Freakanomics and Subway incentives

I just finished Freakanomics by Steven D. Levitt. It was a fabulous read and has given me a whole new perspective on economics. The only economics course I’ve ever taken was when I was in 11th grade, and all I can remember was talking about supply and demand, and how the stock market worked. Since then I’ve viewed economics as more a academic language for talking about economies and markets. Thanks to Steven Levitt, I’ve learned that economics is not just the study of markets; it’s more about incentives, things that induce action or motivate effort. Reading the book has given me a different worldview [1], and so in my own feeble way, I’m trying to open my eyes more to incentives and how they affect people’s behavior.

One example of incentives in our daily lives is the customer reward scheme, where the customer gets ‘rewarded’ for repeat visits to a particular shop. These types of schemes are especially common among coffee shops, but they pop up in sandwich shops as well.

I’m not happy to admit this, but I eat lunch at Subway at least two times a week. I can’t say their sandwiches are that great, but I’ve always thought the daily special - £1.99 for a 6” sub - was good value for the money. Plus they have a rewards scheme. [2] Every time you buy a 6” sub, including the daily special, you get a stamp. Every time you buy a 12” sub, you get two stamps. Save up eight stamps and you get a ‘free’ 6” sub. The rewards scheme sounds great, and acts a moderate incentive, but is it really worth making Subway a regular lunchtime destination?

In terms of pricing, there are effectively two ways to get a single stamp: buy the daily special or buy any other 6” sandwich. But the most cost effective way to collect eight stamps and get the ‘free’ 6” sandwich is to buy the daily special every day for eight days. This would cost you £1.99 a day or £15.92 over eight days. After several weeks, you’re ready to reimburse your stamps and get your ‘free’ sandwich. You order the Italian BMT on honey oat, and tell the Sandwich Artist to load it up with lettuce, tomato and onions. “Would you like a drink with that?” asks the cashier.

“No thanks,” you say with a smile, thinking that you’re going to make this one a cashless transaction.

“Actually,” she quickly replies, “you have to buy a drink in order to get the ‘free’ sandwich.”

Firmly stabbed in the back, you manage to mumble, “So what’s the cheapest drink I can get?”

“A small fountain drink is £1.09.”

You begrudgingly hand over the drug money. They wrap up the sandwich, you fill up your cup with carbonated sugar water, and then you leave. On the way back to work, you realize that you just paid £1.09 for a ‘free’ 6” sub. In terms of the daily special, you paid 90p less than the price of a 6” sub, and each of those stamps that you carefully placed in your wallet was only worth 11.25p. In terms of the most expensive 6” sandwich you can buy - about £3.50, you paid £2.41 less than the price of a 6” sub and each of those stamps was worth a bit more, 30.13p. So considering that most people probably aren’t getting the daily special as their ‘free’ sub, and they’re getting one of the subs between £2.30 and £3.50, they’re paying an average of £1.81 less than the price of a 6” sub. In this average case, each of their stamps are worth about 22.62p. So is saving an average of £1.81 once every eight trips to Subway enough incentive to keep coming back? You decide.

[1] Levitt described the components of this worldview in an interview with Jason Kottke last year. ↑

[2] This reward scheme has apparently been canned in the U.S. due to fraud. ↑