<< by on September 2nd, 2009
Last week I was relaxing at the beach and reading a fascinating book, Predictably Irrational by Dan Ariely. I’ll be covering several topics from this book over the next week, but first I’d like to focus on a compelling study Ariely presented in the book on how free may really come with a higher price than you think.
The Hershey’s Kiss vs. the Lindt Truffle
Ariely conducted a study there were two options at a table — a Hershey’s Kiss for $0.01 and a Lindt truffle for $0.15. Lindt truffles are arguably the higher quality chocolate in this case, and thus a majority of people selected the Lindt truffle (73%). However, when the price of each chocolate was dropped by just a penny, making the Lindt chocolate now $0.14 and Hershey’s Kiss free, the numbers reversed, and 69% then chose the free Hershey’s Kiss instead of the Lindt truffle!
Why, when the price only dropped by one penny, would the numbers reverse like this? It comes down to the power of FREE.
Ariely surmizes that “free” is very attractive to us because it appears to have the least risk — there’s essentially no risk of loss. Innately, we have a great fear of paying for something only to be disappointed, which is why a free offer appears to have the least risk.
Amazon.com and Free Shipping
Ariely also gives the example of Amazon.com’s success with free shipping. A few years ago, Amazon introduced free shipping for orders over a certain amount. If you’re like me, when told you only need an additional $3.95 in orders to get free shipping, you likely rationalize that you are saving money by getting the free shipping. In other words, book buyers would actually BUY MORE just to take advantage of saving a few dollars on shipping.
While the free shipping program increased sales in the US, sales in France remained the same. Why? The French division of Amazon.com did not offer free shipping, but rather discounted shipping — the shipping would be discounted to one franc (about 20 cents). When Amazon changed the program to free shipping in France as well, like in all other areas, sales increased dramatically. The difference between “cheap” shipping and “free” shipping is substantial in the buyer’s mind.
Implications for Businesses
As Ariely’s example shows, even the difference of only one penny, buyers are more likely to turn towards a free option. So what can businesses do to harness the power of “free”?
Ariely gives examples of a free version of SaaS software that also offers a paid premium version. Or, as in the Amazon example, perhaps free shipping? Giving something away for free can be a powerful marketing motivator.
For more on the power of “free”, I also recommend you read Chris Anderson’s “Free”, which is available on Amazon.com as a free download for the Kindle! I’ll report more on Anderson’s book in later posts — still making my way through it.