The Why Axis: Hidden Motives and the Undiscovered Economics of Everyday Life (31 page)

Here’s another thing that Brian, adman-turned-philanthropist, can teach us about business. If he understands anything, it is scale. Smile Train now conducts roughly 100,000 surgeries a year, and that number is going down—not because Smile Train can’t help more children, but because the charity’s services have caught up with the world’s needs. Children with clefts no longer have to wait for the help they deserve. Brian didn’t want to stop with fixing clefts, however; he wanted to go after even bigger problems. Having come away with what works to drive charitable donations, he parted company with Smile Train and founded a new operation called
WonderWork.org
.

This new charity attacks five easily fixable problems poor children around the world face: blindness, club feet, burns, hydrocephaly (“water on the brain”), and holes in the heart. Inexpensive surgeries can address each of these. Take blindness, for example. More than forty million blind people populate the world. Of these, says Brian, “half could regain their eyesight with a ten-minute outpatient surgery that costs a hundred bucks.”

WonderWork.org
, which
Time
named in 2011 as “one of 10 ideas that change the world,”
⁵
has a unique organizational structure no charity has ever tried. “We are going to build a General Motors of Compassion with different charity brands that tackle single causes,” says Brian. “Just like GM has Chevrolet and Cadillac, we will have a blindness brand, a club foot brand, a burns brand, a hydrocephalic brand, and a hole-in-the-heart brand. By managing five causes
under one roof, we reduce overhead and administrative costs for each cause by 80 percent. That gives us huge advantages. If we are successful in creating five new Smile Trains, we can create 100.”

While Smile Train has made great use of “once and done” campaigns so has
WonderWork.org
. One of
WonderWork.org
’s “brands,” Burn Rescue, has also used it to great effect.

After extensive testing in a 2012 mailing of over four million pieces using the “once and done” campaign,
WonderWork.org
expects to bring in over 350,000 donors and raise around $15 million with this offer in 2013.

Even better, Brian hopes to double the revenue per donor because contributors will have more than one cause from which to choose. The new structure doesn’t let donors lapse, because it “cross-sells”—something unheard of in the nonprofit sector. “Charities hate the word ‘selling’!” Brian says. “
But I love it
.”

Obviously, not too many people in the charity world are like Brian. He is an entrepreneur. Most of the bigwigs in the nonprofit world are still terrified of changing business as usual—which isn’t to accuse them of negligence, just status-quo bias. Their hearts are in the right place. Many probably got involved in nonprofit work because of a deep belief in trying to do as much good as they possibly can in the world. Acknowledging that donors might not share that belief, or be as altruistic as charities would like to believe, might feel like conceding defeat.

Still, it’s increasingly obvious that charities are the frontline providers of many kinds of important public services and goods. As federal and state governments cut back on funding, resources for aiding children, seniors, the poor, the environment, and the arts all lose. Organizations such as the Sierra Club, Amnesty International, the Red Cross, and all the great nonprofits that do everything from feeding, housing, and educating the needy to providing us with great arts and entertainment need someone to step up for their cause. Scientific reasoning can help.

The Foundation for Long-Term Success

Having dug deeper into the economics of charity, we have uncovered solid, quantifiable evidence on how incentives work to attract
new donors and customers; more importantly, this evidence lays the foundation for long-term success. We now know that seed money, humbly proportioned matching grants, raffle tickets, sad-eyed Caucasian children with cleft palates, and a pretty woman on a fellow’s doorstep can all help raise money. Our evidence shows that social pressure accounts for a sizeable proportion of the motivation to give. We believe tontine-like schemes might work to open people’s pocketbooks. And we’ve discovered that giving people the right to opt out not only increases giving now, but lays the groundwork for efficient campaigns later as well.

In the end, we suspect that even though everyday givers focus on that warm, glowing feeling, larger donors—those who give millions of dollars a year—are more influenced by changes in the tax code. If you think about it, this makes sense. Come tax time, the federal government allows you to deduct dollars you give from your reported income if you itemize your deductions. For those itemizers in the 35 percent tax bracket, this allowance effectively drops the price of giving a dollar down to about something like 65 cents. Not a bad incentive to give.
⁶

We all assume that people give because doing so helps others. But the truth, as we have seen in our field experiments again and again, is that many people give more out of self-interest. Sadly, charities haven’t understood this just yet. To get people to open their wallets, charities have applied certain tricks of the trade—announcements of having raised 33 percent of seed money, 3:1 matching grants, direct-mail appeals, and so on—relying on tradition and formulas. In so doing, they have left money on the table.

In a wide variety of experiments—from Smile Train campaigns to the Sierra Club, from the University of Central Florida to
neighborhood streets around the country, we found that certain long-held assumptions about charitable giving don’t hold much water. Frankly, we were not surprised to discover that men give more when beautiful women ask them. But we were surprised to learn that Smile Train donors more frequently open an envelope when the kid on it looks like them. In the words of the inimitable Carly Simon, we are (all) “so vain.” In the end, we need to feel that we have some skin in the charitable game.

Our conclusion is simple: charities, by necessity, will need to stop relying on hand-me-down formulas and begin experimenting more; if they do not, they will lose to their competition.

We hope that the field experiments described in these chapters offer a set of new ideas, prescriptions, and lessons that can help organizations to take that first step (or at least call us to make that first step!). As the sector advances, field experiments will serve as a tool that revolutionizes it, and field experiments will become the rule in the nonprofit world, rather than the exception.

Next, we will visit another set of managers in need: those who lead for-profit companies.

          
CHAPTER ELEVEN

       
Why Is Today’s Business Manager an Endangered Species?

          
Creating a Culture of Experimentation at Your Business

It’s a sweet, blue-sky September day in New York City. The year is 1965. The taxi driver drops a man at the corner of 1st and 64th. He steps into the new art-nouveau restaurant. Checking himself out in a greeting mirror, he finds he looks super-sharp in his Brooks Brothers suit, black necktie, and starched white shirt. A hint of Old Spice drifts from the pulse in his neck.

He greets the three marketing guys from Westinghouse like best friends while the hostess, outfitted in stilettos and a bottom-hugging pencil skirt, nods and smiles coyly at him. She guides the party to a linen-and-crystal-adorned table beneath a gorgeous, multicolored Tiffany-glass ceiling. He and his guests sit down and scan the menu while the waiter takes the first round of drink orders.

“Hello, Roger,” he says familiarly. “I’ll have the usual. Dry martini with triple olives. What’s your soup today?”

“Our soup is a freshly made, creamy Maine lobster bisque, sir. Delicious!”

“No, I’ll pass,” he says. “I had the lobster yesterday. I’ll take the pâté en croute to start, followed by the wild boar, and the lemon custard pie with coffee for dessert.”

Just one lunch in the day of the life of another Madison Avenue businessman, albeit nearly fifty years ago. What does the rest of his workweek look like? A short week, thanks to all those three-martini lunches that last for hours. More client meetings in the fanciest restaurants and clubs in New York City. More bourbon-laced office meetings. And, of course, the hanky-panky.

This is the kind of weird world depicted in the TV series
Mad Men
(and, no, it isn’t a huge exaggeration of the then-reality). The setting makes for great drama, hence the thirteen (and counting) Emmy awards. But from the perspective of the curmudgeonly economist, the series begs the question:
What on earth were the businesses that hired fancy-schmancy, Don Draperesque advertising guys thinking?
They were certainly creative, but how did they know that what they suggested worked?

Today, top executives might not always make big, important decisions about products, prices, and ad campaigns at booze-filled lunches, but too often they make such decisions based on little more than hunches. We think that businesses that don’t experiment—and that fail to show, through hard data, that their ideas can actually work before the company takes action—are wasting their money. Not only that, but these executives are clearly placing themselves on an endangered species list.

Netflix: A Case in Point

Netflix, the movie delivery service, is the poster child for the need for experimentation in business. Because its product and client base
is second to none, it was able to avoid bankruptcy following a series of breathtakingly, entirely avoidable, bad moves it made in 2011.

Netflix was founded in 1997 on the basis of a great question:
Would people pay a monthly subscription to have DVDs delivered to their doors (without late fees) instead of having to tromp down to the local video store (which made a lot of money on late fees)?
The market responded with a resounding “yes.” The feisty little Silicon Valley company delivered movies people wanted, delivered them fast, and in general did a fantastic job of playing David to the Goliath of video chains such as Blockbuster.

Later, Netflix also started offering streaming online videos, though the selection was far more limited, so that customers could watch films two different ways. In so doing, it effectively disrupted brick-and-mortar video rental outfits, including the giant Blockbuster, which was forced to shutter many of its stores. With twenty-five million happy subscribers, Netflix was a darling of the stock market, too: it was trading at nearly $300 a share by July 2011.

But then, the company did something strange: it told its customers in a lengthy, rather confusing email that it was breaking up its bundled mail and streaming service into two separate services. Customers already paid $9.99, $12.99 or $14.99 a month to rent one, two, or three DVDs at a time, respectively, depending on their plan, and a limited number of streaming videos. But now, the company said, it would charge all customers $7.99 a month for one-at-a-time movies by mail and another $7.99 a month for streaming service, effectively raising its previous prices by 60 percent.

Customers vociferously disapproved of the move, likening it to a “brain fart” on the part of management. Posting a comment on the Netflix site, one fellow named Greg (signing himself as an “ex-customer”) wrote the following:

         
Dear Netflix,

         
To say the least, I am shocked and appalled at your recent behavior. It seems like yesterday we were the best of friends. You informed me with your poignant documentaries; I always laughed at your corny B horror flicks. For four years you’ve been the gracious receptacle of my hard earned money, but alas, your current actions have forced me to reevaluate our relationship. Your nominal price increase, while unexpected, does not deter my loyalty. However, your mouthpiece Jessie Becker’s presentation of this upcharge—as an added choice for my own benefit—insults my intelligence and reveals the breadth of your arrogance. Had I been treated like an adult and informed of these changes in a straightforward, honest manner, perhaps we could rekindle our spark. Unfortunately, this course of action is no longer available; your condescending and manipulative tone has irreparably ruined our relationship.
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