When it's good to leave money on the table

I don't usually read books on economics for fun, but I made an exception with Robert Frank's fascinating The Economic Naturalist. The book poses basic questions and then answers them with economic theory. One of my favorite concepts was "money on the table." Why, we might wonder, are last-minute airline tickets so expensive whereas last-minute baseball tickets can be found on StubHub for a fraction of the cost? Why do fancy hotels charge for wifi or continental breakfasts but cheap hotels tend to throw these amenities in free?

The answer has less to do with a secret conspiracy of albino zebras (my typical assumption of all such questions) and more to do with basic economics. Who tends to buy last-minute airplane tickets? Businesspeople. They tend to charge to a company account, and the price of the ticket matters less. A family on a budget, in contrast, will be more likely to plan ahead - and price does matter quite a lot. Similarly, businesses are likely to buy baseball tickets for the company so that good seats would always be available to show a potential client a good time. Families, however, are more likely to spontaneously decide to see if there are any cheap tickets left to the game. Businesspeople are more likely to stay at fancy hotels, and so don't particularly care if the wifi or breakfasts are free - it's not their money. People on a budget, who are more likely to stay at a cheap hotel, care much more about these types of features being free.

A company can err in one of two ways (actually, likely about a thousand ways - but two for this blog's purpose). One is that they can charge high prices for services that their customers are likely to expect for free or less money. These companies tend to not last long. Netflix seems to have vastly overestimated how much fans were willing to pay to have both streaming and by-mail movie service, with quite extreme consequences. Family restaurants that charge exorbitant prices are similarly not in tune with their customers' wants. Hopefully, recent decision by major banks to charge higher fees for debit card usage will bring out comparable wrath and loss of business.

The other type of mistake is to leave "money on the table" - to charge less money than people are willing to spend (or offer more services than people are expecting). The consequences are less dire (making less money) but can also hurt the bottom line. Some companies like Costco intentionally offer better worker conditions and customer service than major competitors (leading one miserable person to complain, ''It's better to be an employee or a customer than a shareholder."). But most companies don't like doing this. If a fancy hotel decides to provide free wifi, then the amount of business/good will they would gain from happier customers wouldn't make up for the money lost; most of their clientele wouldn't care enough.

The key is knowing what's money on the table and what isn't. My wife and I are subscribers to a musical theatre troupe in Southern California. It is any performance company's best interests to have a large subscriber base; without a certain number of pre-sold tickets, it's hard to take any risks or produce shows that may not appeal to the masses. Regular subscribers need to be treated well. One way is via a general discount; subscription tickets are usually cheaper than buying individual tickets to all shows. Yet in these budget-crunching times, a number of discount ticket websites have cropped up. Last year, I realized that it would have been cheaper to have bought tickets individually from a particular (legal) website than subscribe. That said, there were a number of reasons to be a subscriber. Certainly, there is a warm glow at supporting a beloved art form; in addition, without pre-purchased tickets it is far easier to decide to miss a show. But the crown jewel for this company was a subscriber's lounge. For 45 minutes before the show, subscribers could mingle with the actors and have some munchies.

At the first show of this season, they did away with the lounge. An accountant-type said that they felt all the money should be reflected on the stage. At a certain level, I understand this. Times are tight. The munchies had gotten a bit elaborate and theme-based. But I think the bean counters misjudged. The subscriber's lounge seemed to be money on the table - I imagine the logic was that people came for the shows, and anything else was low-hanging fruit (i.e., easy pickings). But I realized that the lounge was money on the table for the regular customers - people who bought tickets to see one or two particular shows. The subscribers (at least, the ones I spoke to) equally bought into the feeling of community. The lounge helped create that community. It wasn't a matter of needing the glass of wine or brownie (although they were sometimes really good brownies). The issue, from what I gathered, was the experience and chance to get to know the company.

Was this decision correct? Was the cost of the lounge "money on the table"? Time will tell - if subscriptions dip for next year the way I predict they will, then it was foolish. The money lost from fewer subscribers will, I predict, outweigh the money saved. Veering away from economics and back into psychology, this comes down to practical intelligence. As proposed by Robert Sternberg, it represents the ability to apply one's knowledge in a ­hands-­on, real-­world manner. Some might call it "street smarts." People with high analytic intelligence (such as some of the accountants) or high creative intelligence (such as some of the performers) do not necessarily have high practical intelligence. Knowing how to make money and how to put on a show is not the same as knowing how to keep a subscriber base happy - and without that, there's no money and no show.

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