The Perils of Free Coffee

As prices go, “free” is an interesting one. Dan Ariely plays with the idea in his book Predictably Irrational, as does Seth Godin — and Chris Andersen has gone so far as to suggest that “$0.00 is the Future of Business.”

There are, of course, a lot of different kinds of “free.” Giving away a free razor or a free computer printer in order to lock a customer into buying your razor blades or printer cartridges is one model; giving away free merchandise as a pure marketing play is another.

I have a pair of stories to share about free coffee. The first was sent in recently by a reader, Etan Bednarsh of New York:

Today is Free Iced Coffee day at Dunkin’ Donuts. Attempting to take advantage, I just went on a field trip from work with my boss and co-worker. When we got there, though, the line was out the door — a very long wait. It obviously was not worth the cost of the iced coffee to wait in line for a $3 drink.

That said, we were already jones-ing for iced coffee, so we went to Starbucks and paid for Starbucks iced coffee (which I am now sipping at my desk).

This made me wonder — does the long line incurred by giving out free coffee serve as a reverse incentive, driving Starbucks to do more business on a Dunkin’ Donuts promotional day?

I am guessing that Starbucks in general doesn’t profit much from Dunkin’ Donuts running a free-coffee promo; I am guessing that Etan and his colleagues happened to be in close proximity to a Starbucks and had the time and inclination to change their plans — a sort of free-coffee perfect storm that probably doesn’t strike too many people. But I may be entirely wrong.

The free-coffee experience I had not too long ago also concerned Starbucks:

It was mid-morning and I was walking from the East Side of Manhattan over to the West Side, through the northern end of Central Park. It’s a lovely walk, especially on a cool morning, as this was.

I stopped at a Starbucks to get a coffee for the walk but found, as Etan did, a long line outside: it was free coffee day. In this case, Starbucks was dispensing free “tall” cups of coffee on the sidewalk. Because of the length of the line, and because I wanted a larger coffee than “tall,” I went inside to buy what I wanted.

But the doors were locked. Huh? I tugged again. One of the clerks giving out the free coffee gave me a disapproving look, told me the coffee was free this morning, and I should get on line. Hmm. In this particular case at this particular store, Starbucks proved to be really bad at price discrimination. Here I was, a loyal customer willing to pay good money for a product similar to the one they’re handing out for free, and they didn’t want my business. Was the promotional value of the free coffee so large that it offset the opportunity cost of telling your paying customers to get lost?

As it happened, there was a Dunkin’ Donuts nearby, but since I dislike DD coffee, I made my walk with no coffee whatsoever.

What kind of lesson does Etan’s story and mine provide? Stores should be a little more careful when they throw around free coffee. It may not be making as many people happy as they think.


John S.

Whst's amazing to me is that everyone commenting on this thread is too smart to stand in line. Who are all those people who stand in line for the free stuff then?

Reminds me of Vegas. I've never heard of anyone losing money there. Everybody comes back "a little bit ahead". Where are all the losers?

Alex R.

Really, Dubner? You think Starbucks' coffee is better than Dunkin' Donuts? Come on...

TJ

Showing up at Ben and Jerry's Free Cone Day, you had better expect the "cost" of a lot of social pressure - various charities/causes were going up and down the line, hitting up people for donations. Free cone day is only free if you can handle the stigma of saying "no" to Habitat for Humanity.

David Damore

Dear Sir,
Promotions have several different objectives. Below are a few to think about.
1. Increase sales + profits [Now or in the future]
2. Increase brand awareness [LOOK what we are offering]
3. Stir demand from consumers [Marketer Message: a nice cool and refreshing iced coffee on a hot summer day is refreshing and enjoyable. Consumer: Yeah, that sounds great. 'Heading out for some iced coffee, anybody want to go with?']
4. And on and on...
What others can you think of?

Several things may happen with a 'free' promotional event.
1. Demand is created... Firm grows category demand... if they are not capable of handling it, competitors may gain business.
2. Brand becomes known for a new product or service [iced coffee, soft serve ice cream etc]
3. Media [MSM and bloggers] carry on a conversation about said promotion and what it means [just like here on the Freakonomics blog] Snowball, buzz, viral effect.
4. Product and service matches the price. Consumer feels that free is too high a price for the product/service. [a bad experience Damages firm reputation]
5. Competitor may co-opt your idea/promotion. You may be neutralized by their moves in the marketplace.

People love free.

What are your thoughts?

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David D

A few weeks ago my Starbucks Dueto card was mistaking inactivated. The barista gave me my order for free. Then a week or two later, Starbucks mailed me a pound of free coffee beans and appologized for the inconveience. Bravo to Starbucks for their great customer service!

Allison

Starbucks has a policy right from the top of giving away free coffee in a variety of situations like the one you mentioned above where the register was broken. If you don't have enough change for your drink they'll take whatever you have, like the friendly corner stores of yore. And there's never any fuss about replacing a drink, even if you've just changed your mind or made a mistake ordering. They know that their brand is based on the relationship - you'll come back to buy coffee grounds, tea, even espresso machines - not the one measley cup of coffee. Surely this is the right way to give out free goods - building customer loyalty by making them feel like they've been done an extra special favour by their favourite barista.

Concerned Citizen

I've never heard of anyone losing money there. Everybody comes back "a little bit ahead". Where are all the losers?

The one and only time I went to Vegas I saw the perfect example of how people value their time. The hotel had two all-you-can-eat buffet lines side-by-side. One buffet was $3, the other $6. The line for the $6 buffet was reasonable, while the cheaper line was out the door and into the lobby.

Needless to say, we took the slightly more expensive buffet, ahead of all the people who had just spent countless hours gambling away their kid's college funds and inheritances, trying to make up all their losses by gorging themselves on the casino's food.

Nickelsnow

So the moral of the story is if you want to increase your business, subsidize your competitor's "free offer" promotion! Brilliant!!

Dennis

Stephen

I think your "is the free coffee worth the wait" thesis can be broken down into simply: the only true cost of anything is "how much of your life are you willing to spend in order to have a thing no matter what it is."

RR

Three times last week I walked out of a store because the line was too long. Assuming that each customer would spend $4 on average, if the store loses two customers an hour due to long lines, it would be worth it for them to take another $7/hour employee. During peak hours, I have no doubt that they lose at least two customers an hour. Are store owners unaware of lost customers? It makes sense since we don't log complaints.

Joshes

Dubner writes: "I am guessing that Starbucks in general doesn't profit much from Dunkin' Donuts running a free-coffee promo; I am guessing that Etan and his colleagues happened to be in close proximity to a Starbucks and had the time and inclination to change their plans - a sort of free-coffee perfect storm that probably doesn't strike too many people. But I may be entirely wrong."

You may very well be wrong. Near Boston College there's a Boloco burrito joint. It's been there quite some time and does a steady, but unremarkable business.

Then cometh Chipotle to the neighborhood. The beloved burrito behemoth opened shop a few doors down. They gave away free burritos all day opening day.

Now here's the screwy part. One would expect that free Chipotle burritos (widely considered to be far superior to Boloco's own) would negate the need for Boloco to even staff their storefront that day. The exact opposite happened. The Chipotle free-burrito line grew so long--exceeding at some times of the day an hour wait--that Boloco posted what from the looks of it was a banner day.

The story doesn't end there though. As a frequent burrito eater, and member of the Chipotle > Boloco crowd, I fully expected Chipotle's presence to run Boloco into the ground. In fact, it seems to have had the reverse effect; Boloco appears to be bringing in more business than ever.

I have two theories as to why this is: (1) Chipotle has made the strip of stores and take out restaurants more of a destination, and/or (2) Variety. Seeing Chipotle's comely facade, I am often put into a burrito state of mind. At least some of these times, though, I've just had Chipotle --perhaps even the day before. Because I'm in the area and in the mood, I'll often just slip on into Boloco. In fact, I probably eat more Boloco now than before Chipotle and its come-to-Jesus burritos arrived on scene.

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Peter Payne

Here in Japan, a local Italian restaurant has a special "double coupon customer thanks day" when they give 2x coupons for the next visit. There are so many obasans (middle aged Japanese women) there we can't get in, and we gladly go elsewhere. Our time is, you know, valuable, no?

Doug

The Starbucks clerk should not have told you to get on line.

The Starbucks clerk should have told you to get *in* line. Or, perhaps, to get lost.

Josh Millard

Who are all those people who stand in line for the free stuff then?

People who either don't account for the value of their time or who do account for it and have a surplus of same.

I've never heard of anyone losing money there. Everybody comes back "a little bit ahead". Where are all the losers?

In the segment of the population from which your outlier correspondents have been by whatever mechanism culled? I can't say I've had anything like the same experience with anecdotal win/loss reports from people that I trust.

Stacy

I once tried to order two different "specialty" drinks at a Starbucks, but they told me they were out. I was buying for friends and carrying them back, so I had to call and see what they wanted instead. When I got back in line and ordered the new drinks, I was told that those two would be free.
I was pleasantly surprised - my friends didn't get their first choice, but they were ok with that since no one had to pay. (Except for the other two, who just ordered regular coffee and paid for it.)

Gene

Whenever I see "free" I always remember "TINSTAAFL" from day one of economics 101. "There is no such thing as a free lunch". In other words, there is always opportunity cost. (I have also taught my children about this..)

For instance, I've seen "Black Friday" Deals for some little gadget to be free if you're one of first xxx customers. But it is not worth my time to get up at 2 a.m. and sit in line for 4 hours for a $10-20 item that if I watch I can get on sale and not pay that much for anyway.

On the other hand, one year we got in line @ Best Buy to get 2 of the free cell phones they were offering (pay as you go things). At the time we didn't have cells, wanted them and it was much cheaper to spend a couple hours in line than to pay what they were retail.

Generally the lower the price of the item (coffee), the less opportunity cost (time) I am willing to invest to get it.

As for the staffing question earlier. As a former retail manager, I can tell you it is always difficult to staff for peak times. You can not schedule even part time people for less than 4 hours. So if you have a 2 hour peak at lunch (in a store), if you staff for your peak, you may have 2-3 times what you need the rest of the time. The key is in cross training. We always had floor associates trained who could come up and help out during the rush to get customers taken care of. Any time I see long lines in a store, I see a failure of managers to call for back up, not necessarily a failure in staffing..

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Josh Millard

Was the idea of sipping some-but-not-enough coffee so unattractive? That you went without sounds almost like you refused them non-business, which is a strange circumstance.

Did you consider grabbing two coffees?

sundae1888

Yesterday, I had a similar experience as the one DJH described at Starbucks, although I was not at the receiving end of the free coffee. When I handed my Duetto Visa to pay for my coffee, the (new) employee just put my purchase on my Visa without asking. I saw the receipt and noticed the difference, and I wanted to pay with my Starbucks Card balance instead. (Before I'm accused of being an a**, there was no other customers lining up.) So the manager came over to rectify the situation. While he was doing his magic, a customer came in and asked for a brewed coffee. The manager ended up not charging the customer for the coffee because he didn't want to hold up the customer for a few extra minutes. The customer was all prepared to pay (with his own Starbucks Card) and was mildly surprised.

On a separate note, the last time I visited (a different) Starbucks on their free coffee day, another customer came in and didn't know about the free coffee offer until the staff told him about it. The customer ended up walking out with 7 free coffees. To be fair, the store was not particularly high traffic, and I almost always go to Starbucks during "off-peak" hours. I'm sure the staff would be less friendly to explain the free coffee offer or to honour custom requests if they were already overworked.

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DJH

I have a "free coffee at Starbuck's" story which is a bit different from Dubner's.

I went into a Starbuck's to get a coffee. While I was in line, but before I ordered, something went wrong with their cash registers. I ordered while they were doing something with them to get them working (I guess). They hadn't gotten them working by the time my coffee was ready. They handed it to me without telling me how much it was. I expected they'd ring the order up manually, and with wallet in hand asked how much it was, but the barista refused ... she said, "It's free."

Yep ... while the registers were out of order, they gave away everything that people ordered. They didn't want the hassle of manual payments, I guess.

I didn't stay long enough to find out how long the registers were out (I got the impression the outage would only last a few minutes), but I did see a number of orders placed, yet no one appeared to take advantage of the situation by ordering a lot of stuff that they expected to get for free.

So Starbuck's did the right thing by expeditiously handling the register outage, and the customers did the right thing by being reasonable.

Overall it was a pleasant experience.

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RR

I have a feeling that banks purposely keep long lines to encourage more use of the cheaper-to-maintain ATMs. Notice they have a separate "speed lane" for businesses.