Kottke.org had an interesting post earlier about a coffee/donut vendor in Manhattan who had people pay on the honor system (leaving money on the counter and making their own change) and seemed to be doing really well. This is also reminscent of the story of the Washington-area bagel seller who delivered bagels daily to businesses and had people pay on honor system into lockboxes; he emptied the lockboxes the following day when he delivered more bagels. This was discussed in Freakonomics, and the authors found, looking at bagel-seller ‘Paul F.’s meticulous data that about 87% of the people pay the right amount, but 13% of the bagels disappear (i.e., are not paid for). And ‘smaller offices are more honest than big offices. An office with a few dozen employees generally outpays by 3 to 5 percent an office with a few hundred employees.’ Stephen Dubner and Steven Levitt hypothesize that this is because anonymity is lower in smaller offices so if you cheat, it’s more likely that you may be caught or shun (a form of social capital).
Both the donut/coffee and bagel stories suggest that this honor system might be a more viable strategy when the cost per item is lower (a buck or two) than when one is selling much higher-priced goods (where buyers may see a greater gain from paying the wrong amount). And it does make one wonder whether the repayment/honesty rates are higher when there is more anonymity (like where the bagel delivery guy has simply left the bagels in a lunchroom) than when the victim is known (like the Manhattan donut/coffee guy where if you don’t pay your fair share, you’re much more aware of who is being hurt by your profiteering).
Here is a post about an Ontario bakery.
Here is the kottke.org post.
Business lessons from the donut and coffee guy
“Next!” said the coffee & donut man (who I’ll refer to as “Ralph”) from his tiny silver shop-on-wheels, one of many that dot Manhattan on weekday mornings. I stepped up to the window, ordered a glazed donut (75 cents), and when he handed it to me, handed a dollar bill back through the window. Ralph motioned to the pile of change scattered on the counter and hurried on to the next customer, yelling “Next!” over my shoulder. I put the bill down and grabbed a quarter from the pile.
Maybe this situation is typical of Manhattan coffee & donut carts (although two carts near where I work don’t do this), but this was the first business establishment I’ve ever been to that lets its customers make their own change. Intrigued, I walked a few steps away and turned around to watch the interaction between this business and its customers. For five minutes, everyone either threw down exact change or made their own change without any notice from Ralph; he was just too busy pouring coffee or retrieving crullers to pay any attention to the money situation.
If you were the CEO of a big business — say, a movie studio, music company, or multinational bank — you’d have been tearing your hair out at this scene. He lets his customers make their own change?!?!! How does he know they’re making the correct change? Or putting down any change at all? Or even stealing the change? Where’s the technology that prevents the change from being stolen while he’s not looking? Surely there’s a machine that could be invented to keep track of it. Bad, bad, bad! Unclean, unclean! Does not compute…
Hold on there, Mr. CEO, don’t go all HAL 9000 on us. Ralph probably does lose a little bit of change each day to theft & bad math, but more than makes up for it in other ways. The throughput of that tiny stand is amazing. For comparison’s sake, I staked out two nearby donut & coffee stands and their time spent per customer was almost double that of Ralph’s stand. So, Ralph’s doing roughly twice the business with the same resources. Let’s see Citibank do that.
It’s also apparent that Ralph trusts his customers, and that they both appreciate and return that sense of trust (I know I do). Trust is one of the most difficult “assets” for companies to acquire, but also one of the most valuable. Many companies take shortcuts in getting their customers to trust them, paying lip service to Trust™ in press releases and marketing brochures. Which works, temporarily and superficially, but when you get down to it, you can’t market trust…it needs to be earned. People trust you when you trust them.
When an environment of trust is created, good things start happening. Ralph can serve twice as many customers. People get their coffee in half the time. Due to this time savings, people become regulars. Regulars provide Ralph’s business with stability, a good reputation, and with customers who have an interest in making correct change (to keep the line moving and keep Ralph in business). Lots of customers who make correct change increase Ralph’s profit margin. Etc. Etc.
And what did Ralph have to pay for all this? A bit of change here and there.