Why ‘give and you shall receive’ is good business

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“Free” is a very powerful word.  Just look at the lines on National Ice Cream day and you know that’s true.  Companies use the word “free” all the time to get your attention. If you’ve the Red Tape Chronicles for a while, you know this is often a bad thing — “FREE” often doesn’t really mean “free.”  So before we proceed, please turn up your consumer skepticism whenever you encounter the word free.

That said, free can be far more important than the gift of a simple 99 cent ice cone.  In our upcoming book Barstool MBA, Dan Maccarone and I write about the power of the “Well-Timed Free Gift” — a buyback in a bar that convinces a patron to stay at your bar for a while longer.  It’s a metaphor for all the things a company can do to recognize and reward loyal customers.  You can read more on this idea at our website, BarstoolMBA.com.

The idea has roots in science, too, and I wrote about them recently for PeopleScience.com. Behaviorists use the fancy term “reciprocity” to explain what happens when you give someone a free gift.  Surprise: They feel compelled to give back. There’s an adorable experiment I mention in the piece involving randomly-sent Christmas cards.  What do strangers do when they get an unsolicited card?  Well, you might be able to guess, but read on. Here’s a tease of the piece, but you can read the whole thing at PeopleScience.com

Here’s a secret: Want to get more out of people? Give them more. Give customers more free gifts. Give employees more perks, more compliments, perhaps even more money.  They’ll want to return the favor.  Humans are wired that way.

Since our very first business class — and perhaps since our very first lemonade stand — we’ve been taught the basic principle that people always behave in their own self-interest.  Turns out, that’s wrong, or at least it’s incomplete.

Consider this: When people receive a gift, they feel compelled to give one right back. It’s an easily observable sociological trait called the “reciprocity principle,” and it’s much more than a polite social convention.  It’s science. Humans have an innate desire for fairness and justice. One of the first sentences young children learn to say is, “That’s not fair!”  Reciprocity is motivated, at least in part, by this desire for equity.

his is a relatively new finding, at least in the world of economics, which generally favored the “selfish actor” worldview for quite a while. That is, until Werner Guth and Hartmut Kliemt created a small experiment that shook this bedrock concept to its core.

Known now as the “Ultimatum Game,” it works something like this: Give one person $10, then tell her or him to make an offer to share some of that $10 with a second person. If the offer is accepted, both keep the money. If it’s rejected, neither gets anything.

Here’s the rub: If the “proposer” with the money lowballs the “responder” — say, suggests sharing only $1 or $2 — the offer is usually rejected and everyone loses.  Despite losing out on free money, the responder is more interested in fairness than cash. In this case, the “inequity aversion” is worth more than money.

These surprising Ultimatum Game findings have been replicated in nearly infinite versions and in places around the world.  So it’s true: People are motivated by more than money.

There’s quite an opening.

Continue reading here:

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About Bob Sullivan 1255 Articles
BOB SULLIVAN is a veteran journalist and the author of four books, including the 2008 New York Times Best-Seller, Gotcha Capitalism, and the 2010 New York Times Best Seller, Stop Getting Ripped Off! His latest, The Plateau Effect, was published in 2013, and as a paperback, called Getting Unstuck in 2014. He has won the Society of Professional Journalists prestigious Public Service award, a Peabody award, and The Consumer Federation of America Betty Furness award, and been given Consumer Action’s Consumer Excellence Award.

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