Feb 07, 2013

How “Free” Can Generate Real Value

Here’s this month’s piece from neuroeconomist Paul Zak. For those who might dismiss some of our thinking as the “soft side” of management, Paul puts “hard science” behind it.

“They will think, ‘I am paying retail for a greasy sandwich, and somewhere else there is a guy with the same greasy sandwich, not paying for it. What kind of a dope am I?’”

So said Rob Frankel, a branding strategist, upon the opening in Boston last month of the fifth Panera Cares store.

The Panera Cares stores are run by the nonprofit Panera Bread Foundation and are designed to feed everyone who comes in the door. Instead of prices, there are “suggested donations”; those who can pay more are asked to do so to support those who cannot afford the suggested donation or who cannot pay anything at all.

Frankel seems to misunderstand the human need to connect to others that Panera Cares taps into. He is concerned that the five Panera Cares stores will adversely impact Panera’s 1,500 for-profit stores rather than build goodwill among Panera customers.

For many years, for-profit Panera stores have donated their excess food to local food banks. Panera Cares is another extension of CEO Ron Shaich’s commitment to do well for the communities in which Panera operates. This model has worked for Panera since 1993, and its recent financial performance has been strong.

The science here is compelling: When we see a person or an organization caring for others, this can cause our brains to release the neurochemical oxytocin. My experiments have shown that when our brains release oxytocin we feel a sense of attachment. Put differently, oxytocin is the chemical basis for loyal customers. It is hard not to like a company that is seeking to do good.

Panera’s pay-what-you-can pricing scheme is also a reflection of something Peter Drucker understood well: Human beings are motivated by different things at different times. Sometimes, they are focused on getting the best deal for themselves; other times, they are moved by compassion and generosity. People, Drucker explained, “are diverse, often unpredictable, always multidimensional.”

Plus, consider the opposite: If Shaich had publicly said that Panera’s goal is to maximize shareholder value no matter what this does to the communities its stores are in, there would be a huge outcry of disdain and boycotts of Panera stores. Greed causes visceral disgust in many of us, and we seek to lash out against and punish selfish people.

Taking care of the community is a smart way of sustaining a committed customer base.

One final note: Apparently, Frankel has not been to a Panera restaurant. A number of national publications have ranked Panera as the healthiest casual restaurant. There is nothing greasy on the menu.  So, in addition to taking care of its communities, Panera is also taking care of customers’ health.

Sometimes even for free.

Paul Zak is the director of the Center for Neuroeconomics Studies at Claremont Graduate University and the author of The Moral Molecule.

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