Tuesday, March 04, 2008

The value of free

Predictably Irrational spends quite a bit of time talking about the value of free. Apparently, free makes you go bananas. For instance, if you are checking out at a store and are offered a hershey's kiss for free or a lindt chocolate truffle for $.14, over 70% of the people take the free kiss. If you charge just $.01 for the hershey's kiss, then over 70% of the people will take the truffle, even though it is $.15 (adding the penny back in for relative difference reasons). Free makes people bananas.

Another study came from Amazon. When Amazon started offering free shipping, their sales increased dramatically everywhere but in France. France saw no difference. After researching it, they discovered that the French division had decided not to go completely free, but instead charge 1 Franc (about US $.20 at the time). This small fee was enough to change people's brain chemistry. When they reduced the price to free, France also saw a big jump in purchases.

The next chapter expands this by considering social norms and market norms. We deal with both every day, but we try not to mix them. If you are using a social norm (like eating dinner at a friend's house), you don't offer to pay. You can give a small gift as appreciation, but you NEVER bring up money. Contrariwise, if you are using a market norm, then you want the best deal - you act selfish. What their research found was that the smallest payment was enough to change people from a social norm to a market norm. In fact, even the idea of money was enough to make the change. For instance, if you ask someone off the street to help you move a couch, they will agree. If, instead, you offer to pay them $1.00 to help you, they will turn and run because they are insulted. When operating in market norm phase they want the best deal, when operating in social norm phase, they want to help.

Perhaps we take the free Hershey's kiss over the lindt truffle because we want to operate in a social norm. We are social creatures and we want to be unselfish. Perhaps by thinking of the kiss as a free gift, we get to stay in our social environment that much longer, keeping out the harsh market realities.

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