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Why giving stuff away is good for business

Businesses like IHOP sometimes give away stuff for free, but what's the pay-off?

Behavioral economist Sendhil Mullainathan.

Kai Ryssdal: Happy National Spinach Day, everybody. It is, I grant you, one of the lesser-known food observances, especially compared to something like National Pancake Day, Feb. 28th. National Pie Day, March 14 -- we missed that one.

So it can be hard to keep track, as you can see. But I offer two words that can help: "free" and "stuff."

Sendhil Mullainathan teaches behavioral economics at Harvard, and he's here to explain. Hey Sendhil.

Sendhil Mullainathan: Hey Kai, how are you doing?

Ryssdal: I'm all right man, what's going on?

Mullainathan: What'd you last month for National Bagel Day?

Ryssdal: What?

Mullainathan: We just had National Bagel Day!

Ryssdal: I didn't know there was a Bagel Day. I have salmon in the fridge and everything, nobody told me.

Mullainathan: Well, if you had known, you could have gone to Bruegger's and gotten a free bagel, that's what they did for their celebration this year.

Ryssdal: OK, but why?

Mullainathan: I think what they're doing is they're relying on one of the oldest principles in psychology called reciprocity. There's a beautiful psychology experiment that goes back 40 years, it shows this: In this experiment, there's a subject, he's working away, and halfway though the experiment, somebody had gone out for a Coke. They come back and say, 'Hey, I also brought you a Coke.' And the real experiment is at the end of the study, the person says, 'Hey, do you want to buy some raffle tickets?' What they found was that --

Ryssdal: It's like a bait-and-switch, man.

Mullainathan: It's a little bit like a bait-and-switch. If they had brought back a Coke for you, which costs 10 cents, people were much more likely to buy raffle tickets. In fact, they bought 50 cents more worth of raffle tickets, just because this guy spontaneously gave them a gift of a Coke. As a result, they ended up selling two more raffle tickets, which earned them 50 cents. That's a 500 percent rate of return, and that's why reciprocity is so powerful.

Ryssdal: Right, which is a good deal. So is it a little bit like holding doors open for people? What's the real life example?

Mullainathan: Holding doors open; I often think about Hare Krishnas at the airport, if you've seen these guys.

Ryssdal: Oh yeah.

Mullainathan: They give you flowers. Well, they're giving you flowers for a reason, because once they give you a flower and you take it, now you're like, 'Oh man, now I need to talk to these guys.' And that feeling we have of having to give something back when someone's given something to us is really the power of reciprocity. And like in the Hare Krishna example, even if you didn't really want the flower, even if you really don't want to talk to the guy, you're sort of compelled to.

Ryssdal: It's a little bit like being indebted, right? Is that kind of the deal?

Mullainathan: Yeah, it is very much like being in debt. And in fact, there are cultures where this is so much treated like debt -- like in parts of China, they have elaborate books they keep where they say these are the gifts I've received from these people in the village, and this is how much I've given back, and this is how much in the red I am and this is how much in the black I am with this guy. And there, they've turned it into a whole accounting system. But in our mind, I think we keep these accounts -- 'Oh, you helped me move last time, Kai, now I've got to help you move.'

Ryssdal: Yeah. I get that, but so bring it back to the bagels for me. Because I totally get the moving thing, right? Because I've done my share of helping guys move out of their apartments and you know, U-Haul trucks and all that stuff, and I've counted on them to do the same. But what happens with Bruegger's Bagels? They give me a bagel and then the next time I've got the munchies, that's where I go?

Mullainathan: Yeah, you feel like, or maybe even this time -- you went in for the free bagel, but do you want to be the guy to just get the free bagel? All right fine, I should buy something else while I'm here.

Ryssdal: Right, so you buy the schmear and the cup of coffee.

Mullainathan: Exactly. And you guys in public radio, I bet, use this all the time, nonprofits use this.

Ryssdal: You're giving it away, man! No, you can't tell our secrets!

Mullainathan: So you know, I get these solicitations from these charities, and they give free address labels with them.

Ryssdal: Right, right.

Mullainathan: And now I'm like, 'Aww, they send me this address label, I should give some donation.' And in fact, this isn't just a tactic -- it's a very profitable tactic. There was a study that showed including these little gifts increases donations by 75 percent. And so you make the money back by giving this away.

Ryssdal: All that for a bagel. Sendhil Mullainathan teaches behavioral economics at Harvard. Sendhil, thanks a lot.

Mullainathan: Thank you Kai.

About the author

Sendhil Mullainathan is a professor of economics at Harvard University and Founder of ideas42, a nonprofit organization devoted to taking insights about people from behavioral economics and using it to create novel policies, interventions, and products.

Behavioral economist Sendhil Mullainathan.

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