The Homa Files

Excerpted from: Predictably Irrational by Dan Ariely, HarperCollins Books, 2008

“Free has a certain gravitational pull – everybody likes something for nothing. Free gives such an emotional charge that people perceive what is being offered as immensely more valuable than it really is.” 

Examples: 

Opting for a “stripped down”  free checking account  over one with a nominal charge account and a plethera of services; 

Buying 2 of something to get a third one free (even if you don’t need the 2nd or the 3rd ones) ; 

Taking a “no closing costs” mortgage with a higher interest rate; 

Hitting the buffet table for seconds, and thirds, and … 

Snatching up free pens, calendars, koozies … to throw them out when you get home

 
Why?

“Most transactions have an upside and a downside –  when something is free. people forget about the downside.  … humans are intrinsically afraid of loss.  The real lure of free is tied to this fear.  There is no visible possibility of loss when somebody chooses something that’s free.  Of course, that’s not true”  … [since “free” may require a commitment of time, headaches, or disposal fees]. 

Example: Amazon Free Shipping

In the US, Amazon has had great success offering free shipping on orders greater than $25.  Many customers started upsizing their orders (e.g ordering an additional book) just to take advantage of the free shipping offer.

In France, Amazon introduced a comparable program with a token charge for shipping (about 25 cents).  While there was a small uptick in sales, it paled in comparison to the sales increase associated with the totally free shipping program.

In other words, whereas shipping for a quarter – a savings of a couple of bucks – was largely ignored by customers, free shipping generated an enthusiastic response.

“The difference between two cents and one cent is small. 
 The difference between one cent and zero is huge.”  

                                       * * * * * 

Observations: 

1. The aura of “free” creates a market inefficiency – breaking  buyers’ stream of rationality 

2. Amazon’s free shipping is a compelling real life example. 

3. Lesson: If you’re going to give something away – give it away –  don’t nickel-and-dime into “no man’s land”

 
BTW: Based on my experience, Amzon’s free shipping is often just as fast as it’s regular shipping.  Sure, the items are :”flying standby”, but there is usually space on the truck.

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This entry was posted on September 9, 2008 at 7:12 am and is filed under Economics, Mktg - General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.