The Customer is Always Right

In the USA there is a general consensus that the government should be responsible for monitoring the wages of low income earners to make sure they are reasonably compensated. Mandatory minimum wages are set to force businesses to treat employees fairly. This article suggests another possible way to control wages; leave it to the market. Many big box stores have begun paying higher wages not because of government regulation, but because it is what customers want.

Customers have significant power when it comes to pushing companies to change. If a customer’s number one priority is to purchase a product at the lowest possible price, they will send that signal to companies who will cut their costs in whatever way they can to lower prices. This often means seeking out the lowest cost for labor. On the other hand, if consumers really desire higher wages for everyone, they must signal that to businesses through their willingness to spend an extra fifty cents on a burger to support a company that pays higher wages to its employees. Consumers have a real power to dictate a business's behavior by choosing to support companies that go along with a desired change.

It is assumed that businesses seek to optimize profits. Adhering to customer demands can result in increased sales, which can outweigh the cost of the increased labor. If the cost of increased labor is greater than the benefit of increased sales, it is probable that the majority of consumers do not feel strongly about the need to increase wages. It is interesting to consider consumers as voters who really have the power to impose their own regulations on businesses. Such consumer imposed regulation could even prove to be more efficient than government regulation.


Dave Tufte said...

EC: 100/100

I think this sort of thing can work in the short-run, but I don't know about the long-run.

I suspect that paying low wages is like a prisoners dilemma. Employers will pay higher wages if other employers pay higher wages.

So it's possible to coordinate on an outcome with higher wages, but in the long-run there will be incentive to cheat.

Maybe it will work. Am I jaded if I think that there's a lot of magical thinking involved in the sort of viewpoint pushed in the article?

Bruce said...

I never really thought I would say this, but, I totally disagree with this article from Forbes magazine. Maybe it is my naivete or maybe it is my gain in an understanding of people and business. The two reasons that make me question this article are that I do not think this strategy will work in the long run and I think there has been a dramatic shift in the way businesses think about the philosophy that the 'consumer is always right.'

In the short term, the strategy is a home run. The gain in public perception will outweigh the additional cost of labor. However, in the long run, consumers will lose their motivation to pay more to increase 'societal well-being' in exchange for the best bargain they can find for themselves. Competitors will increase their wages, but just a fraction less than the first movers, in order to offer the same products, services, and employee wages at a lower cost which will lead us back to the same scenario as before the wage increase, eventually.

I have seen a dramatic shift in the old adage of 'the consumer is always right' philosophy. It seems to me that businesses are moving from a 'consumers are always right' philosophy to a 'put our employees first' philosophy. I think that businesses are starting to understand that when their employees are more involved and invested with the organization, the better the end results are for the consumer, whether that be the product or the experience. Creating more engaged employees, which in turn creates a better customer experience, seems like the reason behind these minimum wage increases instead of an increase in wages based on consumer outcry.

Lacey said...

I have trouble believing this would work, especially in the long run, but even in the short run. Wanting to increase the wages of a companies' employees doesn't magically give you a larger budget to work with when making your purchases. The concept essentially expects a significant amount of consumers to donate to a cause on a daily basis without receiving any direct benefit through an increase in quality which is the typical expectation when purchasing a more expensive product. The other dilemma that a consumer would come across with this strategy is: Which employees do I want to help the most? I would personally find it hard to say that Crest's employees are more deserving of a raise than those working for Aquafresh.

Dave Tufte said...

Bruce: 50/50 (I was really tempted to take off points in a couple of areas, but I don't think you quite crossed the line).

Oh gosh Bruce ... the ideas are there ... now you just need the nomenclature. I think your second paragraph is saying this is a repeated prisoners' dilemma, and that tit-for-tat is eventually going to get us back to the bad outcome.

I don't expect you to know the right terminology for the third paragraph. It's more of a macroeconomic idea called efficiency wages. In this, you pay the workers more but you expect more from them. And you combine this with an implicit threat that everyone knows you're getting paid more, so don't blow it, or you'll get fired and go back to a place with lower wages. This idea has been kicking around since about 1980, and I think the consensus is that there isn't anything wrong with it, but in the real world it doesn't actually seem to be too common or important.

FWIW: I love the fact that you're conflicted about disagreeing with Forbes. I'm not saying they're wrong much, but it's healthy to have principled dissent. Does this make you feel like you've grown intellectually at SUU?

Dave Tufte said...

Lacey: 50/50

1) I like your thinking here, and agree with it.

But ...

2) We keep having these situations where people are willing to pay more for "psychic income". If you can get a warm fuzzy feeling from buying organic produce or Chevys, who's to say you won't get one from paying more at McDonald's so they can pay a higher wage?

Bruce said...

Yes, I feel like I have grown intellectually at SUU which has produced a higher confidence level in my opinions. In the past, if I had an opinion that differed from someone with a presumed expertise I would be far more likely to keep my opinion to myself, assuming I was incorrect. Now, instead of automatically accepting the ideas of the supposed experts I feel I am equipped with the ability to evaluate their idea versus my idea.

Dave Tufte said...