Why Giving Away Your Profits Makes Financial Sense

Here is an action packed game for you to play at home; it is called the ultimatum game, the rules are very simple:

Two people are given £1,000 to split between them.  One of the players proposes how the money should be split and makes an offer.  The other player gets to accept or reject this offer.  If he accepts, then the money is shared out according to the offer, if he rejects then neither of the players gets any money

It is very straight-forward

This doesn’t sound like much of a spectator sport, it isn’t going to make the Olympics, but psychologists get very excited about it.  Why?  Well because the results aren’t “rational”

  • If the split offered is 50:50 then it is always accepted
  • If the offer is 60:40 then it is sometimes accepted
  • If the offer is 70:30 or worse, it is invariably rejected and both players walk away empty-handed

Rationally this makes no sense, after all £300 is £300 and it is free money (better than a poke in the eye with a sharp stick, as my Dad used to say).  But humans are social creatures, and that means we have a sense of fair play, honesty and trust.  It is buried in us all, and it is buried deep.  And let’s be honest 30% is hardly fair, it is insulting

Now meet Chris Zane, he owns Zane’s cycles in the US.  This is a man who plays the ultimatum game hundreds of times every day and plays it to win.  Every day he makes “offers” to his customers:

  1. He offers a lifetime service guarantee on every bicycle he sells
  2. He offers flat tire insurance; for a nominal fee he will repair any flat tyre, (the cost of both parts and labour) for the life of the bike
  3. He offers a free trade in programme on children’s bicycles.  As your children outgrow their bicycles simply bring them back and Chris Zane will knock the original price of the small bicycle off the cost of the big one
  4. If you buy a gift certificate he will throw in a free branded water bottle to put the gift certificate in
  5. If you need a spare that costs under $1 he will give it to you for free
  6. If you find your bicycle cheaper anywhere else within 90 days of purchase he will match the other price and give you a 10% discount, in cash
  7. If you want to test ride a bicycle he lets you take it, no deposit, no credit card, nothing.  He admits to losing a couple of bikes a year but makes the point that that is a good deal when you think of the hassle avoided and the trust gained

And there is the point.  Trust gained.

Chris has successfully spun the ultimatum game on its head.  Instead of offering 30% and keeping the lion’s share for himself he reverses the deal, always offering more than his customers feel is necessary

And as for his customers, they don’t take advantage of Chris; they are, after all, honest, fair-playing individuals, that would be cheating

Oh, and over and above that, they enjoy playing the game so much that keep coming back

Chris has built a multi million-dollar business out of the ultimatum game

How about you?

Do you believe your customers are honest and fair playing, or are they a bunch of devious, shifty crooks?

What about your policies, procedures, rules and regulations?  What do they say?

Read another opinion

Image by Salim Virji

Thanks to Maz Iqbal for the idea for this post

Comments

  1. Hello James

    I simply wish to say that you have done a GREAT job of extracting the essence of Cris Zane’s way of doing business, a way that has led to the largest, most successful independent cycle shop.

    I also love how you have weaves in the ultimatum game – you are the first person I know of who has used it this way! Fantastic.

    Maz

  2. Hi James,
    I have Chris Zane’s book Reinventing the Wheel and as a bike rider I wish he had shops on this side of the pond. He shows that, as you rightly point out, it is what you believe about your customers that manifests itself.

    Adrian

  3. A really fascinating article. Perhaps this is the secret behind the success of the “freemium” model that seems so successful in mobile app stores these days?

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