The Nuances of the FREE! Experiment
The New York Times and Time Magazine have recently posted interesting articles about two new books that discuss consumer behavior: Chris Anderson’s Free and Ellen Ruppel Shell’s Cheap (see links in The New York Times and Time Magazine).
Both books reference our Hershey’s Kiss experiment that is described in Chapter 3 of Predictably Irrational. If you recall, in one trial of one study we offered students a Lindt Truffle for 26 cents and a Hershey’s Kiss for 1 cent and observed the buying behavior: 40 percent went with the truffle and 40 percent with the Kiss. When we dropped the price of both chocolates by just 1 cent, we observed that suddenly 90 percent of participants opted for the free Kiss, even though the relative price between the two was the same. We concluded that FREE! is indeed a very powerful force.
It’s important to note that we have carried out lots and lots of studies on the effect of FREE!, many of which are detailed in Predictably Irrational. Describing them all, however, would be too much for those who are trying to make just one point abut this effect, so naturally we see authors making choices about which experiments to describe and which ones to leave in footnotes, or not to mention at all. But, some kinds of omissions are made as well — ones that are important for understanding the complexity of the effect.
For example, in one study of FREE!, we tried lowering the price from 2 cents to one cent on the Kiss to see if we observed that same level of increase in demand in the Kiss. We didn’t. In another study we also tried seeing what would happen if we lowered the price from FREE! to negative one cent, and we also didn’t see a difference in behavior. We also tried the experiment on a broad demographic–not just college students, but also on children and older adults.
Personally, I think it is perfectly fine for people to take the main point from some experiments and build on it, but as readers (and writers) we should realize that often there is more complexity to the picture and that before criticizing particular findings, or citing them as supporting evidence, we should keep in mind the nuances.
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One thing I’ve always wondered when I read about your truffles/kisses experiment, was the total volume or participants.
Were there more people interested in free Hershey’s kisses than in 1-cent kisses?
I have to wonder about the number of people that saw the experiment but chose not to participate, and if that changed with kisses being free (I presume it did by a large margin).
I have no doubts that there is a FREE! effect, I just think that making the experiments consider the people that chose option 3 – don’t participate would have made the effect more quatifiable.
Thanks,
Wout.
PS: books like your Predictably/Irrational and Tim Harford’s Logic Of Life are turning me into an armchair economist, and I’m loving it
If I estimate the nuisance to search for 1c coin in my wallet as something that cost me 10c of my time than everything is rational
If it is free it is a gift that they want you to have for what ever reason.
For a cent, it is a deal.
I think your conclusion from the Truffle Hershey Kiss experiemtn is not complete.
Your study proves several things:
1) Price does not equal Value. Dropping a $.26 price by a penny and a $.01 price by a penny is not the same relative change.
2) There are as many people (40%) who will pay a premium ($.26) for quality as people (40%) who will pay a little ($.01)for lower quality. Since the company who sells the truffles will make a much higher profit than the company who sells the kisses, this is the better choice.
3) Charging a little ($.01) will win fewer (40%) eyeballs than free (90%).
4) Media who offer a premium product online for a premium price will generate as many eyeballs as the micropayment guys and make a whole lot more money. This principal is supported by the fact that HBO has all time high subscribers and profits even during this economic crisis.
have you seen the Adam Curtis documentary the century of the self? it does not directly relate to the Hersheys experiment but i think it relates to a lot of the predictably irrational theories. It discusses how politics has changed over the century from a system based on controlling the individual to a more business-like system in which government reacts to the whims of the people in exchange for political money (votes). It comes to the problem that a form of government like that is not capable of solving social issues without upsetting the people. check it out it is quite interesting.
For some time I have been hoping that the U.S. Mint would no longer produce pennies which are indeed nothing but a nuisance. (In fact, while they are at it, why not get rid of nickels?)
Pentagron,
The pennies are very usefull for the 99 pence (or cence) with out this shops would have to charge 90 P/C instead leaving the country with 9 pence less circulation per item, Quite significant, pennies also circulate highly in charities, besides once you have got rid of the penny why not the nickle then 10c then 20c,
If they want the coins to be worth more then just make the dollar worth more,
Who would have thought a little (FREE!) kiss would turn into such a scandal?
When these or other authors use academic research in their books, it is used to give credence to their theories, but at the same time many such authors are dismissive of the academia and ready to proclaim how out of touch it is with the changed world. Selective quoting leads to causation confusion and leaves no room for “what-if” analysis. The authors also talk in absolutes to portray confidence.
Just imagine how dangerous this would be if medical books are written in the same way!
I just finished your book and love it. I teach graduate courses in psychology and plan to include your book my next class.
Another explanation (borrowing from another chapter of Dan’s book) is that a Free alternative changes the Framing from ‘market’ to mixed ‘market/social’ and many subjects elect to engage in the social option rather than the market one.
You can test that explanation by checking to what extent the subjects who elected for the Free alternative are more willing to return a small favor (such as rating the chocolate quality).
We dont have the kiss brand of chocolate in the uk. I would go for it because it was new, also I am not keen on truffles regardless of price
It never occurred (which is probably just as rational as being irrational )to me that FREE was such a subtle but very sophisticated way to create revenue for companies both large and small or the like, but not until I read your ideas and experienced it did I realize that such a simple/profound idea could cost me an exaggerated amount of money. Just want to tell you what happened and can’t find an email to you or your researchers. Anyways, here it goes. I am a currency trader who is not shy about his ability to make money so I entered a contest, where results would be judged based on beginning dollar amount and ending dollar amount and the percentage difference would determine the winner. The prize was 25,000$ for 1st, 10,000$ for 2nd, and 5000$ for 3rd. I ran up the account in approximately 15 trades from 2,000$ to 32,000$ in less than 15 days. Immediately afterward, my strategy was to just hold back and wait to see the results of my fellow competitors cause I figured I finished in the top three, BUT that free 25,000$ just sounded to good to lose and without being aware of the tugging and the pulling I begin to focus on this 25,000$ and the fact that it was free. Never mind that based on my progression in the contest the free 25,000 was a decent sum compared to the exponential gains that I was producing had I just calmly kept moving forward. But wouldn’t you know it I became obsessed with the free 25K and changed and altered my strategy. I’m convinced it was because of this idea of Free and somehow FREE was better than what I already had which was 32K. Irrationality led me to a perfectly predictable outcome but I wonder if there is a similar effect on others?
It seemed like in the book the interpretation of the experiment’s results only went so far as to say that FREE has some great power in choice process but didn’t really analyze why. I would suggest that free items are particularly attractive for the following reason. People have some internal reward system for finding “good value” items. While some amount is being charged, and the value of the item is unknown, the extent of this internal reward may be limited. However, whatever the actual value, if the cost is zero then this is a guarantee of value and the internal reward is given.
It would be interesting to test this by showing beside the chocolates the actual cost of them. In this case an easy calculation should shift the greater reward to the more expensive chocolate. Though maybe not… I imagine that even if told the Lindt costs 30c and is for sale at 15c, some internal calculation may put it’s value down to the current price of 15c.
7ob ohh, 7alet le ya2s ely enta kont feha kant be sabab enk mesh bet7eb, law kan fe 7aytak 7ob makontesh ye2st, kan 7obk 7`lk te7eb el nas we te7eb 7aytak,ya 2asy ya motw7esh
Isn’t free much more attractive than 1c because of the budget constraint? The incremental change in price from 2c to 1c is no where near as important as the 1c to free step insofar as the amount of the good (and other goods) you could purchase with a given budget.
I often wondered about the amazon gift card example you gave in the book as well. What I haven’t seen addressed is how we make judgments based on perceptions of rate of return.
The Setup:
- a FREE! $10 gift card
or
- pay $7 for a $20 gift card
The traditional argument is that paying $7 for $20 nets a higher profit ($13 as opposed to $10). BUT, the return on investment is significantly lower. For a FREE! card my investment is $0 and my net is $10 – that’s an infinite rate of return. Whereas my rate if I pay $7 for a $20 card is just under 2. So, while opting for the FREE! card may not maximize my net profits, it DOES maximize the rate of return on my investment.
Imagine if you were to approach someone and say “invest $1 and I’ll give you $100 return, OR, invest $10,000 and I’ll give you $11,000 return.” which is a better investment?
perhaps we’re wired not to maximize our net profit, but to maximize return rates on our investments. If so, is this strategy categorically irrational? What are the long term implications?
Say you knew you would be presented with a series of investment opportunities, but you didn’t know anything about them before hand and your resources were limited (the general situation we call “our life”). What is the best strategy for approaching each opportunity as it is presented?
… just some thoughts.
A point raised in the NYT article:
Shouldn’t the summary mention people who picked neither sweet?
It’s probably mentioned in the book, but since you mentioned the discrepancies in which experiment _Cheap_ and _Free_ picked, I figured you would set the record straight on this particular subtlety.
Something that I noted in that study was the usage of the word STUDENTS. In the context the word was used, it is difficult to tell if the word is used to describe the fact that the study participant was an actual student (college or high school) or if its being used to describe a study participant in general.
If the participants were actual college or high school students, of course they will all go bonkers over FREE. Free is quality to a student. The only way to have enticed a student to buy a 40 cent truffle over a free hershey kiss is to spike the truffle with alchohol.
My point is, the study really tells us nothing about FREE because of the age demographic and lifestyle. I would like to have seen this study conducted with not only an older age demographic, but also people with buying power in the bank.
Then and only then will we be able to draw conclusions about the power of FREE.
Free often means a trade off for something else, such as your time, e.g. the time waiting for delivery, or the extra time spent in the queue. This happens with free GP consultations; invariably you will get large lengthy delays of 1 hour or more. But its free, so a lot of people would rather waste one hour of their time than pay some money and not have to wait.
I think there is a general psychology ‘Nothing comes for free’. I observed the same thing in a mall when free samples of tea packets were distributed for free for a new variety of an established brand, and very few people were interested. In case of KISSES may be people were a bit nervous or suspicious. The word ‘FREE’ does create a psychological impact on ones mind. If a bottle of cola says 20% extra free, the consumer will hardly notice that he/she consumed 20% free cola. there would be a thought on the back of the mind that “I’ve paid for the cola” rather than the 20% free.
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