Come One, Come All: The Mystery of Business Tolerance
By Bryan Caplan
Firms are usually picky about who they hire. But when they spot potential customers, their standard slogan is “Come one, come all.” Sure, there are some exceptions. A few restaurants still have dress codes, and some rental car companies won’t rent to under-25s. But by and large, firms welcome paying customers of all shapes and sizes.
It’s tempting to shrug and say, “What’s the puzzle?” Firms are picky when they hire because workers are not created equal. But they’re promiscuous when they sell because money’s money. Right?
Wrong. A customer isn’t just money. He’s a package of money and personal issues. If you’re running a restaurant, some of your customers complain and dawdle, while others take what they get, then eat and run. If you’re running a hotel, some customers leave their rooms in pristine shape, while others treat their room like a pig sty. And if you let customers return merchandise, some of them never exercise their option, while others return more than they keep. If businesses charge every customer the same list price, you’d expect them to prize some customers and dread the rest – not welcome all comers with open arms.
You might blame discrimination laws, but don’t be hasty. Only a few kinds of discrimination are actually illegal. And in any case, firms have plenty of tools to discourage undesirable customers without breaking the law. Strict dress codes are only the beginning. You could simply jack up your prices, then target discounts to the right zip codes. As the upscale mall on The Simpsons brags, “Our prices discriminate because we can’t.”
So what’s the real story behind firms’ “Come one, come all” ethos? Some leading hypotheses:
1. Despite some vivid examples, customers rarely predictably vary much in profitability.
2. Businesses have already equalized profit margins with frequent flyer programs, selective coupons, and other preferred customer programs. Good customers get good deals, bad customers bad full price, transforming everyone into a cash cow.
3. In less tolerant times, businesses were more selective. But most moderns would be embarrassed to shop somewhere snobbish enough to turn away paying customers. The upshot is that good customers indirectly subsidized bad customers to avoid feeling elitist.
4. Deviant behavior by both workers and customers has increasing marginal costs. If 5% of your workers or customers are troublesome, it’s no big deal; but 10% is more than twice and bad, and 20% is more than four times as bad. At least for smaller businesses, then, hiring a single difficult worker is a big problem, but a few difficult customers are a light burden to bear. An implausible prediction is that big firms will be more willing to give weird applicants a chance.
Which stories make the most sense to you? Got a better explanation? Please show your work.