I read an article today (by way of the Freakonomics blog) about a coffee shop that doesn’t put prices on any of their food or drinks — payment is strictly voluntary.
I can usually form a firm opinion about a business model within a few minutes (and there are a lot of times when I’m wrong), but I just can’t make up my mind about this one. I think this could either be a doomed experiment from someone who has money to burn, or a genius idea (no in between).
Here’s why I think it’s genius:
- The shop gets a ton of publicity, especially compared to the amount of publicity that any old locally owned coffee shop opening up across the street would get (zero).
- They will attract a lot of new visitors who want to use the experience as a psychology experiment: “would I feel too guilty if I stiffed the shop on payment?” This woman felt so guilt for not paying, she drove back and paid double what she would have.
- Their overhead involved in coffee sales is very low, and there’s a lot of potential for high ticket, high margin ways to make money of customers sitting around in your store drinking inexpensive coffee.
Here’s how it could fail:
- When the publicity and novelty wears off, only the customers who are attracted by the possibility of low/free prices would remain. The customers who would gladly pay $5 for a cup of coffee would do so because of the quality of the product or the setting, which might not necessarily be at Terra Bite Lounge.
- Owning a coffee shop sounds a lot more glamorous than it really is. Even if the experiment is initially successful, the owners are still left with a coffee shop to run.
- They’re battling Starbucks, who has 11 stores in Kirkland, WA (population 45,000). Starbucks is already winning their battles against local coffee shops, and they’re doing so in spite of having higher prices.
Of course, if the owners do have the money to burn, then there’s no fault in running the experiment. And they’re pledging to donate profits to charities, so that would be a win-win if successful.
What do you think? Doomed experiment or genius business model?
6 responses so far ↓
1 Dare // Feb 7, 2007 at 3:19 pm
Doomed experiment!
I agree with you that it’s great publicity (and obviously great for blogs) and I also think they will initially attract people who are willing to voluntarily pay a decent-to-good amount for coffee.
However, after a while, the publicity will die down and they will likely have a number of people that want free/cheap coffee. Although I regularly visit Starbucks, I don’t drink coffee, so the following is simply speculation:
I assume there are two types of coffee drinkers - those that come to hang out for a while (read, work, etc) and those that come in for a quick drink. I think that the first group, the “hanging outers,” might feel social pressure to pay more since they are spending more time at the shop and thus receiving more value. Instead, they could go to another coffee shop and pay normal prices without feeling as guilty for hanging out (I am one of these people so I am familiar with the guilt of paying $2 for a drink and hanging out for 3 hours). Interestingly, I think this point directly reflects the argument that Levitt and Dubner put forth in Freakonomics when discussing free after hours child care vs. penalized after hours child care.
As for the second group of people, those that come in just to grab coffee to go, I don’t think they will see the value in paying premiums for coffee when they are just grabbing a commodity-to-go.
Net, I think that it makes great publicity and conversation but it is hardly a sustainable business model for more than a short period of time. And in the off chance that it is a profitable business model, then as with any other profitable business model, it will attract competition and imitators. Thus, driving the “price” down (the amount people are willing to voluntarily pay).
2 ade // Feb 7, 2007 at 4:07 pm
Very well put. I should have made reference to the fact that Freakonomics tackles this kind of psychology/business model by looking at the day care penalties and the guy who delivered donuts to offices. Good reminder.
3 Chris // Feb 8, 2007 at 5:12 pm
I think this is an interesting study. I think it has potential to be a sucess if they use the publicity to garner traffic and articles etc. and use the popularity to grow the base of customers. I am not sure if it will be a sucessful business, but it could be a sucess in other ways. Once you start brining in a not for profit angle then people will be compelled to “pay” for the cofee - people want to feel like they are contributing to something good, even if it is a $3.00 cup of joe. So it depends on how you define sucess, as it appears they aren’t in it to make a profit, or at least not a big one.
4 brock // Feb 10, 2007 at 2:08 am
Penn Jillette was the raving about this idea other day on his radio show, but I’m sure you heard it. What? You aren’t listening to podcast of Penn Jillette’s show?
I think this is like the whole teen drinking in Europe vs. the US argument - the idea being if you suddenly removed the drinking age you wouldn’t get the same result. Culture is ingrained, so American kids would still get wasted behind the DairyQueen.
This shop will never be a fair model of this approach. I think you’d have to have at least a decent percentage of business using this model for it to be feasible.
5 brock // Feb 10, 2007 at 2:10 am
P.S. - The “Moon Hoax” show was awesome. I love science.
6 chrisp // Feb 19, 2007 at 7:32 am
In my case it depends on who has the best coffee. If the free shop had better coffee, I would probably go there and pay something close to the standard. Whether or not it would succeed would depend on how many others like that are out there. In my case that’s usually close to zero, so I’d say it’s destined to fail!
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