Freakonomics Radio - 79. A Cheap Employee Is … a Cheap Employee

Episode Date: June 13, 2012

Paying workers as little as possible seems smart -- unless you can make more money by paying them more.

From APM, American Public Media, and WNYC, this is Freakonomics Radio on Marketplace. Here's the host of Marketplace, Ty Rizdahl. Time now for a little Freakonomics Radio, that moment every couple of weeks where we talk to Stephen Dubner, the co-author of the books and the blog of the same name. It is the hidden side of everything. Dubner, the co-author of the books and the blog of the same name. It is The Hidden Side of Everything. Dubner, how are you? Thank you for holding. Stephen Dubner is currently assisting other radio hosts. Your call will be answered in the order it was received.

All right. All right. Come on. Come on. Come on. Come on. Come on. Hello, Kai?

Yes. What? Yes. I am sorry for that inconvenience. I really do appreciate your patience. How can I help you today? Well, one, you can answer the doggone phone when I call Yes, what? I am sorry for that inconvenience. I really do appreciate your patience. How can I help you today? Well, one, you can answer the doggone phone when I call. But what?

What's your stick this week? Well, Kai, as you may have guessed, our topic today is about customer service, how we are treated when we have some kind of retail experience. By the way, you give lousy customer service. Can we just say that right up front? I am working on it. Thanks for the feedback. I do appreciate that. We started by asking our blog readers about their experiences with customer service, good or bad, mostly bad. Here's Eric Jones, a guy who found himself in one of those ridiculously long lines at the phone

company. And remembering my life as a hippie in the 60s, I decided that the right way to do this, instead of throwing the phone display through the store window, was to simply lay down on the floor. And I did that, and I was astonished how well it worked. Occupy my belt, right? That's exactly right. Now, it's no dream scenario on the other side of the counter, as we know as well. So here's Jamie Krauthammel, who worked at a phone store in Charleston, South Carolina. She had to tell a customer that he couldn't return a bag of crushed

phone parts. He pushed back from the table and pushed his stool out from under him and slammed his fist on the table and just started cursing. And then he threw the phone at me. People never cease to amaze me. But here's the thing about retail, right? I mean, it's all about low wage jobs in pursuit of low cost products that Americans buy until they don't want to buy them anymore, right? That is the conventional wisdom. But this wisdom may not be so wise, it turns out. All right. So Zeynep Tan teaches management at MIT Sloan School, and she did a study that looked at successful low cost retailers like Costco, Trader Joe's, the quick trip convenience stores. And what she found is that these companies spent more on labor than their competitors with higher wages and more money for training.

And these companies were more profitable. If you pay your employees more, you attract a better group of employees and you retain them longer. Connect the dots for me here. If you pay people more, you make more money. How does that work? Retail isn't necessarily a complicated enterprise, but there's a lot of room for things to go wrong when you hire the cheapest possible employees.

When a retailer doesn't invest in his people, then execution at the store suffer. You often find products in the wrong locations, promotions not carried out on time or at all, or mistakes at the checkout. So these operational problems, what was surprising to me was how frequent these problems and how expensive these problems were. All right. Well, Dubner, help me out here. If spending more money on labor is good for a company's bottom line, why aren't more companies doing it? Well, because most retailers think of labor as purely a cost as opposed to a way to make more money. And if you're trying to control costs, which every business is trying to do, one thing about cutting costs is that you immediately see it as a benefit to your bottom line. Whereas investing more on employees, well, that doesn't pay off until later.

All right. Let me ask you my customer service bugaboo. You know, you walk into a store, usually it's clothing, but it could be anything. And you're like accosted by, man, I'll help you with this and that. And I'm like, no, man, I just want to look around. Yeah. Well, I've got good news for you. That doesn't really seem to work.

So a recent survey of 75,000 people found that customers don't really care about all those niceties. Here's Nick Toman, one of the authors of that study. The pleases, the thank yous, the flowery language, that didn't matter so much. Making things simply easy for customers, getting a question answered, returning an item, making the burden as low as we can on the customer results in the greatest initial economic benefit for the company itself. Now, Kai, let me add what I think is the most important point, okay? What you really want to do for retail is...

Oh, Kai, I'm going to have to get back to you. Just hold on. Don't you get... Oh, you know what? First of all, I don't like this music very much. Thank you for waiting. Your call is very important to us. No, it's not.

Stephen Dubner will be with you in just a moment. No, he won't. This call may be recorded for quality assurance. Stephen Dubner, Freakonomics.com is the website. He may or may not be back in a couple of weeks, depending on, you know, customer service. Coming up next week, another full-length podcast called Riding the Herd Mentality. It's about how we all respond to peer pressure, for better or worse, and how to use guilt

and shame to improve the world with stories from Bogota, Columbia, West Texas, and the Petrified Forest National Park. And also, before we let you go, Freakonomics Radio needs your vote. We've been nominated as one of the top edutainment podcasts on iTunes. Now, I'll warn you, the competition is very stiff. We're up against Radiolab, which would probably get my vote, to be honest, and the TED Talks podcast. But if you're feeling charitable, you can go to the iTunes Facebook page and cast your vote for Freakonomics Radio or whatever else your conscience tells you. Thank you very much.