Before reading this week’s post, spend a few minutes and listen to this podcast from Planet Money.
I have this unusual aversion to one of Atlanta’s trendy burger joints, Yeah! Burger.
Unusual because I like a good burger a lot! I frickin’ love them. When I worked at BlueFletch burgers were my ‘flare’.
I suppose now is a time to point out two very relevant and competing facts:
- I have an unhealthy love for condiments. Especially the fancy, spicy, artisanal concoctions unique to the house. Yeah! Burger charges a modest $0.50 for their side sauces
- And just to be clear, I am a “value” sensitive consumer for sure. Or you can just call me cheap.
To be fair it’s more about judging price & value. There’s nothing wrong paying $100, $1,000 or even a cool milli for something, as long as you get the same value in return. That’s what I’m really critiquing.
Still though, is $0.50 really enough to justify me passing up on this juicy, cheesy, burger-y goodness?
Well, frankly the answer has been yes.
But now I know why, and it’s actually not all that irrational of a reason.
The Power of Free
Returning to Planet Money’s pod. Here’s your reminder to listen if you haven’t already.
In the episode, Chana Joffe-Walt & Alex Blumberg explore how free can hurt your business. Or more specifically, how when something isn’t free that it can be a risky game with little payoff to play with your customers.
To help explain, they offer up two theories that help explain this unexpected aversion to Yeah! Burger.
Theory 1 – Referential Price Changes
Chana and Alex first posit that when you increase your prices, no matter how much, you create reference dependence. If you’re used to one price – say the same price you pay for a cup of coffee every morning – any price increase seems dramatic. We’re talking ANY change, even just a couple cents.
And if your base price is zero the effect is magnified.
The classic example used in the pod is airline luggage fees. You’ll remember how you could once check your bags for free when you flew. Well, as long as you weren’t checking 43 hat boxes or 2 ton roller-board suitcases.
But this theory doesn’t actually explain the Yeah! Burger aversion. Just as we’ve all largely gotten over luggage fees, even if it’s still a nuisance, businesses can expect that customers eventually reset their reference point.
In Yeah! Burger’s case, the issue is that it just doesn’t make intuitive sense.
Theory 2 – Categorical Price Changes
In the second theory, again you can create price friction with your customers when not giving something away for free. The rationale, however, is much different.
A categorical price change changes the way you view a company altogether. It changes the entire nature of the customer relationship. And that may sound somewhat severe, which is precisely the point.
When this relationship you thought you had – that you thought was mutually agreed to – when this relationship unexpectedly changes, it opens the door for other parts of the customer relationship to change.
Have you been into a J.C. Penny lately? If so you’d have been unable to avoid the coupons, sales and heavy discounts littered throughout the store. For example, this is J.C. Penny’s home page right now:
Hmmm…notice a theme?
Well, former CEO Ron Johnson (emphasis on “former”) tried to get J.C. Penny out of its heavy discounting business model into a “Fair and Square” every day pricing. Even though actual prices customers ended up paying under this new initiative were lower than what they were paying before, they revolted. The stock slid 60% on over $1 billion in losses in 2012. And that’s where Mr. Johnson got is “former” title.
The issue is that J.C. Penny had created a categorical price change with its customers. When this happened, customers started wondering what other accepted norms of the customer relationship might be broken. The trust in the buyer relationship was gone.
The $0.50 Categorical Change
When Yeah! Burger decided to charge for their delectable sauces, they created a categorical change.
[BIG DISCLAIMER: This is based on MY experiences. I’m sure there are many places that do charge similar to Yeah! Burger, but not having run into them that’s why this felt like a categorical change.]
As benign as it may seem, consider that condiments and sauces are largely free. McDonald’s, Chick-Fil-A, Wendy’s and the rest of the lot will let you grab what you want. Of course as long as you’re not actually dumping the entire box of ketchup packets into your togo bag. Actually, I wouldn’t be surprised if Taco Bell did let you do that. And let’s consider Taco Bell for a moment. With witty hot sauce packet labels and home grown flavors sold separately in stores, they’ve built a brand around their free sauces. What about burrito joints? Willy’s, Chipotle and the rest of the crew let you have the hot sauce and salsa as you like. And similarly, think about how guacamole is always a separate up charge.
When you get into the territory of full service restaurants you’re more likely to get a mixed bag of whether you’ll be charged or not. Even still, a nice server and a good rapport can get that $1 in-house ranch off your bill without question.
On the one hand Yeah! Burger is physically playing up the look more of fast service food along the lines of a Grindhouse or Farm Burger (neither of which will charge you). Yet on the other hand the pricing relationship betrayal has us mentally putting them in the category of a sit down restaurant. And the result is confusion.
Because of this categorical change the customer has no expectation what their bill is going to be. When I go to a Grindhouse I’m fairly confident my bill will be in the $10 rage, or maybe $15 if I get a beer. Give or take, but in that range. But at Yeah! Burger there’s uncertainty about what your final bill is going to be. As absurd as it sounds, we subconsciously also start wondering what else we might be charged for. Will we have to pay for napkins, forks & knives? What about the patio heaters if we want to sit outside? As wildly unrealistic as it may be since no burger joint passes on their heating bill directly to customer, the same burger joints don’t charge for their sauces.
Don’t Charge for Things You Shouldn’t Charge For
Back to the pod again, they explain how as consumers we’ve eventually gotten over baggage fees. At the end of the day, as annoying as that $35 fee is, it does actually seem reasonable. It’s intuitive, justifiable, that in an era of expensive fuel we should pay for someone to fly our heavy suitcases across the country.
$0.50 for Sriracha Mayo just doesn’t pass the intuitive test, especially when regular mayo is actually free on the same menu.
Blumberg offers up the perfect litmus test to test this principle out.
If you’re a business, avoid charging for things people would excitedly describe as, “Hey, I got this for free!”
“Hey, I Didn’t Get This for Free!!”
This aversion started as a very innocuous line item on my bill and took a very long time to understand. But the theory absolutely nails it.
Yeah! Burger, when you print up next month’s menus why don’t you consider opening up the flood gates and letting that hot ‘bama relish flow freely – literally!