Case Study TERRA BITE LOUNGE: PAY WHAT YOU WANT CAFE

Synopsis April 20, 2009, Ervin Peretz, the founder and owner of Terra Bite Lounge, a Kirkland, Washington Café, with no prices, was thinking about opening a second location. He believed that Terra Bite was not only an experiment in public honesty, but it was also a visible demonstration of a high level of honesty and trust. He trusted his customers to pay, and they responded to this trust by doing so. There were several decisions major decisions to be made. First, where should next location be? The original Terra Bite was in an affluent suburb, but peretz thought that several types of neighbourhoods would be receptive. Second, besides his general trust and belief in the good of all people, Peretz wondered what kind of consumer characteristics would be suited for this type of model. Lastly, was there anything that he could add to the existing Terra Bite model that would make it more successful?

Questions What is the retail value proposition for Terra Bite? Can Terra Bite Survive in the long run? Can it thrive? Can such a concept be replicated in India? If yes, which location would you prefer to open up a store and why? If no, give reasons? When can a retailer use a voluntary pricing strategy?

Probable Answers It is combination of price, selection, convenience and experience. It is not just price. Retailers that emphasize price typically do so by trying to provide the lowest price to their customers and compete instead of volume. Terra bite is not attempting this. Its focus is on the customer experience, with the goal of creating an inclusive, highly efficient experience that can then spread through society. Café offers Wi-Fi, free console games and a good reading selection. They proactively exclude those who ruin their experience for others: They have begun excluding unsupervised youths, especially groups of youth, because some are too abusive, destructive and distracting. Being trusted to pay what they think is right also, adds to the consumers’ experience factor by making them part of the process.

Contd.. View 1: Pricing scheme is a fad that will ultimately lead to the failure of Terra Bite. Reasons are likely to include: Freeloading customers Difficulty in differentiating Can only pricing scheme work Similar products in other café chains Easy for competitors to adopt a similar strategy Power of large café chains Exclusive supplier relationship Volume discounts Greater financial resources View 2: Terra Bite has few significant advantages- Trust of its customers Intimate customer relationship Customer loyalty

Contd.. Voluntary pricing strategy may work- Consumers are likely to accept this type of payment scheme only from a retailer they trust. Retailer must have certain level of trust and good intentions for the consumers. From a pricing perspective, this model depends upon consumers having a reference price for what they are buying i.e. an internal price idea of what they feel the product is worth. Reference prices are developed through experience, so such a strategy will likely to work only for those products where consumers have strong reference prices. Without reference price guiding their payment, customer would become confuse and even distressed about underpaying or overpaying.