Is the Customer Always Right? When we discuss the social

Is the Customer Always Right? When we discuss the social

Is the Customer Always Right?
When we discuss the social contract between a business and its customers, our focus tends to be on the responsibilities of business and how well or how badly a business treats its customers. Social contracts, however, are two-way relationships in which the customer also plays an active part. In this case, we focus on how well or how badly customers treat the businesses they patronize. We will examine situations in which customers are able to determine the prices they will pay and even whether they will pay at all.
THE TERRA BITE LOUNGE
The Terra Bite Lounge has a locked box on the counter. Customers put money into the box to pay for their meals—they determine what, when, and even whether they pay. The café has no prices listed on the wall and employees do not suggest prices to customers. The employee handbooks suggest that employees respond to customer questions by saying something like, “We don’t have set prices, you can pay what you feel is right.” Employees are specifically told never to use the words free, tip, donation, and contribution.1
An average of 200 customers frequent Terra Bite each day, paying about $2 to $3 per person. Although the café makes less per food items than typical cafés, they are able to break even by keeping operational costs low. They save money by being able to get by with hiring fewer staff, as well as forgoing the expense of financial transaction services.2
One of the café’s founders, Ervin Peretz, says that the café is able to help people while still turning a profit: “We’re not nearly as selfless as a soup kitchen. We’re able to operate without charity.” It certainly helps that they have customers like Tina Cooper, who says, “I feel like some people might not pay so I pay a little bit more.”3 ISSA Issa, the Canadian singer–songwriter formerly known as Jane Siberry, uses “self-determined pricing” to sell her music. Fans of her music can download it from her website using one of four options: (1) Free (gift from artist), (2) Self-determined (pay now), (3) Self-determined (pay later, which gives downloaders a chance to hear the music and determine its worth to them), (4) Standard (going rate of $.99). The website includes statistics regarding the choices that people make. At this writing, 19 percent chose to make the music a gift from the artist (i.e., they paid nothing so it was free) and 18 percent paid the standard rate. Most people (57 percent) chose to pay later while only 5 percent chose self-determined pay now. This added to an average price per song of $1.18 (higher than the $.99 standard rate). The majority of people (80 percent) paid the suggested price: 14 percent paid more than the suggested price while only 6 percent paid less.4
The artist gives the following payment advice to her fans: You decide what feels right to your gut. If you download for free, perhaps you’ll buy an extra CD at an indie band’s concert. Or if you don’t go with your gut feeling, you might sleep poorly, wake up grumpy, put your shoes on backwards and fall over. Whatever. You’ll know what to do.5 She goes on to say: I am making a choice to work this way and take full responsibility for whatever it may bring to me. You make your own decision and stand by it, too. This is not a guilt trip. Feel no pressure.6 Freakonomics co-author Stephen J. Dubner opines that the posting of downloader statistics indicates Issa has a good sense of the impact of incentives. He suggests that by posting those statistics she reminds people who might want to take the music for free that other people have paid. He also notes that allowing people to opt not to pay until they hear the music takes the variable pricing method, favored by economists, and puts it in the hands of the consumer.7
THE BAGEL MAN
As the head of a public research group at a research institute in Washington, DC, Paul began the habit bringing bagels as a Friday treat for his employees. When employees from other departments wanted them as well, he found himself bringing in fifteen dozen bagels each week and so he put out a basket to recoup his costs. After years on the job, Paul ended up well paid but unfulfilled. So he decided to turn his hobby of bringing bagels into the office into a full-time job. A few years after leaving his job to deliver bagels for a living, Paul was delivering 700 dozen bagels a week to 140 different companies and leaving a basket to collect money. He would return before lunch to collect the leftovers and the money. Paul earned as much as he ever did as a research analyst and was much happier.8 Paul’s economist friends thought Paul would be wasting his talent and economics training with this career move. However, the move to the bagel business created an unexpected benefit—a natural economic experiment that was featured in the book Freakonomics. Paul could compare the money collected to the number of bagels taken and determine how honest his customers had been. The bagel data provided a unique opportunity to study white-collar crime. Admittedly, cheating the bagel man is on a smaller scale than most white-collar crime, but it still is exactly that. “Stiffing” the bagel man is not unlike embezzling or stealing company property. Most statistics on white-collar crime only capture the known criminals (those that get caught), but the bagel data provided information on every bagel user.9 After eight years, Paul had delivered 1,375,103 bagels, of which 1,255,483 were eaten. In addition, he had delivered 648,341 doughnuts, of which 608,438 were eaten. His payment rate while he still worked at the research institute, before he began the business, was 95 percent. He found that percentage was artificially high because people knew him at the research institute and his presence deterred some of the stealing. In his bagel business, he came to perceive 90 percent payment as being a high level of honesty and adjusted the price accordingly. He described averages between 80 and 90 percent as “annoying but tolerable” and he had to “grit his teeth” to continue with businesses that averaged less than 80 percent.10 Paul has observed some interesting trends. From 1992, the payment rates declined slowly but steadily until 2001 when the terrorist attacks precipitated a 2 percent increase from the 87 percent rate to which it had fallen. The rate has remained fairly steady ever since. As Freakonomics coauthors Dubner and Levitt point out, a 2 percent increasemay not seem like much, but it means the nonpayment fell from 13 percent to 11 percent—a 15 percent decrease in nonpayment. Many of Paul’s customers work in national security, so he is not certain if the change reflects an increase in patriotism or simply a general increase in empathy.11 Paul went through several different containers for the cash. In the beginning he put out an open basket, but the money disappeared too often. He then tried coffee cans with a slit in top but that didn’t improve matters enough. He finally settled on plywood boxes with a slit for the money in the top – those have worked well. He loses about one of the 7,000 boxes he puts out each year. Paul is intrigued by the fact that the same people who regularly steal from him by eating more than 10 percent of his wares without paying will rarely go so far as to steal the money boxes.12 Paul has kept data on payment rates over the years and this experiment in human nature has yielded some interesting findings—some backed by data and some from years of observation. Office morale is a strong predictor—people who like their bosses and their work have significantly higher payment rates. In addition, smaller offices have higher payment rates. Dubner and Levitt note that this might be surprising because a larger office would have more people around the table and thus more potential witnesses to the theft. They point out, however, that this finding is consistent with the fact that rural communities have less crime than big cities. The employment rate is a factor as well. One might expect a low unemployment rate (i.e., a good economy) would lead to higher payment rates because people have more cash. The opposite was actually true. As unemployment went down, theft went up. Paul thought that places that required security clearances would have higher payment rates, but they did not. As for industries, telecom companies have been the worst culprits, but law firms aren’t much better. Weather plays an important role. On unseasonably pleasant days, payment rates are higher but unseasonably cold weather or heavy rain and wind lead to greater cheating. Holidays have a variable effect—depending on the holiday. Those that lead to higher payment rates are July 4, Labor Day, and Columbus Day. Payment rates drop in the week surrounding April 15 and they also drop for Thanksgiving and Valentine’s Day. Surprisingly, the week of Christmas produces a 15 percent increase in theft—as previously mentioned, that is a 2 percent drop in payment rates.13 One company’s office design enabled Paul to observe how position in the hierarchy might affect behavior—of course, one must be careful in drawing too many conclusions from the results at one firm. In this firm, Paul delivered bagels to three floors where different levels of employees were on different floors. The executives were on the top floor; sales, service, and administrative employees were on the lower floors. Paul found that the executives cheated more than the lower-level managers. Paul suggests two possible explanations for this finding. Perhaps executives cheat more due to a general sense of entitlement. Alternatively, Paul wonders if cheating is how they attained their positions.
Questions for Discussion
1. Would a place like the Terra Bite Lounge succeed in your community? In what places might that business model work and in what places might it not? What payment would you give as a customer of the café? How do you feel about Tina Cooper’s philosophy?
2. Would “self-determined pricing” work for all musical artists or is Issa’s situation in some way different? What insights can you gain from the statistics the website presents? If you wanted to download an Issa song, what would you pay?
3. How do you handle baskets that ask for donations for coffee, bagels, and the like? What payment rate do you think your organization would have if Paul delivered his bagels there? Why? How would you interpret Paul’s findings from his economic experiment? Do any of his findings surprise you?
4. Taken as a whole, how do the results of these experiments with pricing shape, predict, and/ or explain how customers deal with the companies they patronize? What does it tell us about how companies deal with their customers? What general insights can you draw about people’s honesty?

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