what is being offered as immensely more valuable than it really is. Why? I think it’s because humans are intrinsically afraid of loss. The real allure of FREE! is tied to this fear. There’s no visible possibility of loss when we choose a FREE! item (it’s free). But suppose we choose the item that’s not free. Uh-oh, now there’s a risk of having made a poor decision—the possibility of a loss. And so, given the choice, we go for what is free.
For this reason, in the land of pricing, zero is not just another price. Sure, 10 cents can make a huge difference in demand (suppose you were selling millions of barrels of oil), but nothing beats the emotional surge of FREE! This, the zero price effect, is in a category all its own.
To be sure, “buying something for nothing” is a bit of an oxymoron. But let me give you an example of how we often fall into the trap of buying something we may not want, simply because of that sticky substance, FREE!
In 2007, I saw a newspaper ad from a major electronics maker, offering me seven FREE! DVD titles if I purchased the maker’s new high-definition DVD player. First of all, did I need a high-definition player at that time? Probably not. But even if I had, wouldn’t it have been wiser to wait for prices to descend? They always do—and today’s $600 high-definition DVD player will very quickly be tomorrow’s $200 machine. Second, the DVD maker had a clear agenda behind its offer. This company’s high-definition DVD system was in cutthroat competition with Blu-Ray, a system backed by many other manufacturers. At the time, Blu-Ray was ahead and has since gone on to dominate the market. So how much is FREE! when the machine being offered will find its way into obsolescence (like Betamax VCRs)? Those are two rational thoughts that might prevent us from falling under the spell of FREE! But, gee, those FREE! DVDs certainly look good!
GETTING SOMETHING FREE! is certainly a draw when we talk about prices. But what would happen if the offer was not a free price, but a free exchange? Are we as susceptible to free products as we are to getting products for free? A few years ago, with Halloween drawing near, I had an idea for an experiment to probe that question. This time I wouldn’t even have to leave my home to get my answers.
Early in the evening, Joey, a nine-year-old kid dressed as Spider-Man and carrying a large yellow bag, climbed the stairs of our front porch. His mother accompanied him, to ensure that no one gave her kid an apple with a razor blade inside. (By the way, there never was a case of razor blades being distributed in apples on Halloween; it is just an urban myth.) She stayed on the sidewalk, however, to give Joey the feeling that he was trick-or-treating by himself.
After the traditional query, “Trick or treat?” I asked Joey to hold open his right hand. I placed three Hershey’s Kisses in his palm and asked him to hold them there for a moment. “You can also get one of these two Snickers bars,” I said, showing him a small one and a large one. “In fact, if you give me one of those Hershey’s Kisses I will give you this smaller Snickers bar. And if you give me two of your Hershey’s Kisses, I will give you this larger Snickers bar.”
Now a kid may dress up like a giant spider, but that doesn’t mean he’s stupid. The small Snickers bar weighed one ounce, and the large Snickers bar weighed two ounces. All Joey had to do was give me one additional Hershey’s Kiss (about 0.16 ounce) and he would get an extra ounce of Snickers. This deal might have stumped a rocket scientist, but for a nine-year-old boy, the computation was easy: he’d get more than six times the return on investment (in the net weight of chocolate) if he went for the larger Snickers bar. In a flash Joey put two of his Kisses into my hand, took the two-ounce Snickers bar, and dropped it into his bag.
Joey wasn’t alone in making this snap decision. All but one of the kids to whom I presented this offer traded in two Kisses for the bigger candy bars.
Zoe was the next kid to walk down the street. She was dressed as a princess, in a long white dress, with a magic wand in one hand and an orange Halloween pumpkin bucket in the other. Her younger sister was resting comfortably in their father’s arms, looking cute and cuddly in her bunny outfit. As they approached, Zoe called out, in a high, cute voice, “Trick or treat!” In the past I admit that I have sometimes devilishly replied, “Trick!” Most kids stand there, baffled, having never thought through their question to see that it allowed an alternative answer.
In this case I gave Zoe her treat—three Hershey’s Kisses. But I did have a trick up my sleeve. I offered little Zoe a deal: a choice between getting a large Snickers bar in exchange for one of her Hershey’s Kisses, or getting the small Snickers bar for FREE! without giving up any Hershey’s Kisses.
Now, a bit of rational calculation (which in Joey’s case was amply demonstrated) would show that the best deal is to forgo the free small Snickers bar, pay the cost of one additional Hershey’s Kiss, and go for the large Snickers bar. On an ounce-for-ounce comparison, it was far better to give up one additional Hershey’s Kiss and get the larger Snickers bar (two ounces) instead of a smaller Snickers bar (one ounce). This logic was perfectly clear to Joe and the kids who encountered the condition in which both Snickers bars had a cost. But what would Zoe do? Would her clever kid’s mind make that rational choice—or would the fact that the small Snickers bar was FREE! blind her to the rationally correct answer?
As you might have guessed by now, Zoe, and the other kids to whom I offered the same deal, was completely blinded by FREE! About 70 percent of them gave up the better deal, and took the worse deal just because it was FREE!
Just in case you think Kristina, Nina, and I make a habit of picking on kids, I’ll mention that we repeated the experiment with bigger kids, in fact students at the MIT student center. The results replicated the pattern we saw on Halloween. Indeed, the draw of zero cost is not limited to monetary transactions. Whether it’s products or money, we just can’t resist the gravitational pull of FREE!
SO DO YOU think you have a handle on FREE!?
OK. Here’s a quiz. Suppose I offered you a choice between a free $10 Amazon gift certificate and a $20 gift certificate for seven dollars. Think quickly. Which would you take?
If you jumped for the FREE! certificate, you would have been like most of the people we tested at one of the malls in Boston. But look again: a $20 gift certificate for seven dollars delivers a $13 profit. That’s clearly better than getting a $10 certificate free (earning $10). Can you see the irrational behavior in action?*
LET ME TELL you a story that describes the real influence of FREE! on our behavior. A few years ago, Amazon.com started offering free shipping of orders over a certain amount. Someone who purchased a single book for $16.95 might pay an additional $3.95 for shipping, for instance. But if the customer bought another book, for a total of $31.90, they would get their shipping FREE!
Some of the purchasers probably didn’t want the second book (and I am talking here from personal experience) but the FREE! shipping was so tempting that to get it, they were willing to pay the cost of the extra book. The people at Amazon were very happy with this offer, but they noticed that in one place—France—there was no increase in sales. Is the French consumer more rational than the rest of us? Unlikely. Rather, it turned out, the French customers were reacting to a different deal.
Here’s what happened. Instead of offering FREE! shipping on orders over a certain amount, the French division priced the shipping for those orders at one franc. Just one franc—about 20 cents. This doesn’t seem very different from FREE! but it was. In fact, when Amazon changed the promotion in France to include free shipping, France joined all the other countries in a dramatic sales increase. In other words, whereas shipping for one franc—a real bargain—was virtually ignored by the French, FREE! shipping caused an enthusiastic response.
America Online (AOL) had a similar experience several years ago when it switched from pay-per-hour service to a monthly payment schedule (in which you could log in as many hours as you wanted for a fixed $19.95 per month). In preparation for the new price structure, AOL geared up for what it estimated would be a small increase in demand. What did it get? An overnight increase from 140,000 to 236,000 customers logging into the system, and a doubling of the average time online. That may seem good—but it wasn’t good. AOL’s customers encountered busy phone lines, and soon AOL was forced to