22 September 2009

Something for Nothing

Ben Franklin, the American Statesman and colonial leader, was once quoted as saying, “A penny saved is a penny earned.” What he probably did not realize was he was establishing the basis for one of the world’s most powerful and impactful economic behaviors which has become a cornerstone for the capitalism and consumerism that has dominated world economies in the 20th and 21st centuries.

How do I know this? It is obvious.

Last week, I experienced the shear joy of exchanging my coffee shop punch card with the requisite 10 distinctive punches for a free cup of coffee. Getting something of value for free is the ultimate consumer victory. I was thrilled.

Upon later reflection and when the after glow of success had diminished, I realized the coffee shop punch card effectively let me save 30 cents a cup for 10 cups. With an outsized salary and considerable savings, 30 cents is just not material to my lifestyle. But it was not the amount saved that was important, it was the idea of getting something for nothing.

One example does not prove theory, however; so let me share the other examples.

Store coupons are a multi billion dollar business. The satisfaction of submitting coupons at the supermarket – 50 cents off on Campbell’s soup with a coupon – means it must be time to buy even if we already have soup. And store sales escalate with double or triple coupon promotions. How many people really need the 50 cents? Not as many as those who use the coupons.

Store loyalty cards are now popular. Every time I buy $400 (cumulative) of prescriptions at a certain pharmacy, they send me a $10 off coupon on my next purchase. This brings me back to collect my $10 worth of free merchandise. If they reduced their prices 2.5%, it would have the same economic affect but then I would not be getting something for free.

Airline miles are reaching absurd levels of non reward. Fly 50,000 miles on a major airline, and you are theoretically entitled to a free ticket. Only the airlines offer very few seats to mileage using customers and the seats are almost always to destinations that no one wants to go. But it is fun to watch the free miles accumulate and think you can use them someday.

When I was divorced, my wife demanded a share of the miles I accumulated during our marriage. I transferred Continental miles to her account as requested and at a cost of $750 per 50,000 miles imposed by Continental for the transfer. She immediately went out and used the miles to purchase a $500 ticket to fly to Houston and felt she was so lucky to find a mileage seat. Nice marketing Continental.

When I signed up for a credit card at my local bank, I was offered the choice of a free card or a fee based card that accumulated miles on Qantas. The mileage card made no sense economically but when I asked the banker, he told me everyone gets the mileage card. After paying the annual fee, the customers view they are getting miles for free.

Last year my company sent out traditional Holiday Cards at Christmas time but included a voucher for 2 free movie tickets. “Why would anyone care about 2 free tickets to the movie? I asked.” What little I knew. The tickets were very popular because the employees felt they received something for nothing.

Every month there is at least one outdoor market in my neighborhood. The card tables are filled with useless stuff but sales are brisk at perceived bargain prices. For example, you can buy candles that smell like vanilla beans for $10 compared to $15-$20 at department stores. It would not occur to me to go to a department store in search of a vanilla bean smelling candle; but now I don’t have to. And I bought it at a discount!

Ben Franklin’s admonition has spread around the world. The quest to find a bargain is portrayed in the cult Australian film, “The Castle”, as a dialog refrain between father and son as they buy useless stuff at perceived low prices.

So what drives our behavior to save pennies when our pockets are full of dollars? Perhaps it is Ben Franklin’s early words of advice. Or maybe it was the Great Depression and stories and behaviors passed down from that generation. Or maybe it is part of our consumer culture and one of the behavioral rules to play the game. I am not smart enough to know, but I do know 10 more coffees and I will get a free one.