A Cheap Employee Is … a Cheap Employee: A New Marketplace Podcast

(Photo: Alan Cleaver)

Our latest Freakonomics Radio on Marketplace podcast is called “A Cheap Employee Is … a Cheap Employee.” 

(You can download/subscribe at iTunes, get the RSS feed, listen via the media player above, or read the transcript below.)

It’s about the question of whether low-paid employees are indeed a good deal for a retailer’s bottom line as the conventional wisdom states.

The piece begins with a couple of stories from blog readers, Eric M. Jones and Jamie Crouthamel, which were solicited earlier here. (One of the true pleasures of operating this blog is having a channel by which to turn readers into radio guests — thanks!)

We then hear from Zeynep Ton, who teaches management at MIT’s Sloan School. Ton did a study (related blog post here) which looked at successful low-cost retailers including Costco, Trader Joe’s and the QuikTrip convenience stores. She found that while these companies spent more on labor than their competitors – higher wages and more training – they were in fact more profitable:

“When a retailer doesn’t invest in his people then execution at the stores suffers.  You often find products in the wrong locations, sometimes in the back rooms as opposed to the selling floor. promotions not carried out on time, or at all, or mistakes at the checkout. So these operational problems — what was surprising to me was how frequent these problems and how expensive these problems were.”

We also touch on another retailing study which found that customers don’t really care about all those in-your-face niceties that some retailers seem to think are important. As co-author Nicholas Toman tells us:

“It was not the pleases, the thank yous, the flowery language … that didn’t matter so much. Making things simply easier for customers, getting a question answered, returning an item, making the burden as low as we can on the customer results in the greatest initial economic benefit for the company itself.”

In the podcast, you’ll also hear Kai Ryssdal deal with some pretty bad Freakonomics Radio customer service.

Have a nice day!

If you’ve come to this post looking to vote for Freakonomics Radio in the iTunes “edutainment” contest, here’s the link.

Audio Transcript

Kai Ryssdal: Time now for a little Freakonomics Radio. It's that moment every couple of weeks where we talk to Stephen Dubner, the co-author of the books and the blog of the same name -- it is the hidden side of everything. Dubner, how are you?

Hold music: Thank you for holding. Stephen Dubner is currently assisting other radio hosts. Your call will be answered in the order it was received.

First of all, you're two-timing me? All right, all right. Come on, come on.

Stephen Dubner: Hello Kai? Kai, yes.

Ryssdal: Yes, what?

Dubner: I am sorry for that inconvenience. I really do appreciate your patience. How can I help you today?

Ryssdal: Well one, you can answer the doggone phone when I call, but what? What's your stick this week?

Dubner: Well Kai, as you may have guessed, our topic today is about customer service -- how we are treated when we have some kind of retail experience.

Ryssdal: You, by the way? You give lousy customer service. Can we just say that right up front?

Dubner: I'm working on it. Thanks for the feedback. I do appreciate that. We started by asking our blog readers about their experiences with customer service -- good or bad, mostly bad. Here's Eric Jones, a guy who found himself in one of those ridiculously long lines at the phone company.

Eric Jones: And remembering my life as a hippie in the '60s, I decided that the right way to do this, instead of throwing the phone display through the store window, was to simply lay down on the floor. And I did that, and I was astonished how well it worked.

Ryssdal: Occupy Ma Bell, right?

Dubner: That's exactly right. Now, it's no dream scenario on the other side of the counter, as we know as well. So here's Jamie Crouthamel, who worked at a phone store in Charleston, S.C. She had to tell a customer that he couldn't return a bag of crushed phone parts.

Jamie Crouthamel: He pushed back from the table and pushed his stool out from under him and slammed his fists on the table and just started cursing. And then he threw the phone at me.

Ryssdal: People never cease to amaze me. But here's the thing about retail, right? I mean, it's all about low-wage jobs in pursuit of low-cost products that Americans buy until they don't want to buy them anymore, right?

Dubner: That is the conventional wisdom. But this wisdom may not be so wise, it turns out. So Zeynep Ton teaches management at M.I.T.'s Sloan School. And she did a study that looked at successful, low-cost retailers like Costco, Trader Joe's, the Quik Trip convenience stores. And what she found is that these companies spent more on labor than their competitors with higher wages and more money for training -- and these companies were more profitable.

Zeynep Ton: If you pay your employees more, you attract a better group of employees and you retain them longer.

Ryssdal: Connect the dots for me here: If you pay people more, you make more money? How does that work?

Dubner: Retail isn't necessarily a complicated enterprise, but there's a lot of room for things to go wrong when you hire the cheapest possible employees.

Ton: When a retailer doesn't invest in its people, then execution at the stores suffer. You often find products in the wrong locations, promotions not carried out on time or at all, or mistakes at the checkout -- so these operational problems. What was surprising to me was how frequent these problems and how expensive these problems were.

Ryssdal: All right Dubner, help me out here: If spending more money on labor is good for a company's bottom line, why aren't more companies doing it?

Dubner: Well because most retailers think of labor as purely a cost, as opposed to a way to make more money. And if you're trying to control costs -- which every business is trying to do -- one thing about cutting costs is that you immediately see it as a benefit to your bottom line. Whereas investing more on employees, well that doesn't pay off until later.

Ryssdal: Let me ask you my customer service bugaboo: You know, you walk into a store -- usually it's clothing but it can be anything -- and you're like accosted by 'May I help you?' and this and that. And I'm like, 'No man, I just want to look around, all right?'

Dubner: Well I've got good news for you: That really doesn't seem to work. So a recent surveyof 75,000 people found that customers don't really care about all those niceties. Here's Nick Toman, one of the authors of that study.

Nick Toman: The 'pleases,' the 'thank yous,' the flowery language -- that didn't matter so much. Making things simply easy for customers -- getting a question answered, returning an item, making the burden as low as we can on the customer -- results in the greatest initial economic benefit for the company.

Now Kai, let me add what I think is the most important point: What you really want to do for retail is -- oh, Kai, I'm going to have to get back to you, just hold on.

Hold music

Ryssdal: Don't you -- oh, you know what? First of all, I don't like this music very much.

Hold music: Thank you for waiting. Your call is very important to us.

No it's not.

Hold music: Stephen Dubner will be with you in just a moment.

No he won't.

Hold music: This call may be recorded for quality assurance.

Stephen Dubner, Freakonomics.com is the website. He may or may not be back in a couple of weeks, depending on, you know, customer service.

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  1. GLK says:

    It is fashionable these days for high paid business consultants to sing the virtues of the many employee incentives that are allegedly way more important than pay.

    To that end I laughably respond:

    “Brains Cost Money, How Smart Do You Want Me To Be?”

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  2. J says:

    I think demographic relationships affect this data.

    An upper-class neighborhood’s mall probably has more transactions and bigger transactions. So it seems like companies could offer more money to employees.

    A lower-class neighborhood’s mall would have the opposite situation. You’d only be able to afford cheaper labor.

    Maybe I’m wrong?

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  3. Voice of Reason says:

    It doesn’t take a rocket scientiest, or a behavioral economist to understand that if you pay more for better rectruitment and employees, than you’ll realize the benefit.

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  4. RD says:

    Talk about reacting to bad customer service – checkout this video of a man who smashes up T-mobile shop Manchester, England – http://youtu.be/VbnEB9ntztY

    I am guessing there is a direct cost you could associate with this damage.

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