A day care center had a problem. Working parents were occasionally late in picking up their children, creating scheduling issues for teachers and care-givers, and imposing costs on the day care center. On average, there were about eight late pick-ups per week.
All problems are an opportunity for innovation, right? This day care center ran an experiment.[i] Call it a pricing innovation, or call it a reverse service innovation, but they spent twelve weeks trying out a fine system: parents were charged a fee for being late on pick-up. Simple and rational…deterring people from being late by hitting them in their wallets, while getting a little compensation on the side. That ought to reduce the lateness problem!
Human Beings are Not Simple and Rational
Not so much. What happened was not a rapid reduction to zero late pick-ups. Quite the contrary! In the first four weeks of the experiment, the number of late pick-ups increased by 50%, up to twelve per week. Maybe parents just didn’t get it? Maybe keeping the fine around for a while, letting them feel the pain for their lateness, would ultimately resolve the problem? No. By the end of the twelve weeks, late pick-ups were averaging 16 per week, double the pre-fine days.
The fine system was dropped. It would be more tolerable to forego that minimal compensation but return to only eight late pick-ups. Innovations don’t always deliver what we expect, and this was a good exercise in failing fast and learning from it.
But the average late pick-ups did not return to eight.
Long-Term Impacts on Customers
After the removal of the fine system, the late pick-ups increased yet again, to an average of nineteen per week – more than doubling the rate of lateness from what they were just three months before.
How could this happen?
Even in business transactions, customers follow both social norms and market norms. You can think of social norms as the consideration of others, while market norms are the consideration of self. Whether you are a B2B or B2C, for-profit or non-profit, manufacturer or service provider, you relate to your customers through both social norms and market norms. Decisions about transactions always consider both – but not equally.
Before the fine was introduced, the care-givers and the parents had a business transaction with strong social norms governing decisions about being late. Perhaps guilt about past late pick-ups, simple conscientiousness about the impact of being late on the teachers and care-givers, or how being late impacted their children’s psyches kept them generally on-time.
Imposing the fine changed the nature of the decision process, placing market norms front-and-center, ahead of the social norms. Now that parents were being fined, they were refocused on how lateness impacted them, and they more frequently chose to be late. It was now “worth it.” Guilt was removed by paying for it financially.
The day care center could have played around with the amount of the fine. Increasing the fine to the point that it was no longer "worth-it" may well have changed behaviors the way they had intended. But at what cost? Such market-norm-only thinking could have alienated parents, leading them to find another day-care alternative.
Yet trying to change the decision-making weight back to social norms was far from automatic. When the fine was removed, the market-norm orientation of the parents didn't change. Social norms continued to be weak, and with the financial costs removed, demand for “lateness” as a service increased even further.
As Dan Ariely puts it in his book, Predictably Irrational, “when a social norm collides with a market norm, the social norm goes away for a long time. In other words, social relationships are not easy to reestablish. Once the bloom is off the rose — once a social norm is trumped by a market norm — it will rarely return.”
Our innovations, by definition, change the conditions in the marketplace. They change our business transactions with our customers. Are you thinking that the impact isn’t that great? Tell that to JC Penney, which lost about 75% of its value with their pricing innovation experiment of 2011-2013.
You have both a social contract and a market contract with your customers in all of your transactions. Are you considering both as you innovate? If not, you may find that you can't go back.
[i] This was actually an experiment conducted by academic researchers, and is fully described in “A Fine is a Price,” by Drs. Uri Gneezy and Aldo Rustichini, Journal of Legal Studies, 2000, and is referenced in Dan Ariely's book.