April 9, 2021 • 35 mins
Pepsi twice ended up in court after promotions went disastrously wrong. Other big companies have fallen into the same trap - promising customers rewards so generous that to fulfil the promise might mean corporate bankruptcy.
Businesses and customers alike are sometimes blinded by the big numbers in such PR stunts - but it's usually the customers, not the businesses, who end up losing out.
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Episode Transcript
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Speaker 1 (00:15):
Pushkin in a tin roof chack in a slum of Manila,
the capital of the Philippines. Victoria Angelo lived with her husband, Puanito,
(00:38):
and their five children. Puanito was a rickshaw driver. He
made around four dollars a day. Life was a daily grind.
Hard work alone offered no route out of poverty. So
when the Pepsi Cola company started a new promotion in
nineteen ninety two, Victoria took notice. Number fever seemed easy
(01:01):
to understand by a bottle of Pepsi, and under the
bottle cap you'd see printed a three digit number and
a cash prize amount. Every night, on the Channel two
TV news program, Pepsi would announce a winning number. If
you had a bottle cap with that number, you'd win
(01:21):
the amount shown. The prizes went up to a million
paceos some forty thousand dollars. It would take Juanito thirty
years to earn that. Victoria started buying Pepsi. Every night,
she watched Channel two for the announcement of the winning number,
and she checked her growing collection of bottle caps, and
(01:45):
every night she was disappointed until one night the television
announced the number three four nine hold on Victoria was
sure she had a bottle cap marked three for nine.
Here it is. Now, what's the amount on the cap?
One million paceos. You can feelish school, you can get
(02:10):
the gullege. She told her children. We can buy a
real house. It seemed like a dream come true. But
unknown to Victoria, something very strange was happening in homes
all across the Philippines. Exactly the same scene was playing out.
Families were watching Channel two checking their collection of bottle caps,
(02:33):
discovering that they had one printed with three for nine
and a million Paco prize, and celebrating their incredible good fortune.
What had happened, It's not clear exactly. Instead of printing
just two bottle caps with three for nine on them,
they'd accidentally printed hundreds of thousands, and nobody at PEPSI
(02:55):
had noticed the problem. But three for nine had just
been announced as a winning number. PEPSI would notice the
problem soon enough. I'm Tim Harford and you're listening to
cautionary tales. In Worcester, England, a physicist called Phil Calcutt
(03:36):
was doing his regular shop at his local supermarket Tesco.
As he strolled down the fruit tile, a special offer
caught his attention. Buy a bunch of bananas and get
twenty five Tesco club card points. The bananas cost one
pound and seventeen pence. The points were worth fivepence each.
Mister Calcutt did the math. He'd get club card points
(03:59):
worth eight pence more than the bananas cost. Could that
be right? He double checked his mental arithmetic. Yes, he'd
make a profit of eightpence on every bunch of bananas
he bought. So mister Calcott piled his trolley seven feet
high with bananas. Then he got another trolley and filled
that with bananas too. My living room was stacked from
(04:22):
floor to ceiling with twenty five cases containing around three
thousand bananas. But when I popped back for some more,
they said they would only sell me one case, which
is quite understandable because they seemed to be making a
loss on it. When he'd redeemed his Tesco club card points,
mister Calcott ended up with a profit of twenty five
pounds and twelvepence, a modest sum, perhaps, but far more
(04:47):
valuable was all the fun he had distributing free bananas
like some comic book superhero around his neighborhood. Children in
the street. Now shout banana man whenever they see me.
Whoever in Tesco's marketing department had proposed that promotion evidently
(05:07):
hadn't done the math, nor had the manager who signed
off on it, nor had any of Tesco's millions of
other customers. Only one man had noticed banana man. Is
that surprising? Probably not if you're the mathematician John Allan Paulos,
who wrote the classic book in Numeracy. Paulos tells the
(05:31):
story of watching the TV news with a friend, a
notoriously pedantic friend, the sort who'd correct you for saying
continuously when you mean continually. The weather forecast came on.
There's a fifty percent chance of rain on Saturday and
a fifty percent chance on Sunday, so there's certain to
(05:52):
be rain this weekend. Paulos turned to his friend. Did
you hear that? How embarrassing? What was I'm sure you've
noticed the forecasters mistake. In fact, there's a one in
four chance of no rain, the same probability of flipping
a coin twice and getting two tails. It's the seventy
(06:12):
five percent years of weekend rain. Obviously it is. I mean,
oh yeah, sure, when it comes to numbers, said Paulos.
Even the smartest among us are unobservant. Companies know that
they take advantage of it all the time. We see
the low monthly payment in big type and forget to
(06:32):
multiply by the number of months we keep paying our
monthly gym membership instead of dividing it by our monthly visits,
and seeing we should switch to pay as you go.
We buy extended warranties on household appliances when some simple
probability would suggest we should take our chances. Number fever
(06:53):
played on that numerical laziness. Flip the cap off your
bottle of PEPSI, see a three digit number and a
million pay so prize, and you might naturally get the
impression that you have a one in a thousand chance
of winning. Not too shabby and not of course, think
about it, and you'd quickly realize that Pepsi must have
(07:14):
printed far more losing numbers than winning ones, wouldn't they
The true chance of winning was vastly smaller than one
in a thousand. When consumers fail to do the sums,
we get screwed. But what happens when it's the companies
that mess up? As we'll see the answer is often
(07:36):
that consumers still get screwed, often, but not always. An
engineer called David Phillips was shopping in his local supermarket
in Davis, California, in nineteen ninety nine. He noticed a
(07:56):
new promotion by a food brand called Healthy Choice. Send
in ten barcodes from their products and they'd give you
five hundred air miles. They'd double it to a thousand
if you sent them in before a certain deadline. Just
like banana man Phil Calcutt, mister Phillips paused to do
the math. How much is an air mile worth? That
(08:18):
can vary depending on how you redeem them, but Phillips
calculated one air mile was surely worth at least two cents.
His family liked Healthy Choice frozen meals, which cost two dollars.
Ten frozen meals twenty dollars. Send in the barcodes and
he'd get a thousand air miles, also worth at least
(08:39):
twenty dollars. Who said there was no such thing as
a free lunch, Phillips filled his freezer. Then he thought,
what else is in the Healthy Choice product line? If
he could find products for cheaper than two dollars, he'd
be getting back more in air miles than he would
spend on the food. I found Healthy Choice soups that
(09:02):
were less than a dollar tin soup perfect, it would
keep forever and didn't need more freezer space. David bought
all the Healthy Choice soups in his local supermarket. Then
he went to other nearby supermarkets and bought all their
Healthy Choice soups too. Soon he had accumulated eight hundred
(09:22):
cans of soup. By this point, David's wife, Cindy was
wondering if this might all be a little too good
to be true. Are you sure you haven't missed something
in the small print? Maybe there's a limit on how
many miles you can claim. David poured over the terms
and conditions. In return. For every ten barcodes and proof
(09:43):
of purchase, it said Healthy Choice would issue a certificate
for air miles. The certificates could be redeemed with six
different airlines, and while two of them did indeed stipulate
a limit on how many certificates they would redeem, the
other four didn't. In fact, the offer told consumers to
remember there was no limit to the number of miles
(10:05):
they could earn with just three weeks to go. For
the deadline, mister Phillips stumbled on a startling new opportunity.
One supermarket chain grocery outlet had started selling Healthy Choice
chocolate puddings for just twenty five cents. Remember, Healthy Choice
(10:26):
was effectively offering air miles worth at least two dollars
on every one of those puddings. There was no time
to lose. I drove to about fifteen grocery store outlet
stores in a weekend. I filled up my van with
chocolate pudding. After that, I made contact with a local
grocery store outlet manager had him special order me sixty
more cases. David Phillips now had over twelve thousand chocolate
(10:52):
puddings and a problem. Two problems in fact, how would
his family ever eat all those puddings? The second problem
was more pressing, how would he managed to peel off
twelve thousand barcodes in just three weeks? But mister Phillips
was a resourceful man, and he realized he could solve
(11:14):
both problems at once. He contacted his local food bank
and offered to donate all the chocolate puddings if their
volunteers would do him the favor of taking off the
barcodes for him. They said yes. Phillips meticulously organized his
barcodes into bundles of ten and filled in the claims
(11:35):
forms over a thousand of them, enough for over a
million air miles. That would basically be all the long
haul holidays his family could ever want. David Phillips posted
off his barcodes and waited. There was no immediate reply
from Healthy Choice, but he had read the small print
(11:58):
that said it would take six to eight weeks for
the air mile certificates to arrive. Six weeks past, then
eight weeks. Now, Phillips was to get worried. With still
no response from Healthy Choice, he phoned them up Disaster.
They said they had no record of receiving any barcodes
(12:22):
from him at all. Cautionary tales will return after this message.
After Channel two News announced that three four nine was
(12:43):
the winning number on the Pepsi bottle tops, crowds of
jubilant customers descended on Pepsi plants to claim their prizes.
It soon became clear that something had gone horribly wrong.
How much would it cost Pepsi to honor all the prizes?
Upwards of fifteen billion dollars It was roughly half the
(13:08):
Philippines gross domestic product. More to the point, it was
close to the entire market capitalization of the Pepsi Corporation,
not just in the Philippines but the whole world. There
was simply no way that Pepsi could afford it. Panicked
executives held a crisis meeting at three o'clock in the morning.
(13:29):
They apologized for the computer glitch. They pointed out that
every bottle cap also contained a security code, and explained
that this would identify the two bottle caps they had
intended to be winners, and for everyone else with a
three four nine bottle top, they decided to offer a
goodwill payment of five hundred pasos, a mere twenty dollars.
(13:55):
The bottle tops came flooding in four hundred and eighty
six thousand, one hundred and seventy of them. The goodwill
payments cost PEPSI about ten million dollars, five times what
they'd initially budgeted for the tire number fever campaign, but
it wasn't enough to quell everyone's outrage. Thousands of people
(14:16):
kept hold of their three four nine bottle tops. They'd
thought their lives were about to change forever. Now they
were being offered just twenty dollars. That wasn't going to
buy their goodwill. They were determined to make PEPSI pay.
(14:38):
David Phillips was determined two. He'd gone to all that trouble,
buying eight hundred tins of soup and twelve thousand chocolate puddings,
organizing all the barcodes, filling in all the forms, and
now he learned that the package he had sent to
Healthy Choice had apparently gone missing. This seemed pretty incredible,
(15:00):
given that I mailed the package registered and someone on
their end signed for the package. But would a man
as meticulous as David Phillips failed to plan for that
eventuality Not likely. Phillips had photocopied everything. He'd even videotaped
himself buying the chocolate puddings and stacking them up in
(15:22):
his house, just to be on the safe side. Presented
with this evidence, Healthy Choice quickly caved. Mister Phillips got
his air miles think for a moment about what David
Phillips did. He hadn't just done one calculation, the numerical
(15:43):
one that showed the sums on the chocolate puddings didn't
add up. He'd made a second kind of calculation, too,
a pragmatic calculation about how things work in the real world.
All along, I was somewhat worried that Healthy Choice wouldn't
honor the deal. Packages do sometimes go missing, It's true,
(16:03):
so he'd taken practical steps to make it expensive for
Healthy Choice to refuse him his air miles, ensuring that
if the company tried to back out of the deal,
the media would have a field day with the story. Companies, too,
make both kinds of calculations about their marketing offers, numerical
and pragmatic. Sometimes they fall down on the numbers. It
(16:27):
makes no sense to pay shoppers to buy bananas, But
on some marketing offers, they know the numbers wouldn't add
up if everyone took advantage, and they rely on the
pragmatic calculation that many customers won't bother. That's what's happening
when retailers offer rebates on a purchase. Rather than simply
(16:48):
reduce the price, they make you pay full price, then
mail off the receipt or the barcode to claim your rebate.
Whether such promotions pay off depends on what proportion of
customers actually do claim. There's even a term of art
for the percentage of consumers who fail to follow through
(17:09):
a breakage rate. Marketing professors Tim Silk and Chris Yanishevski
study the factors that affect breakage rates. There are principles
from psychology textbooks, such as hyperbolic discounting. That's the tendency
to put higher value on more immediate rewards. Promise a
rebate check quickly and you'll motivate people to apply. Promise
(17:32):
it in six to eight weeks, and maybe they won't
bother then there are sneaky little tricks putting the barcode
on tough, thick cardboard that's hard to cut with household scissors.
Increasing the breakage rate is a serious and cynical business.
When the UK branch of Hoover launched a big new
(17:53):
promotion in nineteen ninety two, they gambled on a high
breakage rate. They were offering two free flights to Europe
to anyone who spent one hundred pounds on a Hoover appliance.
That's about two hundred and fifty dollars in today's money.
It's not a bad deal at all. In fact, it's
such a good deal that Hoover knew they couldn't afford
(18:16):
for too many customers to take up the offer, so
they made it logistically difficult. You had to snail mail
the receipt for the item you'd purchased and wait for
Hoover to send you a form, fill that in, and
wait for Hoover to send you a voucher. Then you
had to choose three possible dates and destinations and wait
for Hoover to let you know if any of them
(18:36):
were available, and on and on. Only the most determined
customers had the patients to persevere to the point where
they actually got on a plane. It looks like Hoover
managed to keep the breakage rate high enough to make
their giveaway deal profitable. Then Hoover became overconfident they decided
(18:59):
to expand the offer to include flights to America. This
was a much bigger incentive to return. Flights from Britain
to America cost about five times the price of a
Hoover vacuum cleaner, and Hoover's pragmatic calculation about breakage was
way off. Beam far more people applied for flights than
(19:21):
they'd expected. Crucially, the applicants also proved far more tenacious
than Hoover had hoped, many initially heard nothing back. When
they followed up, Hoover said their application forms must have
been lost in the post. They became frustrated and suspicious.
(19:42):
David Dixon, a horse trainer in Cumbria, was among the
disgruntled customers who had bought a Hoover appliance a washing
machine in his case, and then had trouble claiming his
free flights to America. I have fucked them, I have
retner them, I have formed them, And then, to add
insult to injury, his washing machine broke down. Hoover sent
(20:05):
a technician who failed to sympathize with mister Dixon and plight.
According to the technician, the offer was obviously too good
to be true. Mister Dixon should surely have realized there
must be some kind of catch. If do you think
bang a washing machines are going to get you two
tickets to America, you must be an idiot, an idiote.
(20:26):
We'll see about that. While the technician was fixing his
washing machine, mister Dixon drove his horsebox in front of
the Hoover truck, blocking it in. He told the technician
to walk home and pass on a message to his employers, well,
I'll get me tickets. They'll get there vun. Mister Dixon
(20:46):
became something of a folk hero. The BBC meanwhile sent
an undercover reporter to investigate what was going on. She
got a job in the agency that was processing the
applications for free flights on who was behalf. It went
something like this, So what would you like me to do.
Here's a list of people, contact them and offer them
(21:08):
flights London. These people all live in Glasgow. That's four
hundred miles from London. That's right. But the person sitting
next to me is phoning people who live in London
and telling them we can only offer them flights from Glasgow.
He gets you one fast love. When the BBC investigation
was broadcast, it did not play well for Hoover. They
(21:31):
eventually begrudgingly bought over two hundred thousand flights at a
cost of over seventy million dollars. The majority of customers
had given up without getting their flights, but the company's
reputation had taken a hit, so had their market share
in the UK. Part of the problem was that anyone
(21:52):
who wanted a Hoover appliance could find plenty of attractive
deals in the classified ads never used still in their
original packaging. People had bought them just to get the
air tickets. No wonder Hoover's parent company, the executives who
had approved the promotion and quietly sold off the European
(22:14):
arm of the company for a knock down price. For
Pepsi executives in the Philippines, merely getting fired might have
seemed like a relief compared to the continuing disaster of
number fever. They were getting so many death threats they
needed round the clock security. Pepsi erected barbed wire barricades
(22:36):
around its processing plants. Dozens of its trucks were attacked.
In one tragic case, a grenade thrown at a Pepsi
truck in Manila bounced off and killed a schoolteacher and
a five year old girl. The small print of the
number fever adverts did mention the existence of a security
(22:58):
code on the bottle tops, but was it sufficiently clear
that the prize depended on the security code, not just
on the three digit number. PEPSI found itself fighting thousands
of lawsuits after this message. Cautionary tales will return, even
(23:24):
as the number fever lawsuits raged on. Pepsi found itself
once again in a numerical dispute described in Matt Parker's
book of mathematical mishaps, Humble Pie. This dispute followed yet
another promotion called Pepsi Points, this time running in the
United States. A thirty second advert starts with the caption Monday,
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seven fifty eight am and an external shot of an
ordinary suburban house. Cut to the inside of the house,
A cool young dude is wearing a T shirt with
a Pepsi logo. He slicks back his hair, T shirt
seventy five Pepsi points flashes the on screen caption. He
dons a leather jacket. Leather jacket fourteen hundred and fifty
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Pepsi points, ongo, the sunglasses one hundred and seventy five
Pepsi points. Then a voiceover the introduce Pepsi stuffed chaveler.
Now the more Pepsi a drink club, more of great stuff.
You're going again. Meanwhile, on screen, there's a school classroom.
(24:35):
From outside, there's some kind of loud noise and strong
wind blowing books and papers everywhere. Other students watch in
amazement as the cool dude arrives in a Harrier jump
jet doing a vertical landing in the school yard. He
steps out sipping a can of Pepsi, and on screen
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Harrier Fighter seven million Pepsi points. Sure beat the bush? Yes,
very good? Held on? Has anyone done the math on this?
A can of Pepsi was one point, but once you
had a few points from Pepsi purchases, you could buy
(25:18):
additional points for ten cents apiece, So a T shirt
at seventy five points was effectively seven dollars fifty fair enough,
a leather jacket one hundred and forty five dollars not unreasonable.
And a Harrier Fighter, let's see seven million times ten cents,
that's seven hundred thousand dollars. Doesn't that sound cheap for
(25:43):
a fighter jet? The US military paid over twenty million
dollars for each of its AV eight Harrier two jump jets.
If you could get one from Pepsi for seven hundred
thousand dollars, that would be an absolute steal. There are
(26:04):
a few cultures now very rare, whose counting words only
cover one two big number, but that's because they rarely
need to talk about large numbers. Modern marketing executives do,
and yet when it came to the Harrier, Pepsi's decision
makers were helpless. Once those Pepsi points started mounting up,
(26:28):
all they could seem to think was big number. Enter
twenty one year old business student John Leonard. He somehow
raised seven hundred thousand dollars, which he deposited with a lawyer.
He bought fifteen cans of Pepsi and sent off his
fifteen Pepsi points with a check for seven hundred thousand
(26:50):
and eight dollars and fifty cents. That was to cover
the remaining six million, nine hundred ninety nine, nine hundred
and eighty five Pepsi points plus the ten dollars delivery charge.
Pepsi wrote back politely, the item that you have requested
is not included the catalog or on the order form
(27:11):
the Harrier jet and the Pepsi commercials. Fanciful. We apologize
for any misunderstanding or confusion that you may have experienced.
Mister Leonard had his lawyer swing into action. Your letter
of May seven, nineteen ninety six is totally unacceptable. We
have reviewed the videotape at the Pepsi stuff commercial and
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it clearly offers the new Harrier jet for seven million
PEPSI points. This as a formal demand that you honor
your commitment and make immediate arrangements to transfer the new
Harrier Jet to our client. The case went to court,
where District Judge Kimba Wood had to decide if the
(27:54):
advert was serious. She came to the understandable conclusion that
it wasn't. The callow youth featured in the commercial is
a highly improbable pilot. The teenage's comment that flying a
Harrier Jet to school sure beats the bus evinces an
(28:16):
improbably ensusian attitude toward the relative difficulty and danger of
piloting a fighter plane in a residential area as opposed
to taking public transportation. Might some other court take a
different view? Probably not, But Pepsi decided to edit its
(28:37):
commercial just in case. Harrier now cost seven hundred million
PEPSI points. Again big number, but this time big enough.
I assume John Leonard knew that his chance of winning
the case was small, and that if he lost, there'd
be lawyers fees to pay. It must have been a
(28:59):
calculated gamble. Judge Kimbawood summed up why she wasn't letting
that gamble pay off. An objective reasonable person would conclude
that purchasing a fighter plane for seven hundred thousand dollars
is a deal too good to be true. Fair enough,
(29:20):
But can we predict if a corporate marketing bungle is
likely to have a happy ending? Can we come up
with a taxonomy of the too good to be true
from these stories? Perhaps we can. It's all about that
pragmatic calculation. Imagine if you will a tool beloved by
marketing types, a two by two matrix, how much will
(29:43):
it cost the company to pay up and how bad
will it make the company look to wriggle out? In
one corner, expensive promises with an easy get out. In
this corner is John Leonard with his video of the
Pepsi staff ad Harrier jets are expensive and did it
make Pepsi look unreasonable to fight the case? Not really.
(30:07):
At the other extreme, cheap promises with no means of escape,
here stands David Phillips with his stack of chocolate puddings.
Giving one customer a pile of air miles wasn't especially
expensive set against the entire healthy choice marketing campaign, and
thanks to his videotape, they could hardly wriggle out. The
(30:30):
other two corners of the two by two matrix are
more ambiguous. Giving Tesco club card points to banana man
was a trivial expense, but nobody would have cared much
if they'd refused. The financial stakes were low, and so
were the publicity stakes. It could have gone either way.
Tesco's one crate banana limit seems a reasonable compromise. It
(30:54):
can also go either way when both stakes are high.
That's why some Hoover buyers got their flights and some didn't.
It was the worst possible combination for any company. They
looked awful for trying to wriggle out of their own promises,
and those they were forced to keep were ruinously expensive.
(31:15):
But perhaps Hoovers marketers had always had their doubts deep down.
The tagline for their free flights campaign was two return
seats Unbelievable. In the Philippines, number fever left the three
four nine bottletop holders facing their own pragmatic calculation. Take
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Pepsi's goodwill twenty dollars or fight. Fifteen thousand Filipinos joined
a pressure group called Coalition three four nine, set up
by Vicente Delfiero junior, a public relations consultant and a
fiery preacher. Mister Delfierro flew to New York to file
(31:59):
yet another lawsuit against Pepsi, modestly describing himself as a
Philippino or Don Quixote, a biblical David growing up again
Stagg Global Goliath. The Pepsi three for nine fiasco mirrors
how irresponsible multinational organizations abuse consumers in developing countries. Vicente
(32:22):
del Piero was tapping into a sense of injustice that
runs much deeper than one botched soft drinks promotion. Recall
what the thought of winning a million pasos had meant
to Victoria Angelo. You can finish school, we can buy
a real house. These shouldn't be unrealistic ambitions for anyone.
(32:47):
But it's hardly Peps's fault that life is so unfair.
And was it ever really likely that a court would
make PEPSI pay a sum that was almost its entire
market value? Remember, nearly half a million bottletop holders had
accepted the good will payment, far more than joined mister
Delfierro's coalition. The aragmatically calculated that this was the most
(33:11):
PEPSI could reasonably be expected to do after well over
a decade of legal wrangles, the courts agreed it would
be wonderful to imagine a bottletop printing error lifting hundreds
of thousands of Filipinos out of poverty. That that was
always going to be too good to be true. Key
(33:41):
sources for this episode include reporting from the Los Angeles Times,
the BBC, and The Independent, and a paper on consumer
rebates in the Stamford Journal of Law, Business and Finance.
For a full list of references, see Tim Harford dot com.
Cautionary Tales is written by me Tim Harford with Andrew Wright.
(34:02):
It's produced by Ryan Dilley and Marilyn Rust. The sound
design and original music is the work of Pascal Wise.
Julia Barton edited the scripts. Starring in this series of
Cautionary Tales Helena Bonham, Carter and Jeffrey Wright, alongside Nazzar Elderazzi,
Ed Gochen, Melanie Gutteridge, Rachel Hanshaw, copnaholbrook Smith, Greg Lockett,
(34:27):
Messiah Munroe and Rufleus Wright. This show wouldn't have been
possible without the work of mil LaBelle, Jacob Weisberg, Heather Fane,
John Schnarz, Carlin mcgliory, Eric Sandler, Emily Rostick, Maggie Taylor
and Yellow Lakhan and Maya Kanick. Cautionary Tales is a
(34:48):
production of Pushkin Industries. If you like the show, please
remember to rate, share, and review.
Pushkin in a tin roof chack in a slum of Manila,
the capital of the Philippines. Victoria Angelo lived with her husband, Puanito,
(00:38):
and their five children. Puanito was a rickshaw driver. He
made around four dollars a day. Life was a daily grind.
Hard work alone offered no route out of poverty. So
when the Pepsi Cola company started a new promotion in
nineteen ninety two, Victoria took notice. Number fever seemed easy
(01:01):
to understand by a bottle of Pepsi, and under the
bottle cap you'd see printed a three digit number and
a cash prize amount. Every night, on the Channel two
TV news program, Pepsi would announce a winning number. If
you had a bottle cap with that number, you'd win
(01:21):
the amount shown. The prizes went up to a million
paceos some forty thousand dollars. It would take Juanito thirty
years to earn that. Victoria started buying Pepsi. Every night,
she watched Channel two for the announcement of the winning number,
and she checked her growing collection of bottle caps, and
(01:45):
every night she was disappointed until one night the television
announced the number three four nine hold on Victoria was
sure she had a bottle cap marked three for nine.
Here it is. Now, what's the amount on the cap?
One million paceos. You can feelish school, you can get
(02:10):
the gullege. She told her children. We can buy a
real house. It seemed like a dream come true. But
unknown to Victoria, something very strange was happening in homes
all across the Philippines. Exactly the same scene was playing out.
Families were watching Channel two checking their collection of bottle caps,
(02:33):
discovering that they had one printed with three for nine
and a million Paco prize, and celebrating their incredible good fortune.
What had happened, It's not clear exactly. Instead of printing
just two bottle caps with three for nine on them,
they'd accidentally printed hundreds of thousands, and nobody at PEPSI
(02:55):
had noticed the problem. But three for nine had just
been announced as a winning number. PEPSI would notice the
problem soon enough. I'm Tim Harford and you're listening to
cautionary tales. In Worcester, England, a physicist called Phil Calcutt
(03:36):
was doing his regular shop at his local supermarket Tesco.
As he strolled down the fruit tile, a special offer
caught his attention. Buy a bunch of bananas and get
twenty five Tesco club card points. The bananas cost one
pound and seventeen pence. The points were worth fivepence each.
Mister Calcutt did the math. He'd get club card points
(03:59):
worth eight pence more than the bananas cost. Could that
be right? He double checked his mental arithmetic. Yes, he'd
make a profit of eightpence on every bunch of bananas
he bought. So mister Calcott piled his trolley seven feet
high with bananas. Then he got another trolley and filled
that with bananas too. My living room was stacked from
(04:22):
floor to ceiling with twenty five cases containing around three
thousand bananas. But when I popped back for some more,
they said they would only sell me one case, which
is quite understandable because they seemed to be making a
loss on it. When he'd redeemed his Tesco club card points,
mister Calcott ended up with a profit of twenty five
pounds and twelvepence, a modest sum, perhaps, but far more
(04:47):
valuable was all the fun he had distributing free bananas
like some comic book superhero around his neighborhood. Children in
the street. Now shout banana man whenever they see me.
Whoever in Tesco's marketing department had proposed that promotion evidently
(05:07):
hadn't done the math, nor had the manager who signed
off on it, nor had any of Tesco's millions of
other customers. Only one man had noticed banana man. Is
that surprising? Probably not if you're the mathematician John Allan Paulos,
who wrote the classic book in Numeracy. Paulos tells the
(05:31):
story of watching the TV news with a friend, a
notoriously pedantic friend, the sort who'd correct you for saying
continuously when you mean continually. The weather forecast came on.
There's a fifty percent chance of rain on Saturday and
a fifty percent chance on Sunday, so there's certain to
(05:52):
be rain this weekend. Paulos turned to his friend. Did
you hear that? How embarrassing? What was I'm sure you've
noticed the forecasters mistake. In fact, there's a one in
four chance of no rain, the same probability of flipping
a coin twice and getting two tails. It's the seventy
(06:12):
five percent years of weekend rain. Obviously it is. I mean,
oh yeah, sure, when it comes to numbers, said Paulos.
Even the smartest among us are unobservant. Companies know that
they take advantage of it all the time. We see
the low monthly payment in big type and forget to
(06:32):
multiply by the number of months we keep paying our
monthly gym membership instead of dividing it by our monthly visits,
and seeing we should switch to pay as you go.
We buy extended warranties on household appliances when some simple
probability would suggest we should take our chances. Number fever
(06:53):
played on that numerical laziness. Flip the cap off your
bottle of PEPSI, see a three digit number and a
million pay so prize, and you might naturally get the
impression that you have a one in a thousand chance
of winning. Not too shabby and not of course, think
about it, and you'd quickly realize that Pepsi must have
(07:14):
printed far more losing numbers than winning ones, wouldn't they
The true chance of winning was vastly smaller than one
in a thousand. When consumers fail to do the sums,
we get screwed. But what happens when it's the companies
that mess up? As we'll see the answer is often
(07:36):
that consumers still get screwed, often, but not always. An
engineer called David Phillips was shopping in his local supermarket
in Davis, California, in nineteen ninety nine. He noticed a
(07:56):
new promotion by a food brand called Healthy Choice. Send
in ten barcodes from their products and they'd give you
five hundred air miles. They'd double it to a thousand
if you sent them in before a certain deadline. Just
like banana man Phil Calcutt, mister Phillips paused to do
the math. How much is an air mile worth? That
(08:18):
can vary depending on how you redeem them, but Phillips
calculated one air mile was surely worth at least two cents.
His family liked Healthy Choice frozen meals, which cost two dollars.
Ten frozen meals twenty dollars. Send in the barcodes and
he'd get a thousand air miles, also worth at least
(08:39):
twenty dollars. Who said there was no such thing as
a free lunch, Phillips filled his freezer. Then he thought,
what else is in the Healthy Choice product line? If
he could find products for cheaper than two dollars, he'd
be getting back more in air miles than he would
spend on the food. I found Healthy Choice soups that
(09:02):
were less than a dollar tin soup perfect, it would
keep forever and didn't need more freezer space. David bought
all the Healthy Choice soups in his local supermarket. Then
he went to other nearby supermarkets and bought all their
Healthy Choice soups too. Soon he had accumulated eight hundred
(09:22):
cans of soup. By this point, David's wife, Cindy was
wondering if this might all be a little too good
to be true. Are you sure you haven't missed something
in the small print? Maybe there's a limit on how
many miles you can claim. David poured over the terms
and conditions. In return. For every ten barcodes and proof
(09:43):
of purchase, it said Healthy Choice would issue a certificate
for air miles. The certificates could be redeemed with six
different airlines, and while two of them did indeed stipulate
a limit on how many certificates they would redeem, the
other four didn't. In fact, the offer told consumers to
remember there was no limit to the number of miles
(10:05):
they could earn with just three weeks to go. For
the deadline, mister Phillips stumbled on a startling new opportunity.
One supermarket chain grocery outlet had started selling Healthy Choice
chocolate puddings for just twenty five cents. Remember, Healthy Choice
(10:26):
was effectively offering air miles worth at least two dollars
on every one of those puddings. There was no time
to lose. I drove to about fifteen grocery store outlet
stores in a weekend. I filled up my van with
chocolate pudding. After that, I made contact with a local
grocery store outlet manager had him special order me sixty
more cases. David Phillips now had over twelve thousand chocolate
(10:52):
puddings and a problem. Two problems in fact, how would
his family ever eat all those puddings? The second problem
was more pressing, how would he managed to peel off
twelve thousand barcodes in just three weeks? But mister Phillips
was a resourceful man, and he realized he could solve
(11:14):
both problems at once. He contacted his local food bank
and offered to donate all the chocolate puddings if their
volunteers would do him the favor of taking off the
barcodes for him. They said yes. Phillips meticulously organized his
barcodes into bundles of ten and filled in the claims
(11:35):
forms over a thousand of them, enough for over a
million air miles. That would basically be all the long
haul holidays his family could ever want. David Phillips posted
off his barcodes and waited. There was no immediate reply
from Healthy Choice, but he had read the small print
(11:58):
that said it would take six to eight weeks for
the air mile certificates to arrive. Six weeks past, then
eight weeks. Now, Phillips was to get worried. With still
no response from Healthy Choice, he phoned them up Disaster.
They said they had no record of receiving any barcodes
(12:22):
from him at all. Cautionary tales will return after this message.
After Channel two News announced that three four nine was
(12:43):
the winning number on the Pepsi bottle tops, crowds of
jubilant customers descended on Pepsi plants to claim their prizes.
It soon became clear that something had gone horribly wrong.
How much would it cost Pepsi to honor all the prizes?
Upwards of fifteen billion dollars It was roughly half the
(13:08):
Philippines gross domestic product. More to the point, it was
close to the entire market capitalization of the Pepsi Corporation,
not just in the Philippines but the whole world. There
was simply no way that Pepsi could afford it. Panicked
executives held a crisis meeting at three o'clock in the morning.
(13:29):
They apologized for the computer glitch. They pointed out that
every bottle cap also contained a security code, and explained
that this would identify the two bottle caps they had
intended to be winners, and for everyone else with a
three four nine bottle top, they decided to offer a
goodwill payment of five hundred pasos, a mere twenty dollars.
(13:55):
The bottle tops came flooding in four hundred and eighty
six thousand, one hundred and seventy of them. The goodwill
payments cost PEPSI about ten million dollars, five times what
they'd initially budgeted for the tire number fever campaign, but
it wasn't enough to quell everyone's outrage. Thousands of people
(14:16):
kept hold of their three four nine bottle tops. They'd
thought their lives were about to change forever. Now they
were being offered just twenty dollars. That wasn't going to
buy their goodwill. They were determined to make PEPSI pay.
(14:38):
David Phillips was determined two. He'd gone to all that trouble,
buying eight hundred tins of soup and twelve thousand chocolate puddings,
organizing all the barcodes, filling in all the forms, and
now he learned that the package he had sent to
Healthy Choice had apparently gone missing. This seemed pretty incredible,
(15:00):
given that I mailed the package registered and someone on
their end signed for the package. But would a man
as meticulous as David Phillips failed to plan for that
eventuality Not likely. Phillips had photocopied everything. He'd even videotaped
himself buying the chocolate puddings and stacking them up in
(15:22):
his house, just to be on the safe side. Presented
with this evidence, Healthy Choice quickly caved. Mister Phillips got
his air miles think for a moment about what David
Phillips did. He hadn't just done one calculation, the numerical
(15:43):
one that showed the sums on the chocolate puddings didn't
add up. He'd made a second kind of calculation, too,
a pragmatic calculation about how things work in the real world.
All along, I was somewhat worried that Healthy Choice wouldn't
honor the deal. Packages do sometimes go missing, It's true,
(16:03):
so he'd taken practical steps to make it expensive for
Healthy Choice to refuse him his air miles, ensuring that
if the company tried to back out of the deal,
the media would have a field day with the story. Companies, too,
make both kinds of calculations about their marketing offers, numerical
and pragmatic. Sometimes they fall down on the numbers. It
(16:27):
makes no sense to pay shoppers to buy bananas, But
on some marketing offers, they know the numbers wouldn't add
up if everyone took advantage, and they rely on the
pragmatic calculation that many customers won't bother. That's what's happening
when retailers offer rebates on a purchase. Rather than simply
(16:48):
reduce the price, they make you pay full price, then
mail off the receipt or the barcode to claim your rebate.
Whether such promotions pay off depends on what proportion of
customers actually do claim. There's even a term of art
for the percentage of consumers who fail to follow through
(17:09):
a breakage rate. Marketing professors Tim Silk and Chris Yanishevski
study the factors that affect breakage rates. There are principles
from psychology textbooks, such as hyperbolic discounting. That's the tendency
to put higher value on more immediate rewards. Promise a
rebate check quickly and you'll motivate people to apply. Promise
(17:32):
it in six to eight weeks, and maybe they won't
bother then there are sneaky little tricks putting the barcode
on tough, thick cardboard that's hard to cut with household scissors.
Increasing the breakage rate is a serious and cynical business.
When the UK branch of Hoover launched a big new
(17:53):
promotion in nineteen ninety two, they gambled on a high
breakage rate. They were offering two free flights to Europe
to anyone who spent one hundred pounds on a Hoover appliance.
That's about two hundred and fifty dollars in today's money.
It's not a bad deal at all. In fact, it's
such a good deal that Hoover knew they couldn't afford
(18:16):
for too many customers to take up the offer, so
they made it logistically difficult. You had to snail mail
the receipt for the item you'd purchased and wait for
Hoover to send you a form, fill that in, and
wait for Hoover to send you a voucher. Then you
had to choose three possible dates and destinations and wait
for Hoover to let you know if any of them
(18:36):
were available, and on and on. Only the most determined
customers had the patients to persevere to the point where
they actually got on a plane. It looks like Hoover
managed to keep the breakage rate high enough to make
their giveaway deal profitable. Then Hoover became overconfident they decided
(18:59):
to expand the offer to include flights to America. This
was a much bigger incentive to return. Flights from Britain
to America cost about five times the price of a
Hoover vacuum cleaner, and Hoover's pragmatic calculation about breakage was
way off. Beam far more people applied for flights than
(19:21):
they'd expected. Crucially, the applicants also proved far more tenacious
than Hoover had hoped, many initially heard nothing back. When
they followed up, Hoover said their application forms must have
been lost in the post. They became frustrated and suspicious.
(19:42):
David Dixon, a horse trainer in Cumbria, was among the
disgruntled customers who had bought a Hoover appliance a washing
machine in his case, and then had trouble claiming his
free flights to America. I have fucked them, I have
retner them, I have formed them, And then, to add
insult to injury, his washing machine broke down. Hoover sent
(20:05):
a technician who failed to sympathize with mister Dixon and plight.
According to the technician, the offer was obviously too good
to be true. Mister Dixon should surely have realized there
must be some kind of catch. If do you think
bang a washing machines are going to get you two
tickets to America, you must be an idiot, an idiote.
(20:26):
We'll see about that. While the technician was fixing his
washing machine, mister Dixon drove his horsebox in front of
the Hoover truck, blocking it in. He told the technician
to walk home and pass on a message to his employers, well,
I'll get me tickets. They'll get there vun. Mister Dixon
(20:46):
became something of a folk hero. The BBC meanwhile sent
an undercover reporter to investigate what was going on. She
got a job in the agency that was processing the
applications for free flights on who was behalf. It went
something like this, So what would you like me to do.
Here's a list of people, contact them and offer them
(21:08):
flights London. These people all live in Glasgow. That's four
hundred miles from London. That's right. But the person sitting
next to me is phoning people who live in London
and telling them we can only offer them flights from Glasgow.
He gets you one fast love. When the BBC investigation
was broadcast, it did not play well for Hoover. They
(21:31):
eventually begrudgingly bought over two hundred thousand flights at a
cost of over seventy million dollars. The majority of customers
had given up without getting their flights, but the company's
reputation had taken a hit, so had their market share
in the UK. Part of the problem was that anyone
(21:52):
who wanted a Hoover appliance could find plenty of attractive
deals in the classified ads never used still in their
original packaging. People had bought them just to get the
air tickets. No wonder Hoover's parent company, the executives who
had approved the promotion and quietly sold off the European
(22:14):
arm of the company for a knock down price. For
Pepsi executives in the Philippines, merely getting fired might have
seemed like a relief compared to the continuing disaster of
number fever. They were getting so many death threats they
needed round the clock security. Pepsi erected barbed wire barricades
(22:36):
around its processing plants. Dozens of its trucks were attacked.
In one tragic case, a grenade thrown at a Pepsi
truck in Manila bounced off and killed a schoolteacher and
a five year old girl. The small print of the
number fever adverts did mention the existence of a security
(22:58):
code on the bottle tops, but was it sufficiently clear
that the prize depended on the security code, not just
on the three digit number. PEPSI found itself fighting thousands
of lawsuits after this message. Cautionary tales will return, even
(23:24):
as the number fever lawsuits raged on. Pepsi found itself
once again in a numerical dispute described in Matt Parker's
book of mathematical mishaps, Humble Pie. This dispute followed yet
another promotion called Pepsi Points, this time running in the
United States. A thirty second advert starts with the caption Monday,
(23:50):
seven fifty eight am and an external shot of an
ordinary suburban house. Cut to the inside of the house,
A cool young dude is wearing a T shirt with
a Pepsi logo. He slicks back his hair, T shirt
seventy five Pepsi points flashes the on screen caption. He
dons a leather jacket. Leather jacket fourteen hundred and fifty
(24:14):
Pepsi points, ongo, the sunglasses one hundred and seventy five
Pepsi points. Then a voiceover the introduce Pepsi stuffed chaveler.
Now the more Pepsi a drink club, more of great stuff.
You're going again. Meanwhile, on screen, there's a school classroom.
(24:35):
From outside, there's some kind of loud noise and strong
wind blowing books and papers everywhere. Other students watch in
amazement as the cool dude arrives in a Harrier jump
jet doing a vertical landing in the school yard. He
steps out sipping a can of Pepsi, and on screen
(24:56):
Harrier Fighter seven million Pepsi points. Sure beat the bush? Yes,
very good? Held on? Has anyone done the math on this?
A can of Pepsi was one point, but once you
had a few points from Pepsi purchases, you could buy
(25:18):
additional points for ten cents apiece, So a T shirt
at seventy five points was effectively seven dollars fifty fair enough,
a leather jacket one hundred and forty five dollars not unreasonable.
And a Harrier Fighter, let's see seven million times ten cents,
that's seven hundred thousand dollars. Doesn't that sound cheap for
(25:43):
a fighter jet? The US military paid over twenty million
dollars for each of its AV eight Harrier two jump jets.
If you could get one from Pepsi for seven hundred
thousand dollars, that would be an absolute steal. There are
(26:04):
a few cultures now very rare, whose counting words only
cover one two big number, but that's because they rarely
need to talk about large numbers. Modern marketing executives do,
and yet when it came to the Harrier, Pepsi's decision
makers were helpless. Once those Pepsi points started mounting up,
(26:28):
all they could seem to think was big number. Enter
twenty one year old business student John Leonard. He somehow
raised seven hundred thousand dollars, which he deposited with a lawyer.
He bought fifteen cans of Pepsi and sent off his
fifteen Pepsi points with a check for seven hundred thousand
(26:50):
and eight dollars and fifty cents. That was to cover
the remaining six million, nine hundred ninety nine, nine hundred
and eighty five Pepsi points plus the ten dollars delivery charge.
Pepsi wrote back politely, the item that you have requested
is not included the catalog or on the order form
(27:11):
the Harrier jet and the Pepsi commercials. Fanciful. We apologize
for any misunderstanding or confusion that you may have experienced.
Mister Leonard had his lawyer swing into action. Your letter
of May seven, nineteen ninety six is totally unacceptable. We
have reviewed the videotape at the Pepsi stuff commercial and
(27:32):
it clearly offers the new Harrier jet for seven million
PEPSI points. This as a formal demand that you honor
your commitment and make immediate arrangements to transfer the new
Harrier Jet to our client. The case went to court,
where District Judge Kimba Wood had to decide if the
(27:54):
advert was serious. She came to the understandable conclusion that
it wasn't. The callow youth featured in the commercial is
a highly improbable pilot. The teenage's comment that flying a
Harrier Jet to school sure beats the bus evinces an
(28:16):
improbably ensusian attitude toward the relative difficulty and danger of
piloting a fighter plane in a residential area as opposed
to taking public transportation. Might some other court take a
different view? Probably not, But Pepsi decided to edit its
(28:37):
commercial just in case. Harrier now cost seven hundred million
PEPSI points. Again big number, but this time big enough.
I assume John Leonard knew that his chance of winning
the case was small, and that if he lost, there'd
be lawyers fees to pay. It must have been a
(28:59):
calculated gamble. Judge Kimbawood summed up why she wasn't letting
that gamble pay off. An objective reasonable person would conclude
that purchasing a fighter plane for seven hundred thousand dollars
is a deal too good to be true. Fair enough,
(29:20):
But can we predict if a corporate marketing bungle is
likely to have a happy ending? Can we come up
with a taxonomy of the too good to be true
from these stories? Perhaps we can. It's all about that
pragmatic calculation. Imagine if you will a tool beloved by
marketing types, a two by two matrix, how much will
(29:43):
it cost the company to pay up and how bad
will it make the company look to wriggle out? In
one corner, expensive promises with an easy get out. In
this corner is John Leonard with his video of the
Pepsi staff ad Harrier jets are expensive and did it
make Pepsi look unreasonable to fight the case? Not really.
(30:07):
At the other extreme, cheap promises with no means of escape,
here stands David Phillips with his stack of chocolate puddings.
Giving one customer a pile of air miles wasn't especially
expensive set against the entire healthy choice marketing campaign, and
thanks to his videotape, they could hardly wriggle out. The
(30:30):
other two corners of the two by two matrix are
more ambiguous. Giving Tesco club card points to banana man
was a trivial expense, but nobody would have cared much
if they'd refused. The financial stakes were low, and so
were the publicity stakes. It could have gone either way.
Tesco's one crate banana limit seems a reasonable compromise. It
(30:54):
can also go either way when both stakes are high.
That's why some Hoover buyers got their flights and some didn't.
It was the worst possible combination for any company. They
looked awful for trying to wriggle out of their own promises,
and those they were forced to keep were ruinously expensive.
(31:15):
But perhaps Hoovers marketers had always had their doubts deep down.
The tagline for their free flights campaign was two return
seats Unbelievable. In the Philippines, number fever left the three
four nine bottletop holders facing their own pragmatic calculation. Take
(31:38):
Pepsi's goodwill twenty dollars or fight. Fifteen thousand Filipinos joined
a pressure group called Coalition three four nine, set up
by Vicente Delfiero junior, a public relations consultant and a
fiery preacher. Mister Delfierro flew to New York to file
(31:59):
yet another lawsuit against Pepsi, modestly describing himself as a
Philippino or Don Quixote, a biblical David growing up again
Stagg Global Goliath. The Pepsi three for nine fiasco mirrors
how irresponsible multinational organizations abuse consumers in developing countries. Vicente
(32:22):
del Piero was tapping into a sense of injustice that
runs much deeper than one botched soft drinks promotion. Recall
what the thought of winning a million pasos had meant
to Victoria Angelo. You can finish school, we can buy
a real house. These shouldn't be unrealistic ambitions for anyone.
(32:47):
But it's hardly Peps's fault that life is so unfair.
And was it ever really likely that a court would
make PEPSI pay a sum that was almost its entire
market value? Remember, nearly half a million bottletop holders had
accepted the good will payment, far more than joined mister
Delfierro's coalition. The aragmatically calculated that this was the most
(33:11):
PEPSI could reasonably be expected to do after well over
a decade of legal wrangles, the courts agreed it would
be wonderful to imagine a bottletop printing error lifting hundreds
of thousands of Filipinos out of poverty. That that was
always going to be too good to be true. Key
(33:41):
sources for this episode include reporting from the Los Angeles Times,
the BBC, and The Independent, and a paper on consumer
rebates in the Stamford Journal of Law, Business and Finance.
For a full list of references, see Tim Harford dot com.
Cautionary Tales is written by me Tim Harford with Andrew Wright.
(34:02):
It's produced by Ryan Dilley and Marilyn Rust. The sound
design and original music is the work of Pascal Wise.
Julia Barton edited the scripts. Starring in this series of
Cautionary Tales Helena Bonham, Carter and Jeffrey Wright, alongside Nazzar Elderazzi,
Ed Gochen, Melanie Gutteridge, Rachel Hanshaw, copnaholbrook Smith, Greg Lockett,
(34:27):
Messiah Munroe and Rufleus Wright. This show wouldn't have been
possible without the work of mil LaBelle, Jacob Weisberg, Heather Fane,
John Schnarz, Carlin mcgliory, Eric Sandler, Emily Rostick, Maggie Taylor
and Yellow Lakhan and Maya Kanick. Cautionary Tales is a
(34:48):
production of Pushkin Industries. If you like the show, please
remember to rate, share, and review.
Host
Tim Harford
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