This week, I’d like to take a break from investing and talk about some of my favorite restaurants. Yes, there will be a bit of an economics and consumer behavior lesson in each bite, but don’t worry, you won’t even taste it.
The Economics of Bundling
Vij’s is an Indian restaurant in Vancouver, Canada, that emphasizes big flavors and extraordinary customer service. Their signature dish, Lamb Popsicles, consists of a half-dozen perfectly cooked lamb chops in a spicy fenugreek curry.
Vij’s doesn’t take reservations, and the wait on a Saturday night can be more than an hour, but it’s about the most pleasant wait in the restaurant world. While you chat at the bar, waiters bring around cups of chai and trays of puffy fried poori breads and other appetizers, all complimentary. When you order your entree, it comes with side dishes, naan, and rice; there’s no need to order these accompaniments separately. You can order additional appetizers, but only if you want to feel like an overstuffed samosa by the end of the evening.
An economist eating at Vij’s would notice its use of product bundling. You get the passed appetizers, the chai, the side dishes, the naan, and the main dish all at one price. The free appetizers aren’t really free, of course, because they’re rolled into the menu prices. The classic example of bundling is the Happy Meal. Vij’s is operating on a completely different level in culinary terms, but the principle is still the same: Customers will be happier, spend more money and be more likely to return to the restaurant if you don’t nickel and dime them for every morsel.
If Vij’s decided to start charging a dollar for chai, it would be a disaster. Customers (even new customers who hadn’t been previously exposed to the “free” chai) would be less likely to wait and more likely to go somewhere else, much time would be wasted while diners fumbled for cash and waiters for change and the experience would become less convivial and more commercial.
Before we decide that bundling is the key to happiness, however, let me take you to another restaurant.
Unbundles of noodles
U:Don (pronounced, I’m afraid, “YOU-don”) is a new Japanese noodle place in Seattle’s University District. The University of Washington’s Seattle campus has over 40,000 students and at lunchtime they fan out into the nearby neighborhood in search of teriyaki chicken, burritos, and, especially, noodles.
U:Don features eight different bowls of thick, chewy house-made noodles (they imported a heavy-duty noodle rolling and cutting machine from Japan). All are simple, appealing, and available in three sizes. The cheapest bowl of noodles is $3.75 and the most expensive, a huge tub of curry udon, is $6.75. Our hungry economist, however, is more interested in what happens after you order your noodles.
The next stop at the counter is the a la carte tempura bar, where you can select from over a dozen fried items to go with your noodles. You can eat your tempura on the side or, if you want to be authentic about it, drop it right into your soup. “Food that was crispy until recently” is practically a whole category of Japanese cuisine. All the tempura is individually priced: A piece of eggplant is 99 cents and a single chunk of fried chicken (karaage) is 49 cents.
In other words, they’re doing exactly the opposite of what Vij’s does. If you’re hungry for a medium bowl of noodles and three shrimp, you can buy exactly that. It’s unbundled to the extreme, and customers love it. At least, I do. When I’m looking for a cheap lunch, I don’t want an expensive and probably supersized side dish but I sure wouldn’t mind a piece of fried kabocha squash for a buck.
Oh, there is one freebie at U:Don: a bowl of tenkasu, tempura batter bits, the crispy byproduct of all that frying.
Would you like that bundled or unbundled?
I honestly couldn’t figure out why I enjoyed the bundled experience at Vij’s and the unbundled one at U:Don, so I called Kit Yarrow, who teaches consumer psychology at Golden Gate University. “Easy,” she said, “One restaurant is expensive and the other is cheap.”
“When things are more expensive, you’re already paying the higher price of entry to get in there and everything that comes with it feels like a gift,” says Yarrow. “You wouldn’t necessarily add in all those extra items if you had to pay for them yourself.” Indeed, at Vij’s, entrees clock in north of $25.
“On the other hand,” continues Yarrow, “if it’s cheaper sorts of products, if you can add in something for a dollar, two dollars, or three dollars, then it just feels fun to indulge yourself. What’s going on in both of those equations is that people like the feeling of abundance. They both do a perfect job.”
If I know I’m on the hook for a $28 entree as soon as I walk into Vij’s, the last thing I want is to be upsold on a bunch of extras that will compound the pain of parting with that kind of money. It’s the luxury hotel model: Charge hundreds for the room in order to subsidize all sorts of “free” services.
On the other hand, if I’m going to slurp a $5 bowl of noodles at U:Don, having the opportunity to pick up a few pieces of $1 tempura lights up my brain’s reward center over and over. Instead of one measly bargain, I can get five bargains!
Wait a second, though. Didn’t I say McDonald’s offered the quintessential example of product bundling in the form of the Happy Meal? Yes, yes I did. And aren’t Happy Meals meant to appeal to children, who usually aren’t paying attention to how much their meal costs? That’s why, for grownups, there’s the Dollar Menu. I wasn’t going to get any fries… But wait, it’s only a dollar?
After my noodles, I headed a block south for dessert to Yogurtland, a new self-serve frozen yogurt place. You grab a bowl and pile in as much yogurt and as many toppings as you want, and everything is charged by weight. That’s as unbundled as you can get and the college students love it. And I do, too.
Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.