“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)