If you're a small business owner with a brick-and-mortar store, you're probably familiar with the old-fashioned tip jar. But what if you're a small business owner or startup founder who conducts most of your business online?

The modern economy has become increasingly conducted online. Today, almost every business is developing a robust digital component. Given these dynamics, does it make sense to collect tips on online purchases?

This article will look at how virtual tipping works, the uses for it, and the associated pros and cons.

What is virtual/digital tipping?

Adding a gratuity to a digital payment is just the modern equivalent of an old practice. Instead of putting out a jar for loose change (and the occasional bill), companies have added the option at online checkout. Customers now have the ability to give additional money to employees when they make a digital purchase.

[With a virtual tip jar] customers now have the ability to give additional money to employees when they make a digital purchase.

This functionality makes tipping much easier. No awkward passing of bills. No math to determine an 18% gratuity. The move to an online process has streamlined the functionality and made it available in a wider variety of situations.

Tipping is largely expected when you go out to a meal. A recent survey published by CreditCards.com found that about three-quarters of consumers (73%) always tip while at a restaurant, while only 4% say they never tip.

While restaurants mark the most universal tipping situation, many other scenarios prompt gratuities on a regular basis. According to the same survey:

• 66% always tip hair stylists/barbers
• 57% always tip for food delivery
• 43% always tip for taxis/rideshares
• 27% always tip hotel housekeepers
• 22% always tip baristas

Meanwhile, the data suggest that tipping rates have declined slightly in recent years, in part as a result of inflation pressures and concerns about the economy. Still, discussion around tipping has become increasingly vocal of late. This focus has been driven in part by the rise of digital tipping.

Why are more online stores adding virtual tipping?

Of course, tips have long played a part at sit-down restaurants. However, the rise of the gig economy expanded this practice. Companies like Uber and DoorDash made tipping easier for things like rides and deliveries.

One data set provided by Square showed that by mid-2021, U.S. consumers were tipping on two-thirds of all in-person credit card transactions (66%). This only represented a slight increase compared to pre-pandemic habits, which showed a tipping rate of 63% for in-person purchases.

However, the same statistics indicate a massive jump in tipping on remote purchases. Prior to 2020, about 46% of virtual transactions included a gratuity. This ballooned to 86% in 2020 — a rate even higher than that seen for in-person commerce.

As we’ve seen, tipping rates can fluctuate over time. As a result, every company, no matter the business, can consider whether digital tipping makes sense for them.

What can virtual tips be used for?

With the expansion of tipping, especially for remote purchases, the practice has moved far beyond the traditional confines. Many companies have added the feature to their checkout process, allowing customers to give a little extra when they make purchases. Here are a few of the types of companies that have adopted digital tipping:

• Restaurants
• Retailers
• Hotels
• Resorts
• Services (hair cuts, cleaning, home improvements, etc.)

Note that some of these situations involve in-person contact with employees. Even in these circumstances, online tipping becomes a convenient way to provide additional cash to service providers who go beyond the call of duty.

Let’s look at an example. In a hotel, a traveler might want to provide a tip for valet service or for a great recommendation from a concierge. However, they might not have cash in hand. In addition, many people feel uncomfortable with the traditional tipping process, not knowing when and how to hand over the gratuity.

A digital payment structure solves some of this awkwardness. The customer can tip through an online portal, making the process easier and more convenient.

As a result, online tipping becomes available in any situation where virtual payments are possible. If a customer pays online, it's possible to add a digital tipping process.

Pros and cons of online tipping

To weigh whether online tipping makes sense for your business, it’s important to understand the implications. Adding this functionality offers a large number of potential upsides. However, it comes with drawbacks as well. Here are some of the key pros and cons of online tipping:

Pros of online tipping:

• Increased Support for Your Employees: Tipping provides additional income for your employees. This makes it easier for you to attract and keep talent, as well as improving their standard of living.

• Enhanced Motivation for Your Team: The possibility of tips can encourage your employees to go above and beyond.

• Improved Branding: By allowing online tipping, you increase the connection between your customers and your employees. This bond can feed a strong brand, helping you build your customer base and feed your revenue growth.

• Digital Tipping Creates an Easy Process: A well-designed digital system makes tipping easy, intuitive, and convenient.

• Receive More Data about Your Customers: You can gain important insights by studying when tipping occurs and how much customers give. These data points can help you improve your business.

• Collect Donations for Charity: Once you implement the technology backbone necessary for online tipping, you can use that functionality for other reasons. You can also run charity drives, raising money for your favorite aid organizations.

Cons of online tipping:

• Heightened Volatility for Employees' Income: While tipping generally provides more cash for your employees, it also adds volatility. Some months might experience a surge of gratuities, while others might see customers get stingier.

• Customers Might Balk at Higher Costs: As we have seen, higher inflation and economic uncertainty have led to lower tipping rates recently. Customers might push back against the implied expectation that they should pay even more for your offerings in the form of a tip.

• Potential for Unhealthy Employee Competition: The possibility of a tip can engender competition. Often, this is healthy. However, sometimes, the scramble for gratuities can lead to division and hard feelings.

Should you implement online tipping?

Accepting online tips for your small business or startup can lead to many advantages. The strategy lets you support your employees, while providing many ancillary benefits for your organization. In the long run, the process can even help you boost revenue and give you a structure for contributing more to society.

However, there are potential downsides to consider as well. Online tipping can also upset some customers and potentially lead to unhealthy internal competition. To weigh the pros and cons, use the information provided here to determine whether accepting virtual tips is right for your business.