Free, of course, is a very, very exciting price.
We see people doing all kinds of crazy things, or seems to be crazy things, for
free. We see relatively wealthy people stand a
long time in line to get free Ben & Jerry's ice cream, or get something for
free. And you can ask yourself, would the same
people stand in line for the same amount of time to get free you know, $2.25.
Most likely not. We see sometimes, people in flights, cross
Atlantic flights, where the alcohol is free, drinking lots and lots of alcohol on
those flights. Of course making their ability to recover
from the hangover, from the jet lag, much, much lower.
There's all kind of things that seems to be, questioning our ability to think
rationally when free is involved. And, but, but these are not exact tests of
this idea, so we tried to examine it a more precise way.
So imagine I gave you the following, I said look you can have this truffle, this
wonderful chocolate truffle for .25 cents. Or you could have this small little candy,
for 1 penny. How are you sup-, and you can have only
one of the two, how should you look at this choice?
You should say, what's the benefit of this truffle?
How much joy am I expecting to get? How much cost does it have?
25 Cents. And how much joy am I expecting to have
from this small candy? And how much cost does it have, one cent.
So in reality, when you, given the choice between the two, you should say what the
difference in price is 24 cents. How is the difference in price compared to
the difference in quality? If the difference in quality is larger,
then you should say, let's get the expensive truffle.
If the difference in quality is not worth the price difference, you should say,
let's get the cheap chocolate. Now what happen when you give people this
choice? Most people, the vast, vast majority said,
give me the better, the better truffle for more money.
But what if we reduce both prices by $0.01?
Instead of, let's say, 25 and 1, it's 24 and 0.
What happens now? It's the same computation should carry
out. What's the difference in price?
24 Cents. What's the difference in quality, the same
thing. Which one is larger?
But that's not what happened. Now most people go for the one for free.
Most people say oh, this one is free. And they just go for it, almost, almost
everybody. Now you could say, well you know when
something is free, you don't have to take your wallet out, you don't have to pay,
and so on. So we also did this experiment when people
checked out from the supermarket. People bought all kind of things, they
were going to pay anyway, and then at the cashier, they saw these two offers, either
25 and 1 or 24 and zero. They were going to pay anyway.
They were going to take out their credit card or cash and pay anyway, so it was not
adding to the hassle in any way. But what happened now?
Still, people like the one, the one with the zero.
So the idea here is that the moment something involves zero, we're overly
excited with it. We don't see the downside.
You know, even if you're in line, standing for a long time for a free Ben & Jerry's
ice cream, you don't see the cost. You don't see the cost of your time.
You think about this much more emotionally appealing.
One of my favorite experiments on this, by the way, was with kids.
This was Halloween, so I was standing out at my house on the porch.
And kids were coming, and as they were coming I said please put your hand out.
And they put their hand, and I put some Hershey Kisses on, some small candies on
it. I said don't put it back in your bag, hold
it on. Once they had it in their hand, I said,
now I can either give you a small Snickers bar, one ounce, or large Snickers bar, two
ounces. And just have to get you calibrated, every
ounce of a Snickers bar holds between seven and eight Hershey kisses in terms of
weight, so what's the right, what's the right deal?
Here's what I offered them, I said to half of them, I said if you give me one Hershey
kiss I'll give you the small one. If you give me two Hersey kisses I'll give
you the big one. So for one extra investment of a Hersey
kiss they could get another ounce of Snickers bar.
Paying them 7 to 1 in chocolate per weight, plus I think it's a better
chocolate. And what happens?
The kids saw this good, deal they gave me two Hersey kisses an took the big one.
That's great, but in this way, both transactions, the small Snickers bar and
the large Snickers bar, involve them giving me something.
For another group of kids, I reduce the price.
I said, what would you like, the small Snickers bar for nothing, or the big
Snickers bar for one Hershey kiss? Now again they had to give one extra
Hershey kiss to get the big one and again it's a great deal.
High return on investment, better chocolate.
What happened? Now almost nobody wanted it.
So all of these ideas suggest that once something is free, or at least it's
phrased as free, we don't see the cost of it.
We don't see the downside of it and we're overly attracted to it.
Now you can think about all kinds of things in the market.
You can think all kinds of things that, we should make free if we want to incentivize
people to behave in a certain way. For example, maybe we want to take some
unpleasant medical exams, and not have any co-pay for them.
Y'know, I don't know anybody who wants to have colonoscopies, for example, right?
Why do we have a co-pay for colonoscopy? Maybe we should have it at zero and that
would get people to be more attracted to, to this exam, or at least less repulsed by
them. Maybe we want to take, eh, examples when
we give people tax, tax discounts to do something that is good for the
environment. Maybe tax discounts are not enough, maybe
we should make it free. The moment you understand that free is a
special price, that people think about it as different than all other prices, you
could think differently about how to implement it and how to get people to use
it. The last thing I want to say about, the
price of zero is that it also works for part of the product.
So for example, imagine that I'm selling you a book.
And I can sell you the book for $15, and I can sell you the shipping of the book for
$5, so together it's $20. So together it's $20 and imagine three
ways. I can either send you the book for $10 and
shipping for $10. I can sell you the book for $20 and
shipping for 0. Or I can sell you the book for 0 and
shipping for $20. All of those are financially equivalent.
Which one is the worst? They want that you're paying for the book
and you're paying for the shipping, $10 each, because now, you don't get anything
for free. In contrast, what happens when the book is
20 and shipping is zero, that's great. But when the book is zero and 20 is
shipping, that turns out to be the best, now you can think about getting the book
for nothing. And a final advice for life.
Eh, when you go out to dinner, with friends, there's all kinds of ways in
which you can manage the bill at the end of the meal.
And I think the worst way to deal with this is for each person to see exactly
what they ordered and exactly split the bill accordingly to whats correct.
And the reason why I think it's a bad ideal, is because the end of the
experience changes dramatic how we view the whole experience.
And if, at the end of the meal, you're going to penny pinch and worry about
something, and debate with somebody. Oh, you had to bite from my, creme brulee,
and I took an olive from your salad and so on.
And that's kind of going to put a damper on the end of the experience, and
therefore make it less appealing. A better approach, you just split the
bill. No matter what you got, let's split, split
the bill, in general. Now with some people it might not work as
well, and sometimes people eat dramatically different things, but in
general it's a good strategy. But the strategy I like the best is for
one person to pay, and to alternate who is paying.
Why do I like this approach? Because two things, one is the pain of
paying and the other one is the effect of free.
If you're going out with one friend, and you're buying, and they're getting it, for
them, they got the free meal, it's great. And free meal is not just $1 less than
paying $1, or not just $20 less than 20, free meal is a special thing, you get
extra happiness out of that. And of course next time you would get the
free meal and so on. On top of that, the person who is treating
for the free meal paying, feels good now. They're not just paying for their meal,
they're treating the other person, that's another benefit.
But the other thing to realize, the pain of paying, the amount of psychological
agony we get from parting with our money is not a linear its not.
It's not increasing at the same rate as the amount of money is increasing.
So paying, let's say $10, is much worse than paying 0.
But paying 20 is not much worse than paying 10, it's a little worse but not
much. And paying 40 is not twice as bad as
paying 20. So the relationship between how much
you're paying and the pain of paying has the same diminishing return, pattern we've
talked about before. And because of that, if you take a bill,
you split it to two people, both people have the agony of, let's say, paying $20.
But if one person gets to pay $40, they don't get double that agony.
So in some it's always a good deal to alternate, not always, but in most cases,
it's a good deal to alternate. Somebody get the meal the meal for free,
the other person feels that their treating and the accumulation of the pain of paying
is not, eh, is not doubling, it's actually good deal.