(Stanford BUS-21)Martin Westhead

Mastering Marketing

The Psychology of Free

How to make money by giving things away

Overview

Pricing is all about perception Ariely and Shampanier

- Free chocolate experiments- The exuberance of Free

The Penny Gap- The flip-side to Free exuberance

Pricing perception is not always rational

Cold beer on a hot day1. From a grocer2. From a Resort Hotel

"Reasonable" price for (2) is nearly twice (1)

Even worse when it comes to Free

Studying Free

Zero as a Special Price: The True Value of Free Products – Ariely and Shampanier

1. Photo Survey

Pay vs. Pay Pay-1 vs. Pay-1 Free vs. Pay-2Ariely and Shampanier

1 2 30%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

45%40%

90%

40% 40%

10%

Hershy'sFerrero

$0.02 $0.27 $0.01 $0.26

$0.00

$0.25

1 2 30%

5%

10%

15%

20%

25%

30%

35%

40%

45%

14%

42%40%

36%

19%

12%

Hershy'sLindt

2. Real purchase: Money where your mouth is

$0.01 $0.15 $0.00 $0.14 $0.00 $0.10

Pay vs. Pay Free vs. Pay-1 Free vs. Pay-2Ariely and Shampanier

1 20%

5%

10%

15%

20%

25%

30%

35%

8%

31%30%

13%

Hershy'sLindt

3. Removing Transaction Costs

$0.01 $0.14 $0.00 $0.13

Pay vs. Pay Free vs. Pay-1Ariely and Shampanier

1 2 30%

20%

40%

60%

80%

100%

120%

29%

64%

100%

71%

36%

0%

$10 card$20 card

$7

4. Gift Cards

$5 $12 $1 $8 $0

Pay vs. Pay Pay-1 vs. Pay-1 Free vs. Pay-2Ariely and Shampanier

$10 $20 $10 $20 $10 $20

Conclusions

Overwhelming positive over-reaction to Free- Small reductions in price – no effect- Go to free – adoption shoots up

Zero is a disruptive price Why?

- We focus on downside of a transaction- What is we don’t spend the gift card?- Free eliminates the downside

- Cognitive transaction cost- Is it worth the price?- Act of asking the question

Purpose of this classTo study effective business models that leverage this phenomenon

Assumption

Corollary: The Penny Gap

Josh Kopelman- http://redeye.firstround.com/2007/03/the_first_penny.ht

ml

Challenge of Freemium- not $5->$50M, biggest gap is

free to $0.01 Flip side of Free Psychology Free -> disproportionate

demand

Dem

and

Price

$0

$0.01

The Penny Gap

Reality

Paying for shopping bags

2013 - 67 of 88 Municipalities in California- Ban on plastic bags- Min $0.10 charge for

paper/reusable bags Huge change in shopper behavior Its not the cost – the small charge

is a trigger- Our brain recognizes the cost- Extrapolates the environmental

cost

Summary

Pricing is all about perception Ariely and Shampanier

- Free chocolate experiments- The exuberance of Free

The Penny Gap- The flip-side to Free exuberance