During our vacation to the northeastern United States and Canada, I noticed a behavioral pattern of my wife and myself.
We are not as conscientious as we should be about leaving a tip for housekeeping. (A guideline I found on the web -- $1 to $5/night.)
If you're like me, tips sometimes feel bothersome. I paid for the room, which should include the service. But, these service people are underpaid and depend on gratuities as an important part of their income. When we fail to tip, we come off as being cheapskates.
At some of the motels and hotels that we stayed at, the maid left an envelope for gratuities. Sometimes the envelope was signed. When we found an envelope, Janet and I never failed to leave some cash in it.
We also took the Scotia Prince ferry from Yarmouth, Nova Scotia to Portland, Maine, and rented a state room for the day. In our room was an envelope suggesting a gratuity of $2 per person per day. Again, we made an effort to assure there was some cash in that envelope when we left.
This tactic is effectively being used by charities. You could call it the "guilt" technique. The charity sends a brown paper bag, suggesting they can fill it with food for the needy with your donation. Brown paper bags are distributed with the daily newspaper to be filled with food for pick up by the food bank. The effectiveness of the technique is evident because more and more charities are using it.
When charities telemarket or send direct mail, three suggested donation amounts are listed. Tests have proven the middle amount is selected most frequently, so the amounts are structured to elicit the desired amount. This is the "Goldilocks Principle". Middle amounts are not too much, and not too little. The amount is also often circled in red, with "This amount will be especially appreciated" written nearby.
For years, accountants and lawyers performed their services, then sent bills and waited to receive payment. Now more and more professionals are requesting the advance payment of a retainer. This practice helps to minimize losses from unpaid bills and helps to generate funds for paying current expenses. I have found another benefit. I have almost always had long-term relationships with people who paid a retainer at our initial meeting. Most new clients now expect to make an initial payment at that time.
Think about how this relates to your business. If you are in the hotel and motel business and haven't already adopted the practice, you can give many of your employees a substantial raise at a minimal out-of-pocket cost by starting to distribute envelopes with suggested gratuities listed on them. (These tips are supposed to be reported on the employees' Forms W-2. The IRS hasn't cracked down on hotels and motels yet as they have for restaurants because they don't have the credit card transaction trail.)
For other service businesses, always ask for an initial deposit when starting a project--possibly for the total fee. Product orders should also require payment in advance. It's an excellent way to build a sound business relationship.
For new articles about how to improve your business, subscribe to our newsletter, Michael Gray, CPA's Tax & Business Insight!