Zero Price Effect: why do we like free stuff so much?
Freebie hunters and fights over who got first in the line to get a free sample are relatively common, and we all saw them at least once in our lifetime. But what is the science behind free stuff, and what happens to our brain when we see it? In this blog post, we tackle the Zero Price Effect.
Pricing psychology is the marketing field that studies how to maneuver customer perceptions to better position your product. For example, design, color, and discounts are among the variables that influence purchase decisions and your willingness to pay less or more according to perception.
Though primarily unconscious, these decisions are as personal as they can be. For instance, when choosing what to purchase, a complex equation is made in our minds to determine whether that product is worth our money. The equation weighs perceived benefits and perceived risks. And while some of those, like usefulness, tend to be rational, others, such as social status or alignment with brand values, are mostly emotional.
From person to person, each equation has a different — and sometimes unpredictable — outcome. Offering a product for free is a way to counter such unpredictability by highlighting the number of perceived benefits. When faced with a free product, the number of benefits outnumbers the number of risks, increasing the chances of trying a product.
In other words, a free product equals a free trial, enhancing the benefit of exploring something new and reducing the risk of not liking it. And if you don’t, at least you did not pay for it.
Understanding the meaning of money
When considering a product’s cost, money is probably the first thing that comes to mind. Of course, the importance of money in today’s society is far more complex than we aim to explore, but understanding its symbolism allows us to understand its role in the decision-making balance.
According to researchers, money is connected to several dimensions of human behavior, having cognitive and affective meanings. Although highly personal, these meanings are related to the person’s background, including residential place, occupation, or ethnicity. In a Forbes article, it is stated that money harnesses all kinds of emotions and that each family has its particular way of relating to it.
Power, social acceptance, or success are words we often see related to money. These associations increase trading’s complexity, making purchase decisions more important than a mere exchange.
Besides money, time also seems to be a deciding variable. According to the Journal of Economic Psychology, time and money have a similar weight on the decision-making process, which can explain why some are not willing to wait in line to get a free product.
If the time needed to get a free product is higher than the perceived benefits, getting in line might not be worth it.
What is the Zero Price Effect’s definition?
The Zero Price Effect is described by The Decision Lab as an exception to the linear model that most price decreases follow. In the traditional linear model, when a price decreases, there is a proportional increase in the demand, increasing the number of purchases. However, in the Zero Price Effect, when the price drops to zero, the need immediately peaks.
The concept of the Zero Price Effect got more popular when Dan Ariely, a professor of behavioral economics, published Predictably Irrational, a book inspired by his co-authored previous study “Zero as a Special Price: The True Value of Free Products.”
In this study, Ariely asked people to choose between a free Hershey’s Kiss (traditionally seen as a lower chocolate candy) or a $0.13 Lindt truffle (perceived as a superior product). The free Hershey’s Kiss was preferred by twice those who chose the Lindt truffle.
In a second experiment, Ariely labeled the Hershey’s Kiss with a $0.01 price instead of offering it for free, keeping the $0.13 Lindt truffle. The change resulted in a complete overhaul of the results: when paying, most people preferred the Lindt truffle over the Hershey’s Kiss.
The researcher and his colleagues concluded that consumers tend to overvalue free products through the studies. Besides stressing the perceived benefits, free offering triggers an irrational side of the brain, overriding a rational cost-benefit analysis.
Ariely argues that the effect can be applied to other areas, adding that “People are willing to work for free, and they are willing to work for a reasonable wage; but offer them just a small payment and they will walk away.”
Examples of free and zero-price strategies
Strategies anchored in zero-price or free offers are common and can be highly effective on and offline. As an example, David Bell, a former professor from Wharton School, cited by The Hustle, found that e-commerce websites can benefit from having free shipping policies.
According to him, instead of saving $10 and paying for the shipping, they preferred to save only $6.99 and have the product shipped for free. Such happens because, when seeing free shipping, people overcome an initial sense of unfairness and become more likely to purchase.
Besides free shipping, there are other strategies that can be implemented to take advantage of the Zero Price Effect.
- Free samples: samples are common in stores and supermarkets. Marsh, an American retail chain, found that 68% of samplers end up purchasing a product. Products such as frozen pizza and lipstick are among the products that can benefit the most from such strategies.
- Free breakfast: based on Business Travel Monitor, in 2010, CNN published “Appetite grows for free hotel breakfast.” The article said that 63% of travelers considered complimentary breakfast extremely desirable, considering this an important variable when choosing a hotel.
- Free trials: free trials are common in SaaS (Software As A Service) companies. The strategy’s primary goal is to get the customer to experiment with a product and upgrade its plan. FastSpring distinguishes different types of free trials, including Freemium (free plan), Opt-in Free Trial (limited period for experimentation), and Opt-in Free Trial (payment method is required to start the experimentation period)
- Free reports: reports are used to generate deals mostly through digital channels. Users need to leave their email and consent to receiving information to access the information. Coupons, discounts, and giveaways can work similarly.
Though these strategies can increase demand, they might not be enough to conquer your customer, especially in a world full of trials and digital products. And that’s where customer and user experience comes in. So, in addition to offering a product, ensure it is delivered swiftly.
Another concern is to establish the boundaries and rules of the trial. After accessing a product for a long time without restrictions, users will likely resist paying for it. That happened, for instance, in the news industry, currently pursuing a shift from free to paid news. As a result, in 2020, only 1 in 5 Americans subscribed to a news media platform.
A different but similar case happened with Microsoft Visual Studio. After providing the developer platform for free in an open-source model, Microsoft decided to include proprietary features that users should pay to unlock. The decision backfired with the company being sued for what the U.S. Department of Justice called their “embrace, extend, extinguishing” strategy.
The hidden cost of free products
With costs being mostly overlooked, zero prices often have catches and require customers to comply with specific rules. For example, according to Psychology Today, several marketing deals can only be done if the customer accepts to purchase another item or has to leave their email.
In a period where data privacy is in the spotlight, establishing the rules of the game is vital for a long, honest, and healthy relationship between the customer and the company. As customers, we all want to get better offers. As companies, we all want an engaged and happy customer base.
Image by Miguel Á. Padriñán.
Originally published at https://angry.ventures.