Free is NEVER Free

Free is never free: Imagine you walk into a store, and a workers approachs you.  They say “Congratulations, we are doing a special promotion and you won.  You can either choose a free $10 gift certificate, or you can spend $7 right now and receive a $20 gift certificate.”  As you read this scenario, what was your gut reaction?  How tempted were you by the gratis $10 gift certificate?

If you even studied Economics, the rational choice is spending the $7 and receiving a $13 profit.  But sadly, for most Economists, human beings are not calculating logic driven decision makers.  Humans can be incredibly irrational in how they make decisions.  When this simple experiment was run on real people the majority of people take the free $10.

But just because humans can be irrational, it doesn’t mean that we cannot predict and understand this irrationality.   I believe that by truly understanding these cognitive biases that are in all of us, you can use this irrationality to benefit your professional and your personal lives.

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There is no such thing as a free Lunch

Have you ever been shopping on Amazon, realized you needed one more book or cd to earn gratis shipping, and then spent 10 minutes trying to find something else to buy to get the free shipping?  I cannot be the only one who has done this…  In fact, when they introduced this tactic Amazon saw huge increases in the sales.  People love getting something for free, and irrationally they are willing to spend more money to get it.

Something being free is an incredibly powerful bias in our minds.  Many research studies have demonstrated this, but my favorite is study by Duke Professor Dan Ariely.  One day on the student quad, he sold Belgian truffle chocolates for 15 cents and Hersey kisses for 1 cent. The majority of people (73%) chose the truffle.

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On another day they changed the prices by 1 cent.  So now the truffle was 14 cents and the kiss was gratis.  Even though this as a negligible change in price, 69% of people now chose the free Kiss.  Even though the luxury truffle got cheaper, the power of free overpowered their internal value calculators.

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In real life, this experiment was almost exactly replicated by Amazon.  Amazon rolled out the shipping benefits differently in different countries.  In some (like the US) it was free shipping on purchase above a certain amount.  But in France, instead of gratis shipping they put shipping to 1 franc (about 20 cents) for purchases above a certain amount.  By any logical sense, this is still a great deal because 20 cents is very cheap.  But while every country that introduced the free shipping saw significant increases in sales, Amazon France saw nothing.  Eventually, Amazon France also moved to free shipping, and immediately they saw their sales jump.

Our love of something free can cause people to make irrational decisions.  Dan Ariely wrote in his book Predictably Irrational best: “People might opt for a FREE! checking account (with no benefits attached) rather than one that costs five dollars a month. But if the five-dollar checking account includes free traveler’s checks, online billing, etc., and the FREE! one doesn’t, they may end up spending more for this package of services with the FREE! account than with the five-dollar account. Similarly, people might choose a mortgage with no closing costs, but with interest rates and fees that are off the wall; and they might get a product they don’t really want simply because it comes with a free gift.”

Even though I am writing about how you can use these biases in favor of you and your company, I believe that this power of the free bias is something you should not abuse.  As we saw in the financial crisis, too many people were drawn into bad decisions because of the power of something being free.  There is the line between smartly using psychology to help yourself versus manipulating customers into bad decisions.

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So how can you stop ‘FREE’ from overpowering your mind?

If we are not careful we all can fall victim to our cognitive biases, especially when it comes to something being ‘FREE’.  That is why we recommend the following ways to help you counteract the power of ‘FREE’.

The first thing we recommend is to remember the HALT acronym when making decisions.  HALT stands for Hungry, Angry, Lonely, or Tired.  These 4 mental states can cause you to make some of the most irrational decisions.  Don’t believe me, then try going grocery shopping when you are really hungry.  When I do it, I always end up buying so much extra crap and junk food.  So if you are feeling Hungry, Angry, Lonely, or Tired, then you should HALT the decision and come back to it later.

The second thing I like to do when faced with a Free situation is I add a nominal cost to the free item.  In the chocolate example, I might add 10 cents to each type of chocolate.  Do I want a Hershey Kiss for 10 cents or a Belgian Truffle for 24 cents?  In this way I am still comparing the relative prices against each other, and I am ignoring the pressure of it being free.

This trick is best used when the stakes are the highest.   I have seen some banks offering free closing costs on your mortgage, but charging ridiculous fees later?  I have also seen ‘free’ financing of items for the first 2 years, but with significant interest fees from year 3 an onwards.  The free might feel better in the short term, but in the long term it costs you significantly more.  So ask yourself “would I still like this deal if it cost $10, $100, or $1,000 instead of being free?”  Most likely you won’t like it as much.

Never forget that people are irrational… even you!

While it would be nice to think of people using logic and facts to drive decisions, a lot of times that isn’t the case.  Countless studies have shown again and again that people are often irrational in their decision making.  By better understanding how people make their decisions, you can make sure you don’t fall victim to manipulative marketing, and if you are in Sales or Marketing, then you can use this information to make better marketing campaigns.

If you would like to discuss the concepts of cognitive biases, and how they apply to your company, please contact us.

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