Consumers Behave Stupidly When Things Are "Free"
"Free" has a magic effect on people's minds, according to research by Dan Ariely (whose new book, Predictably Irrational could become the Freakonomics of 2008). He did an experiment giving people a choice between a "high-value" and a "low-value" product, a Lindt's chocolate and a Hershey's, respectively, and nothing. When the price was set at 1 cent for the Hershey's and 15 cents for the Lindts, 14% chose the Hershey's and 36% chose the Lindt's. What do you think happened when the price was reduced by one cent for both items?
Human beings are rational creatures who subtract costs from benefits to make decisions, traditional behavioral economics tells us, and you would think that the demand for both items would increase by the same factor. After all, the cost for each was reduced by the same amount. But Ariley found something quite different. When the Hershey's were FREE and the Lindts were 14 cents, 42% chose Hersheys and 19% chose Lindts. Airley explains, saying, "when people are faced with a choice between two products, one of which is free, they overreact to the free product as if zero price meant not only a low cost of buying the product, but also its increased valuation."
Something to think about the next time you're deciding between getting the car with three years of free oil changes and the one with $1,000 cashback.
Kristina Shampanier, Nina Mazar and Dan Ariely (2007) "Zero as a Special Price: The True Value of Free Products". Marketing Science. Vol. 26, No. 6, 742 - 757. (PDF)
(Photo: Maulleigh)
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Comments:
First off, drawing grand conclusions based on an experiment using chocolate bars is silly.
Second off in this example, maybe the test cases are smarter than they think. It's not just about 1 cent vs 0 cents. It's also about the ability to now get an infinite number of a product for no cost. Maybe the human mind subconsciously processes that cool fact.
The fundamental flaw in this arguement is that they assume people think in terms of absolute discounts (1 cent) instead of percentage discounts (6.6% vs 100%).
If you take their data and assume that people think in terms of percentage, then the conclusion is that people UNDERVALUE free products.
Which is why a research report is only as good as its assumptions.
My part-time job is selling women's fragrances and we often have customers that shop based entirely on the "free" gift. I have been in the business for years and I am still amazed by the search for a free bag or some 1 ounce lotions as the overriding decision maker. These items are not free at all, since the brands that are known for gifts are also the brands that raise their prices every season - Ralph Lauren, I am looking at you.
Hershey's is a premium chocolate only in comparison to Palmer's.
Palmer's should be considered congealed floor wax
This study just doesnt feel right. It doesn't compare quite right to the car example ethier, because their you are buying something and picking between oil changes or 1000 dollars.
in the study, the choice was between paying for the candy, or getting it for free. Why would you not take the freebie, if there is no catch? How is that stupid, in one case you have some one picking to pay for 2 different items. In the other you ethier pay, or just get.
People get crazy over free stuff. I didn't think we need a study to figure that out. I was at a trade show and people were going ape-shit over free ugly t-shirts. It didn't matter the size or color, if it was free, there was a crowd.
Mmm...chocolate. Chocolate (that isn't hersheys) is so expensive now that when I need a grocery store chocolate fix, I pick the cheapest kind that isn't hershey's. I don't like solid hershey's chocolate. It tastes waxy to me..chocolate should be smooth. And I love dark chocolate, and Hershey's only makes the gigantic dark chocolate bars, and I can get better quality dark chocolate for the better price.
After all, the cost for each was reduced by the same amount.
It's not so much that both prices were reduced by 1 cent -- one product was marked down 7%, while the other was marked down 100%. Is that really that hard to grasp?
Seeing as they could only take one piece, that is irrational. But if they could take as much as they want, people are of course going to take something that is no cost to them. Maybe they didn't want to have to deal with making change for a 1 cent candy before it was free?
@missdona:
I totally do that. Half my wardrobe consists of free shirts for volunteer activities or free shirts I get as part of my company's appreciation award program.
Welcome to the life of any grad student. Free=instant need. I've gotten stuff I knew I didn't even want just because it was free.
@Buran: You're entitled to your opinions, but for my money Hershey's is just fine (Then again, I might be biased living as close as I do to Hershey.)
1) People who rag on Hershey's are the worst kind of snobs. Dude, it's chocolate, take your yuppie/bobo pretensions over to the wine aisle.
2) I'd go for the free option too, because who the hell carries pennies these days?
A much more legitimate test would be to offer Hershey bars for 35 cents at your door and simultaneously offer them for free (one per submission) if you send in a form on which you provide the 41 cent stamp.
Hershey's isn't terrible chocholate, not great either. Though they are pushing to make it terrible by having the term "Chocolate" redefined to not contain cocoa butter.
American food processors, slowly killing their business in the quest of cost reductions.
What about the 41% of the people who chose nothing over the free Hershey's?
@crabbyman6: My friends and I did that as undergrads. We went to the housing office almost every week to get the free boxes of candy, coupons and personal care samples. I even had a boyfriend who gave his mom one of those boxes for her b-day (ok, he used it to hide the dvd in, but she thought it was really the present, which was funny when she pulled the condom out and turned to her husband and said "and I thought you were fixed") Crazy family.
I think I'll just drive 5 minutes over to Chocolate World and get some free chocolate that way.
@ratnerstar: While I like Hersheys there is a HUGE difference between the quality of Hersheys and Lindt. If I was only allowed one piece I'd rather pay 14c for Lindt than get free Hershey.
@gmanj: My hubby used to too. I brought in a professional organizer to "help" him with his wardrobe. She convinced him that he should not be a walking billboard for the local Jazz radio station or his company (that he doesn't even like) when he's off working hours.
I am forever thankful for that.
Ever been to Hershey, Pennsylvania? The whole town smells like chocolate.
Maybe the people didn't have any change and the reason some of the people chose the Lindt chocolate was that anything below $1 was deemed insignificant enough to not worry about the price because they still had to break a dollar into change that they will most likely lose while the free chocolate later on would not require breaking a dollar.
@hc5duke:
Yeah, but the price difference didn't change. If you thought that Lindt was worth 14c more than Hershey's when they're 15 and 1 cents, then why do you think it's worth less than 14 cents extra when they're 14 and 0 cents?
@tequilajunction: Some studies have shown that people do think in percent discounts. I remember hearing about a study sometime last year that went something like this:
People were given a scenario in which they had to buy a clock radio. They had a choice between getting a clock radio at a store within a 5 minute walk for $20, or taking 20 minute drive to get the same radio for $10 and all other things would be equal. Most people opted to go to the store that's a 15 minute drive away and save $10.
Participants were then asked to change the situation some. Instead of buying a clock radio, they would have to buy a computer. The store within walking distance would charge $1000 for the computer, but the store a 20 minute drive away would charge $990. All other things would be equal (both stores offer the same warranty, they both have in-home tech support, etc). In that situation, people overwhelmingly chose to go to the store within walking distance.
Now, either way you are saving $10, and rationally if the 15 minute drive was worth saving $10 in the first situation, it should be worth it in the second situation as well. But most people thought it of as 50% savings versus 1% savings.
@missdona: My mom get mad at my dad because all of his are from races he ran in, and have the date. She is less than happy that our vacation pictures from 2006 have him wearing a shirt that says 1993 on it. She says it's hard enough to keep up with what year the pictures are from without him doing that, not to mention it advertises the fact his shirt is over 10 years old. Then again he has so many race shirts, it's probably only been worn 3 times in since 93.
@gmanj: His t-shirts were overtaking our bedroom. It was time for an intervention, and by hiring someone, I didn't have to be the 'bad guy'.
Maybe people just didn't have $.14 sitting in their pocket and didn't want to have $.86 floating around afterward?
When something's free, you don't have to fish for change.
When something costs one cent versus fifteen cents the price difference, for most Americans, is virtually negligible. People will choose the one they think tastes better.
That's not to say that I don't agree with the conclusion, but I'm not sure if the data completely supports it.
@JustAGuy2: That's one way to look at it, but my line of thought is, one thinks that the Lindt was valued at 15 times the Hershey's, and when it's 14 cents vs 0, the 0 is always going to be a better deal.
Lindts > Hershey's
@ratnerstar: People who think I'm a "snob" because I prefer a less popular, more expensive item over a particular popular item are douchebags of the highest caliber. Congratulations!
Interesting. To me the Lindt is "low value" because it tastes the same as Hershey's, but costs oh so much more. I guess it appeals to those folks who think paying more for something makes them special, but not to me.
I wouldn't say that means consumers behave "irrationally," just differently. For one, chocolate is a minor-luxury. Try the test with water and see what happens.
Two.. The value of anything "free" is ∞/$, way better than a savings of $.01 for the Lindts.
this reminds me of the commercial for "memory supplements" that says "we wouldn't give it away for free if it wasn't good" my first thought is always "you get what you pay for"
Interesting study....Would it be possible to tag links to PDFs with [PDF] or something? I usually have to switch browsers or Adobe locks up my computer for several minutes. Thanks.
@ratnerstar: I'm not a snob. I just don't like the flavor much. Not liking something doesn't make me a snob... it just means I buy something else and don't think Hersheys is worth the money.
EXACTLY, they're thinking whole-value, I instantly thought % reduction. The hershey's was now 100% off, the Lindt was a singe-digit % off. The Hershey's is Free, the Lindt you pay for.
Let's make this look as logical as it is: If your'e presented with paying for something or getting a "lesser-quality" alternative for free, why wouldn't you take the free one? It's FREE. That means there's NO COST WHATSOEVER for at least trying it. Hell, take the Hershey's it may not taste as good, but if it satisfies you, then you didn't have to pay a dime (or 14¢) for it. However if you decide that it's NOT to your liking, you STILL didn't pay a dime (or 14¢) for it. And maybe you go and get something else, too.
@missdona:
The reason people get giddy over it is that it's COST FREE. I mean, hell I don't care if a T-shirt that's FREE is ugly. Who the hell says I'm going to wear it? Maybe I'll just turn it into a dish rag or bathroom rag or wipe my ass with it. Then, it was a rag I STILL didn't pay for. FREE=FREE, so I don't care.
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I don't like this example either. In the chocolate thing you really are getting the Hershey's totally free. So it is the more obvious choice.
Reducing the cost to zero is not the same as reducing the cost by some lower percentage. (as other people mentioned).
With 'free oil changes' vs 1k, you are still paying for the car, so I think most ppl would take the 1k.
As usual, I'll use this post to reiterate how much much I hate that damned "free stuff" scrubs. I once worked at a full service gas station/convenience store that offered a free 10oz Pepsi with fill-up on Tuesdays. Fill-up, by the way, was an 8 gallon minimum. NOBODY wanted to work Tuesdays, nobody. Why? Because all day you'd be dealing with the kind of turkey heads that would go out of their way for a free (10oz!) Pepsi - the dregs. And all day you'd be having the same arguments, even though the rules of the game were in large print. After a 3 gallon fill-up: "But I filled it up...!" After an 8 gallon non-fill-up: "But I bought 8 gallons...!" After G-d-knows-what: "I thought all I had to do was stop in for a free Pepsi...!"
Needless to say regular, decent customers got the Pepsi virtually for the asking.
14c? That is an annoying price.
@ratnerstar: Dude, people who rag on people who rag on Hershey's are the worst kind of boors.
I'm lucky though. Our boss buys us the "monkey" chocolate, which is now the standard to which I hold all other chocolate. It is quite exceptional and surpasses even the finer Euro stuff. You can find it in your favorite hippy store.
@randombob: For me, free stuff has a cost. Free stuff (unless it's consumable, like chocolate) takes up space in my life, and sometimes I would rather have nothing in the space than something I will have to dispose of in time.
Come to think about it, even free chocolate can have a cost... time on the treadmill to burn it off.
@missdona: but if you would have eaten chocolate at some point anyway, then it's time on the treadmill you would have needed regardless
Maybe they just don't like the low-quality stuff Hersheys calls "chocolate"?