Cautionary Tales with Tim Harford - Number Fever: How Pepsi Nearly Went Pop

Episode Date: April 9, 2021

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. Read more about Tim's work at http://timharford.com/ Learn more about your ad-choices at https://www.iheartpodcastnetwork.comSee omnystudio.com/listener for privacy information.

Pushkin. In a tin roofed shack, in a slum of Manila, the capital of the Philippines, Victoria Angelo lived with her husband, Juanito, and their five children. Juanito 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 1992,

Victoria took notice. Number Fever seemed easy to understand, by a bottle of Pepsi, and under the bottle cap you'd see printed a three-digit number and cash prize amount. Every night, on the channel 2 TV news program Pepsi would announce a winning number. If you had a bottle cap with that number, you'd win the amount shown. The prize is went up to a million pesos, some $40,000. It would take Juanito 30 years to earn that. Victoria started buying Pepsi. Every night she watched Channel 2 for the announcement of the winning number and she checked her growing collection of bottle caps and every night she was disappointed. Until one

night the television announced the number 3 4 4, 9. Hold on, Victoria was sure she had a bottle cap marked 3, 4, 9. Here it is. Now what's the amount on the cap? 1 million pesos. You can finish school. You can go to college. 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 2, checking their collection of bottle caps, discovering that they had one printed with 349 and a million peso prize, and celebrating their incredible good fortune.

What had happened? It's not clear exactly. Instead of printing just two bottle caps with 349 on them, they had accidentally printed hundreds of thousands. And nobody at Pepsi had noticed the problem, but 349 had just been announced as a winning number. Pepsi would notice the problem soon to cautionary tales. In Worcester, England, a physicist called Phil Calcutt was doing his regular shop at his local supermarket Tesco. As he strolled down the fru-tile, a special offer caught his attention by a bunch of bananas and get 25 Tesco club card points. The bananas cost £1 and £17. The points were worth £5 each. Mr Calcut did the math. He'd get club card points worth £8 more than the bananas cost. Could that be right? He double checked his mental arithmetic. Yes, he'd make a profit of £8 on every bunch

of bananas he bought. So Mr Calcut 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 floor to ceiling with 25 cases containing around 3,000 bananas. But when I popped back for some more, they said there 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, Mr. Calcut ended up with a profit of 25 pounds and 12 pence. A modest sum perhaps, but far more 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 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 Allen Paulos, who wrote the classic book in numeracy. Paulos tells the story of watching the TV news with a friend, In numeracy, Paulos tells the 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 50% chance of rain on Saturday and a 50% chance on Sunday.

So, there's certain to 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 a 75% chance 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 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 played on that numerical laziness. Flip the cap off your bottle of Pepsi, see a three-digit number and a million peso prize, and you might naturally get the impression that you have a one-in-a-thousand chance of winning. Not too shabby. And not true, of course. Think about it and you'd quickly realise that Pepsi must have 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 that consumers still get screwed, often, but not always. An engineer called David Phillips was shopping in his local supermarket in Davis, California in 1999. He noticed a new promotion by a food brand called Healthy Choice. Send in 10 barcodes from their products and they'd give you 500 air miles. They'd double it to a thousand if you sent them in before a certain deadline.

Just like Banana Man filled Calcutte, Mr. Phillips paused to do the math. How much is an air mile worth? That 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, $20, send in the barcodes and get a thousand airmiles, also worth at least $20. 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 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 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'd accumulated 800 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 10 barcodes and proof 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 offered told consumers to remember there was no limit to the number of miles they could earn. With just three weeks to go before the deadline, Mr. Phillips stumbled on a startling, new opportunity. One supermarket chain, Grocery Outlet, had started selling healthy choice chocolate puddings for just 25 cents.

Remember, healthy choice was effectively offering air miles worth at least $2 on every one of those puddings. There was no time to lose. I drove to about 15 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. It had him special order me 60 more cases. David Phillips now had over 12,000 chocolate 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 manage to peel off 12,000 barcodes in just three weeks? But Mr. Phillips was a resourceful man, and he realised he could solve 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 favour of taking off the barcodes for him. They said yes. Phillips meticulously organised his barcodes into bundles of ten and filled in the claims 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 Philips posted off his barcodes and waited. There was no immediate reply from healthy choice, but he'd read the small print that said it would take 6-8 weeks for the air mile certificates to arrive. Six weeks passed. Then, 8 weeks. Now, Phillips was starting to get worried, with still no response from healthy choice, he phoned him up. Disaster. They said they had no record of receiving any barcodes from him at all.

Corsion retails will return after this message. After Channel 2 News announced that 3, 4, 9 was 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 honour all the prizes? Upwards of $15 billion. It was roughly half the 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 3 o'clock in the morning. 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 349 bottle top, they decided to offer a goodwill payment of 500 pesos, a mere $20. $20. The bottle tops came flooding in.

486,170 of them. The Goodwill payments cost Pepsi about $10 million, five times what they'd initially budgeted for the entire number fever campaign. But it wasn't enough to quell everyone's outrage. Thousands of people kept hold of their 3, 4, 9 bottle tops. They'd thought their lives were about to change forever. Now they were being offered just $20. That wasn't going to buy their goodwill. They were determined to make Pepsi pay. David Phillips was determined too.

He'd gone to all that trouble, buying 800 tins of soup and 12,000 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 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. Philips had photocopied everything. He'd even videotaped himself buying the chocolate puddings and stacking them up in his house

just to be on the safe side. Presented with this evidence, healthy choice quickly caved. Mr. Philips got his airmiles. quickly caved. Mr. Phillips got his air miles. Think for a moment about what David Phillips did. He hadn't just done one calculation, the numerical 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 honour the deal. Packages do sometimes go missing, it's true. So hit take and 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 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 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. The breakage rate Marketing professors Tim Silkenkriysianoshevsky 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 it in 6- 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 promotion in 1992, they gambled on a high breakage rate. They were offering two free flights to Europe to anyone who spent £100 on a Hoover appliance. That's about £250 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 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 were available. And on, and on. Only the most determined customers have the patience 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 to expand the offer to include flights to America. This was a much bigger incentive. Two 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 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. David Dixon, a horse trainer in Cumbria, was among the disgruntled customers who'd 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 retina them, I have formed them. And then, to add insult to injury, his washing machine broke down. Hoover sent a technician who failed to sympathise with Mr. Dixon's plight. According to the technician, the offer was obviously too good to be true. Mr. Dixon should surely have realised there must be some kind of catch. If you think buying a washing machine is going to get you to tickets to America, you must be an idiot. An idiot, eh? We'll see about that. While the technician was fixing his washing machine,

Mr. 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, When I get me tickets, they'll get there fun! Mr. Dixon 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 flights from London. These people all living Glasgow, that's 400 miles from London. That's right. The person sitting next to me is phoning people who live in London and telling them we can only offer them flights from Glasgow. You get Sean fast love. When the BBC investigation was broadcast, it did not play well for Hoover. They eventually, begrudgingly, bought over 200,000 flights at a cost of over $70 million. 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 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 fired the executives who had approved the promotion and quietly sold off the European arm of the company for a knocked-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 around its processing plants, dozens of its trucks were attacked. In one tragic case, a grenade thrown at a Pepsi truck in Minilla 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 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 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, Humboldt Pie. This dispute followed yet another promotion called Pepsi Points, this time running in the United States. A 30-second advert starts with the caption, Monday, 7.58am, 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, 75 Pepsi points. Flashes the on-screen caption. He dons a leather jacket. Leather jacket, 1,450 Pepsi points, on-go the sunglasses, 175 Pepsi points, then a voiceover. Meanwhile on screen, there's a school classroom. 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, Harry a fighter. 7 million Pepsi points. Sure beats the boss. Haha, yes, very good, but hold 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 additional points for ten cents a piece. So a T-shirt at 75 points was effectively $7.50, fair enough, a leather jacket, $145, not unreasonable, and a Harrier fighter? Let's see, 7 million times 10 cents, that's $700,000. Doesn't that sound cheap for a fighter jet? The US military paid over $20 million for each of its AV-8 Harrier 2 jump jets. If you could get one from Pepsi for $700,000, that would be an absolute steal. There are a few cultures, now very rare, whose counting words only cover 1, 2, 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, all they could seem to think was, Big Number. Enter 21-year-old business student John Leonard, he somehow raised $700,000, which he deposited with a lawyer. He bought 15 cans of Pepsi and sent off his 15 Pepsi points with a check for $700,000 and $8.50. That was to cover the remaining $6,999,985 Pepsi points, plus the $10 delivery charge. Pepsi wrote back politely.

The item that you have requested is not included in the catalog or on the order form. The hairier jet and the Pepsi commercial is fanciful. We apologize for any misunderstanding or confusion that you may have experienced. Mr. Leonard had his lawyer swing into action. Your letter of May 7, 1996 is totally unacceptable. We have reviewed the videotape of the Pepsi stuff commercial and a clearly offers the new Harriet Jet for 7 million Pepsi points. This is a formal demand that you honor your commitment and make immediate arrangements

to transfer the new Harriet Jet to our client. The case went to court where District Judge Kimberwood had to decide if the advert was serious. She came to the understandable conclusion that it wasn't. The calo youth featured in the commercial is a highly improbable pilot. The teenagers comment that flying a hairier jet to school sure beats the bus, evinces an improbably insuciant 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 commercial just in case.

A harrier now cost 700 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 calculated gamble. Judge Kimberwood summed up why she wasn't letting that gamble pay off. An objective, reasonable person, would conclude that purchasing a fighter plane for $700,000 is a deal too good to be true.

Fair enough. But can we predict if a corporate marketing bongole 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 2x2 matrix. How much will 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. 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, said against the entire

healthy choice marketing campaign. And thanks to his videotape, they could hardly wriggle out. The other two corners of the two by two matrix are more ambiguous. Giving Tesco Clubcard points to Banana Man was a trivial expense, but nobody would have cared much if they had refused. The financial stakes were low, and so with a publicity stakes, it could have gone either way. Tesco's one-crate banana limit seems a reasonable compromise.

It 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. But perhaps Hoover's 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 three9 bottle-top holders facing their own pragmatic

calculation. Take Pepsi's Goodwill $20 or fight. 15,000 Filipinos joined a pressure group called Coalition 349, set up by Vicente Delfiero, Jr., a public relations consultant and a fiery preacher. Mr. Delfiero flew to New York to file yet another lawsuit against Pepsi. Modestly describing himself as the Pepsi 349 Fiasco, mirrors how irresponsible multinational organizations abuse consumers in developing countries. Vigente Del Fiero 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 pesos had meant to Victoria Angelo.

You can finish school, we can buy a real house. These shouldn't be unrealistic ambitions for anyone. But it's hardly Pepsi'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 bottled-op holders had accepted the good will payment. Far more than joined Mr. Del Fiero's coalition, they had pragmatically calculated that this was the most Pepsi could reasonably be expected to do. After well over a decade of legal angles, the courts agreed. It would be wonderful to imagine a bottled-top printing error lifting hundreds of thousands

of Filipinos out of poverty, but that was always going to be too good to be true. Key sources for this episode include reporting from the Los Angeles Times, the BBC and the Independent, and a paper on consumer rebates in the Stanford Journal of Law, Business and Finance. For a full list of references, see TimHalford.com. Corsion Retails is written by me, TimHalford, with Andrew Wright. It's produced by Ryan Dilly and Marilyn Rust. The sound design and original music is the work of Pascal Weiss.

Julia Barton edited the scripts. Starring in this series of Corsion Ret a hell in a bottom-cater and Jeffrey Wright, alongside Nizar El Dorazi, Ed Gohan, Melanie Guthridge, Rachel Hanzhaw, Koobne Holdbrook Smith, Greg Lockett, Masey M. Rowe and Rufus Wright. This show wouldn't have been possible without the work of Mia Label, Jacob Weisberg, Heather Fein, John Schnarrs, Karly Migliori, Eric Sandler, Emily Rostick, Maggie Taylor, Aniella LeCarn, and Maya Canig. Corsionary Tales is a production of Pushkin Industries. If you like the show,

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