Tuesday, February 06, 2007

Free Coffee Really Costs Three Dollars or Social Stigma

A Kirkland, Washington, coffee shop, Terra Bite Lounge, has a menu like an five-star restaurant—no prices in sight. Unlike Alain Ducasse, you won't even get a bill at the end of your order. But that doesn't mean the food and beverages are free per se. Rather than a restaurant, maybe the business model is more like the Philadelphia Art Museum on Sundays: pay what you wish.
Customers pay what and when they like, or not at all — it makes no difference to the cafe employees, who are instructed not to peek when people put money in the metal lock box.

. . . .

So far, Terra Bite has served up to 80 customers per day, averaging about $3 per transaction, he said. When the shop brings in a steady flow of 100 customers a day, Peretz figures, he will more than break even.

. . . .

Even without posted prices, "social monitoring" — the feeling that others are watching what you do — can enforce payment, said Erica Okada, assistant professor of marketing at the University of Washington Business School.

With its anonymous drop box, Terra Bite has minimized, if not eliminated, that effect. Under these circumstances, Okada said, the economic model predicts that Terra Bite customers won't pay anything.

But they do.
Link (via Freakonomics Blog). If Terra Bite wants to subtly enforce payment—and apparently they really don't—they might want to consider posting a picture of eyes above the honesty box.

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Blogger Marisa said...

"They look out of no face, but, instead, from a pair of enormous yellow spectacles which pass over a nonexistent nose. Evidently some wild wag of an oculist set them there to fatten his practice in the borough of Queens and then sank down himself into eternal blindness or forgot them and moved away."

12:37 PM  
Anonymous Kristin said...

My econ prof. told us about this in class yesterday. He says that the coffee stand will not stay in business because when people pay what the coffee is worth to them they lose all of their consumer surplus (basic supply and demand curve). If they pay less than the coffee is worth to them, they will feel guilty and won't continue to purchase coffee there.
On top of that, most people don't like the hastle of having to decide how much to pay for something and would rather it had a price.

9:16 PM  

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