Don’t Make Customers Signal to You

Recently I was at a summer street fair in Vermont. They shut down a couple of blocks. Farmers, craftsmen, handmade wooden stuff, baked goods, live music, the whole scene.

One vendor had a truck with taps built into the side of it, almost like beer taps. Homemade soda. It caught my eye, it caught my wife’s eye, so we went over.

I’ve been thinking about it ever since, because this soda company does something that I think is one of the worst things you can do for a business. If I could formulate it in a way that didn’t just sound like I was angry at them, I’d probably tell them out of the goodness of my heart. I don’t know how for them specifically. I don’t know how they could ever change their business model at this point. It doesn’t really make sense for them to change it now.

But the rule they’re breaking is this: they are oriented toward one transaction per person, forever.

That’s close to a cardinal rule of business, and very few businesses are positioned to break it.

The One-Transaction Business

There’s a real version of this that works. A restaurant next to a major tourist attraction has built-in foot traffic, necessarily made up of people you’ve never seen before and will never see again. As a business model, you make all of your money on that first and only transaction. You’re not building a relationship. You’re cashing out a stranger.

Most businesses don’t have that luxury. They need repeat customers, people who come back, tell friends, recognize the logo from across the street, and feel something pleasant rather than defensive when they do.

If one business earns one transaction per customer, and another earns five, all things being equal, the second one is going to win. The revenue is going to be a lot higher, even before you get into goodwill, word of mouth, and the hundred other things a long relationship buys you that a single transaction doesn’t.

This is why touristy places can get away with being flashy, gimmicky, and overpriced. They’re not selling you a relationship. They’re selling you a moment, and they know you’re not coming back to check.

Back to the soda truck. It is flashy and gimmicky. The truck looks great. The taps look rustic, old-fashioned, the kind of thing you assume came from somebody’s grandfather’s barn. And here’s the catch: it’s unlimited free refills, but you have to buy the mug. The cheapest one was around twenty dollars.

The Twenty-Dollar Mug

Vermont restricts what you can sell at a lot of these events. At a farmers market, you can’t roll up with a table of Coca-Cola products and call it a day, the way Monster Energy and a carton of cigarettes might do elsewhere. You have to have made what you’re selling. The one exception is merch — if you’re selling something you actually made, you can order branded t-shirts from a bulk supplier and sell those too, since the t-shirts are about the thing, not standing in for it.

I think this soda company makes the soda themselves. I’d guess there’s a CO2 machine in the truck handling the carbonation and the water dilution, and the syrup is theirs. The mug is a different story. It had the logo on it, sure, but there was nothing handmade about it. It had that Temu, drop-shipping-website look. They’d found a loophole: we’re selling soda, but you have to buy a mug, the soda is homemade, the mug is mass-produced junk, and the mug is priced high enough that no amount of soda you could physically drink would ever cut into the margin.

That’s the first problem. The second is what the unlimited refills actually incentivize. I just wanted to taste the soda. Instead, the system nudges you toward drinking a lot of it, because you already paid twenty dollars and you might as well get your money’s worth. They had a diet option, which wasn’t great, and plain seltzer, which was just the machine hooked up to a water line. There was no way for someone who only wanted a sip to participate without buying into the whole arrangement.

We bought the mug. The soda was fine. Then I spent the rest of the day thinking about the mug.

Here’s the part that actually bothered me, more than the twenty dollars: I already knew I’d never buy from them again. If I see the same truck at another fair, I’m not excited. I’m thinking, wait, I have the mug. It’s at home, obviously. And even if I’d brought it, I’m pretty sure they wouldn’t honor it like some kind of lifetime soda contract. I’d have to buy another mug. A business built entirely around extracting maximum value from a stranger’s curiosity had managed to make every future encounter with that stranger worth less.

Costly Signaling

There’s a concept from evolutionary biology, which I first ran into through Rory Sutherland’s book Alchemy, called costly signaling. The peacock’s tail is the standard example. It’s enormous, metabolically expensive, and makes the bird considerably easier for predators to spot. There’s no camouflage benefit at all. And that’s the point. The tail is a signal precisely because it’s inconvenient. It says: look how much survival difficulty I can carry around and still be alive. Evolution usually builds things that are good for survival, but sometimes what’s good for survival is demonstrating that you don’t need something that would normally be good for survival.

Businesses run on the same logic, or they should. A restaurant that eats into its own margin to make sure you try the dish they know is great. A shop that honors a return that falls just outside the policy. A company that quietly gives you the cheaper option when the expensive one isn’t necessary. Each of those is a real sacrifice, made on purpose, as proof of long-term intent.

There’s a well-known pattern in the restaurant industry around this. Go once and have a great experience, and there’s something like a 30 percent chance you become a repeat customer for life. Go twice and enjoy both visits, and that number jumps to somewhere around 45 percent. Get to a third great visit, and it jumps again, into the 65 to 70 percent range. There is almost no discount, comp, or special treatment in those first three visits that wouldn’t be worth it, once you understand what a 6-or-7-out-of-10 chance at a lifetime customer is actually worth.

People have the impression that successful businesses are penny-pinchers, unwilling to give up money for goodwill. The opposite tends to be true. Successful businesses are usually the ones most willing to give something up. The catch is that sometimes companies give up something of perceived value that doesn’t actually cost them anything, and use that gap as a kind of trick.

The Simulacra of Long-Term Commitment

This is where e-commerce gets slippery. It’s genuinely hard to tell what’s a real discount, what’s retail price wearing a costume, or whether a company jacked the price up right before the sale specifically so the sale would look more dramatic. All of that is the simulacra of long-term commitment. It performs the shape of a sacrifice without making one.

When you have an actual relationship with someone, or you’re dealing with the manager of a small brick-and-mortar place who knows what they’re doing, the costly signal tends to be real, because they’re building something with you specifically. The big optimizer-level businesses, the ones running on a dashboard with millions of customers reduced to a few variables, are doing something else. And people see through this stuff. There’s no faking costly signaling forever. It might work on a meaningful percentage of people if you’re Amazon-scale and just looking at the numbers, but it works less and less the more you lean on it, because people start noticing the trick.

Whereas if you’re a small business actually trying to build relationships, costly signaling might be the single best tool available to you.

Back to the soda truck. Paying twenty dollars for a mug I didn’t want was, in effect, me performing the costly signal. I was the one proving commitment. I was the one demonstrating, with real money, that I was curious enough about their soda to take the risk.

That’s backward. And what’s wild is that it’s working for them, at least for now. They don’t need most of the crowd. They can have the overwhelming majority of people at an event get a little curious, hear “twenty-dollar mug,” and walk away, and they’ll still come out ahead, because the margin on the mug alone covers an absurd amount of soda. It’s a clever arbitrage on the rule that you have to make what you sell. We make the soda, the mug is Temu junk, and the mug is priced so the soda becomes functionally free for us to give away. In a certain sense, it’s genius. I still think it’s bad business. It has to run out eventually, even if there’s a long runway before it does.

A Better Cup of Soda

The fix here was never complicated. Keep the twenty-dollar mug, even the seventy-dollar one, for the people who want it. Some teenagers are going to extract heroic value from a parent’s debit card and unlimited soda, and that’s fine, that’s part of the business too.

But also sell a flight. Five sodas in Dixie cups, or shot glasses, for five dollars. Or just one, in a paper cup, for a dollar, no refill. Let someone get curious about the soda without having to enter a committed relationship with a piece of drinkware.

That version is less profitable on paper. More cups, more labor, more individual transactions, less of that beautiful margin on an overpriced mug. But it lets thousands of people try the actual product without feeling like they got cornered into it. Some of those people look for the truck at the next fair. Some tell the organizers to bring them back. Some eventually buy the absurd seventy-dollar mug because they’ve developed a genuine attachment to artisanal birch beer. That’s the version where the vendor is the one proving it intends to stick around.

I don’t think they should be squeezing every last dollar out of someone they’re never going to see again. I think the goal should be that people start looking for them, calling up the organizers of the next fair and asking specifically for the soda guys to come back. Right now, even the people who liked the soda and never noticed the business model probably get home that day, look at a twenty-dollar mug sitting on the counter, and think: that cost more than my actual meal.

The peacock is the one trying to get chosen. It should not be the customer’s job to prove that to the vendor before they’re allowed a sip.