Author: Rafi Mohammed

In this article, the author explores how Uber’s recent high-profile issues with their tipping policy highlight two key pricing principles: one, provide clarity to customers on your price, and two, how you structure your price is important, including the details of how you process payments. Rafi Mohammed is the founder of Culture of Profit LLC, and author of The 1% Windfall: How Successful Companies Use Profit to Profit and Grow. He can be reached at This article originally appeared in the Harvard Business Review ( and the New York Times.

The Pricing Advisor, June 2016

Uber recently settled a class action lawsuit brought by drivers claiming unfair wage and labor practices. In addition to paying up to $100 million, the settlement involves clarifying the ride-sharing service’s stance on tipping.

Uber has long opposed tipping, claiming riders don’t appreciate the extra hassle of adding a gratuity, as well as citing negative effects including potential racial bias (e.g., customers may leave less for nonwhite drivers). While Uber maintains its policy that “…tips are not included on Uber’s platforms (except on UberTAXI), and that tipping is neither expected nor required” as part of the settlement, it retreats by adding, “…riders are free to offer tips and drivers are welcome to accept them.” Drivers are now allowed to solicit tips by asking passengers or posting signs in their vehicles.

An important caveat is that if riders opt to tip, Uber won’t let them do so in its app. Instead, riders will have to hand over cash or make a separate credit card transaction. While this tipping procedure sounds harmless, it puts Uber at a significant competitive disadvantage. In addition to the inconvenience of the extra step, which will require business travelers to collect multiple receipts for expense account reimbursements, many riders will feel pressured to be overly generous in the amount they tip.

A key feature of Uber is its dual rider-driver rating system, which aims to keep both parties on their best behavior. After each trip, both the rider and driver anonymously rate each other on a 1-5 scale (5 being the best). Drivers input their rating immediately after completing a trip, as doing so is required in order to be dispatched to their next fare. There isn’t a big financial incentive for drivers to strive for the highest ratings — as long as a driver’s average score is above 4.6, they remain in good standing with the company. Passengers with low ratings risk not being picked up.

The problem with Uber’s “don’t… but in case you do” tipping policy is it changes the meaning of a tip. Customers view gratuities as payments to reward good service. In Uber’s case, drivers will know whether and how much you tip before they rate you. As a result, tipping is now a Tony Soprano – like veiled threat: “Pay up or I’ll give you a poor rating.”

Uber’s New Tipping Policy is a Mistake

Customers never enjoy being strongarmed over a gratuity. Traditionally, the size of a tip is a personal judgment based on factors such as how the customer values service, custom, and income. Now Uber adds a guessing game over what amount — 10%, 15%, 20% — will secure a high rating. Many riders, myself included, haven’t tipped because Uber told us not to. A “coerced” extra 20% is a significant price increase that reduces the pricing savings (versus traditional taxis) and the frictionless experience (no need to carry cash or even a credit card) that have been a cornerstone of Uber’s marketing.

Sure, famed restauranteur Danny Meyer is implicitly instructing customers on how much to tip by phasing out gratuities in favor of “hospitality included” prices. The difference is his 13 restaurants and bars are among the best in New York. Being so highly differentiated gives Mr. Meyer the mojo to do away with the practice, essentially including them in the price. In contrast, there are alternatives to riding with Uber. Many of its drivers, in fact, also work for Lyft — a competing ride-share service with a more customer-friendly tipping process. Tips can be included in Lyft’s app, and its drivers rate passengers before knowing whether they tipped.

It’s fair to question whether consumers are overly concerned with their ratings. Probably so, but given our society’s obsession with ratings and Facebook likes, scores are meaningful to consumers. We don’t want to feel unfairly judged, especially when Lyft offers a similar service and a more equitable rating system.

What should Uber do? It could completely forbid tipping and remind disgruntled drivers they are free to work exclusively for Lyft. More realistically, Uber needs to realize drivers are ambassadors for its brand. Incentives should be in place to encourage them to provide the best service. The easiest remedy is to adopt Lyft’s tipping model. However, if Uber is intent on maintaining its no-tipping policy, it should find another method to reward highly rated drivers.

Uber’s waffling stance on tipping highlights two fundamental lessons for all businesses. First, provide clarity to customers on your price. Price is a key attribute that customers evaluate; a “don’t, but you probably should” tipping policy is confusing. Second, and most important, how you structure your price is important, including the details of how you process payments. Uber’s faux pas on tipping now provides a distinct advantage to its rival Lyft.

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