases the well-being of customers, because they don’t have to do the math. »

And it adds up quickly. In New York, there were more than 250,000 taxi rides a day before the pandemic. If the cost of calculating an acceptable tip is about a dollar, then the amount saved by passengers choosing a default tip plus the increase in average driver tips is substantial. Donkor calculates that before COVID, the tip menu increased the well-being of taxi drivers and chauffeurs by more than $200,000 per day compared to no menu at all.

As payment screens have replaced tip jars and outstretched palms, Donkor’s findings have implications for cafes, restaurants, delivery services or any industry where workers rely on tips to supplement their income. Tipping menu suggestions can “actually increase workers’ wages without necessarily making life more difficult for consumers or taking money away from them,” says Donkor. “Actually, they don’t have to do so many calculations; we make it easy for them to do those calculations. So it’s a win-win situation.

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This article originally appeared in Stanford Business Insights from the Stanford Graduate School of Business. To receive Stanford GSB insights and business insights, click here: (To sign up: https://www.gsb.stanford.edu/insights/about/emails)

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