One Reason Companies Don't Do 'Free': They're Scared Of Pissing Off Those Who Bought?

from the could-be... dept

Tue, Apr 13th 2010 11:16am — Mike Masnick

Behavioral economist Dan Ariely, whose experiments with how people value "free" we've discussed before, has a fascinating column in the Harvard Business Review, explaining why companies don't experiment, where the basic answer is that they're afraid that some consumers will get a less acceptable experience during the experiment compared to others. For example, Ariely had worked for a while with a company to get them to put in place a series of experiments to see if offering things for "free" worked -- but eventually the company balked:

Several months later, right before we were due to go live, we had a meeting about the final details of the experiment--this time with a bigger entourage from marketing. One of the new members noted that because we were extending differing offers, some customers might buy a product that was not ideal for them, spend too much money, or get a worse deal overall than others. He was correct, of course. In any experiment, someone gets the short end of the stick. Take clinical medical trials, I said to the team. When testing chemotherapy treatments, some patients suffer more so that, down the road, others might suffer less. I hoped this put it in perspective. Fortunately, I said, price testing household products requires far less suffering than chemo trials.

But I could tell I was losing them. In a sense, I was impressed. It was a beautiful human sentiment they were conveying: We care about all customers and don't want to treat any one of them unfairly. A debate ensued among the group: Are we willing to sacrifice some customers "just" to learn how the new pricing approaches work?

They hedged. They asked me what I thought the best approach was. I told them that I was willing to share my intuition but that intuition is a remarkably bad thing to rely on. Only an experiment gives you the evidence you need. In the end, it wasn’t enough to convince them, and they called off the project.

I'm not actually convinced Ariely is correct on the reasoning here. It might not be this "beautiful human sentiment" where they "don't want to treat any [customer] unfairly." I suspect that it's the same reason why dynamic pricing often gets shunned by companies: because if customers find out that someone else got a better deal, even if they were happy with the original deal they suddenly change their minds and believe they got ripped off. It's because we tend to judge things relatively, rather than in absolutes, and companies that have been caught charging different prices to different customers often have found that the backlash is worse than the benefits of differential pricing.

However, it is interesting that many companies fear experimenting and prefer to just make a decision and go with it. I think this is less true in some tech companies. Google, for example, is infamous in their ridiculous level of experimenting and detailed A-B testing on things before going live with a final decision. But for companies that are worried about how any sort of "experiment" is viewed by consumers, you could see them being afraid to even try a concept like "free." I'm not convinced this is really a strong enough effect to keep companies from using "free," but it could be one explanation for why legacy companies are often so resistant to the idea.

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Filed Under: dan ariely, economics, free, harvard business review
Companies: google

24 Comments

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David (profile), 13 Apr 2010 @ 11:28am

It doesn't seem to bother the Airlines
With the constantly changing prices, different sources, etc... You have no idea what the guy (or girl) next to you paid for their flight, unless you ask. it could be less or more...
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Anonymous Coward, 13 Apr 2010 @ 11:33am

not just pissing them off with free but also the effects on the perceived value of their products when they make them free. you paid x for something now it is free dont you feel stupid and dont you think the thing has less value overall? value and price are not the same but attached elastically to each other few things that are free have huge value.
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- John Fenderson (profile), 13 Apr 2010 @ 12:03pm
  
  Re:
  I understand what you're saying, and there's some truth to it, I think you overstate things a little. First, the effect of price on perceived value is mostly noticeable on the more expensive end of things -- and even there, it's driven by shame. If someone buys a very expensive thing that turns out to be junk, they are very resistant to admit to anyone, often including themselves, that they got ripped off. They will continue to extol the virtues of the thing to maintain the illusion that they got value in proportion of what they paid.
  
  But if we talk about things that really are high in inherent value, the price effect is much less noticeable. In fact, I think that most people find the things of the greatest value to them are things which were free or very low cost.
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Beta, 13 Apr 2010 @ 11:33am

outlier
Years ago I bought a small game online from the author. A few months later he started giving it away, and sent a rather sheepish apology to those of us who had already paid for it. I honestly felt no bitterness and told him so; I pointed out that if he had raised the price he wouldn't have been entitled to more money from me, and likewise I wasn't entitled to an adjustment to the new, lower price (i.e. zero).

I dunno, I guess I'm just not into envy.
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- :Lobo Santo (profile), 13 Apr 2010 @ 11:46am
  
  Re: outlier
  Bravo for a logical thinker!
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- Chronno S. Trigger (profile), 13 Apr 2010 @ 11:52am
  
  Re: outlier
  I have to admit, I would be upset if I was in that situation (I have been a few times), but only at myself (and it would pass quickly). I would hold no malice for the person who dropped the price, in fact I would probably be more likely to buy from them again.
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  - Anonymous Coward, 13 Apr 2010 @ 12:50pm
    
    Re: Re: outlier
    I get that feeling every time I hit up a certain store and see something I bought last week is now on sale.
    
    But sometimes I *do* hit those sales, so I also get over it quickly (unless the price difference is really steep, then I'm miffed...and curious...and wondering if I got ripped).
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bob, 13 Apr 2010 @ 11:55am

Apple, Orange?
Pricing of tangible items are one thing.
Google products at the consumer level are another.
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Hephaestus (profile), 13 Apr 2010 @ 11:55am

" I suspect that it's the same reason why dynamic pricing often gets shunned by companies: because if customers find out that someone else got a better deal, even if they were happy with the original deal they suddenly change their minds and believe they got ripped off. "

Then explain why Amie Street and other Variable Pricing Model sites are doing so well ...
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Ima Fish (profile), 13 Apr 2010 @ 11:56am

Oh Mike I'm so glad you're back! Dennis Yang made me feel so touchy-feely I wanted to puke!
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Andy (profile), 13 Apr 2010 @ 12:05pm

Seen before
Think back to the iPhone scandal - after a few months at the outrageous first price $699, Apple dropped the price by a few hundred bucks. What happened? The original buyers creamed bloody murder calling Steve Jobs horrible names and accusing him of ripping them off. He had to issue credits to those people to keep them from storming the Apple stores. Heck - even the Bible addresses this - the parable about the farmer who hires different workers at different times but pays them all the same is a great illustration of 1) Capitalism and 2)Comparative Compensation.

People don't want to feel like they were ripped off - but sometimes that is what happens - the electronics industry uses this model all the time - but they are usually smarter and change the model number before lowering the price. The fact is the first 42 inch flat panel TV's cost $20,000 - now they can be purchased for $500 and they are better.

If you spend your whole life looking over your shoulder to check if you were ripped off you will be very unhappy.
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- Dark Helmet (profile), 13 Apr 2010 @ 12:08pm
  
  Re: Seen before
  "original buyers creamed bloody murder"
  
  Honestly, I'd try for a joke here, but that typo has me giggling uncontrollably....
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  - Anonymous Coward, 13 Apr 2010 @ 12:13pm
    
    Re: Re: Seen before
    Could Thai protesters have a new protesting tool?
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    - Dark Helmet (profile), 13 Apr 2010 @ 12:16pm
      
      Re: Re: Re: Seen before
      LOL!!! That was far and away better than any of the silly one-liners that were going through my head!
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    - Dark Helmet (profile), 13 Apr 2010 @ 12:17pm
      
      Re: Re: Re: Seen before
      I thought maybe creamed bloody murder was the result of slaughtering a lactating cow....
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Just Another Moron in a Hurry (profile), 13 Apr 2010 @ 12:17pm

Oh, the Humanity...
I like Dan's article, but I don't draw the same conclusion he does. He was actually in the room, so I could be way off base here, but when I hear that a company doesn't want to try the experiment because they don't want to upset their customers, that doesn't make me think that they are great humanitarians. That makes me think that they are greedily hoarding the customers they already have, and don't want to risk loosing the profits they are generating.

Am I cynical? Yes. But that doesn't mean I'm not right.
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Michael (profile), 13 Apr 2010 @ 1:01pm

With some things this makes sense, however there is a solution that's obvious to me. It's probably some financial regulation mis-incentive mucking things up, but I'm surprised I haven't seen something like the following.

Sort of a combination of micro-payments and investing. Instead of funding a project only by corporate interests anyone is free to make an initial 'investment' in the work. When the funding goal is reached production begins; for multi-result units, like songs, videos, or chapter style media investment might be more incremental.

After production of a unit has been funded additional buyers pay less for a copy of it. Likely degrading along a decay curve. Former investors also get a small cut of the 'profit' but it would be too small to waste with fees transferring around.

Instead the 'profit' could only be re-invested in new works, since the investor made a sound decision about what was of value to their community.

For popular works the very first investors would probably get all of their input investment back to use for other projects. After a pre-agreed profit limit is reached the entire work would shift in to promotional mode, the cost only enough at that point to cover distribution.

Dead end works would occur as well, but in those cases the investors would at least receive the work they'd paid for, which should have been at a price they were willing to pay to see said result.

Production houses that fail to deliver the expected quality would also quickly be sorted out and taken care of by the market and network effects.

'investors' would all end up paying similar prices eventually, at least for a given work. (The price would trend like a very flattened bell-curve. Those investing in the middle paying only about what their convenience factor was for seeing the content earlier.)

Additionally the inherent transparency requirement would ensure competition among both production houses and content proposers.
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sehlat (profile), 13 Apr 2010 @ 1:01pm

Short answer is: No
What holds things up is too many companies are large monoliths run by committees of Boards of Directors/Lawyers/Accountants et. al. I seem to remember reading somewhere that nothing new ever came out of a committee. Certainly there is Heinlein's comment that "More than three people can't decide when to have lunch, much less when to strike."

So innovation and experimentation falls to the small or even one-man outfit.

Case in point: Baen Books. The late and sorely-missed Jim Baen started selling eBooks as "Webscriptions" in late 1999. They took off like a homesick angel, and it is my understanding that they have a: always made money and b: always increased sales of the paper books.

In mid-2000, Baen experimented even further and created the Free Library, downloadable books for free. Among other people, Eric Flint contributed his first novel, "Mother of Demons," which I, for one, had never heard of. It was NOT available on the site on a "for pay" basis. Eric has commented that that book is still in print and selling, long after it would normally have disappeared into the maw of the used book market.

But the experiment was possible because one man had the vision and the power to make it real. In a large, impersonal corptocracy, that's just not gonna happen.
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Michael Lockyear, 13 Apr 2010 @ 1:18pm

The lack of experimentation by companies probably has something to do with the fact that they are not generally run by scientists! Google experiment frequently because they employ a huge number of people with a university science background. Even then, doing multivariate testing of different versions of free (like Google) is not quite the same thing as playing with paying customers, who tend to get upset when they hear of secret discounts, unexpected price drops, etc.

The real problem with "free" is that incumbent businesses do not want to cannibalize existing markets. For example, Google can give away access to an online office suite in a way that leaves them better off (with very little downside risk), Microsoft has to be more circumspect.
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Griff (profile), 13 Apr 2010 @ 2:23pm

I remember two particular incidents
One was when a European low cost airline advertised "buy ticket early as price can only go up". Then at the 11th hr they dropped the price again to try and fill the plane, and some early buyers successfully sued them.
The offence here was to promise prices would only rise.

Another was when Amazon got clever enough to spot returning big spenders and show them higher prices than the average unidentified joe. When people spotted it ("hey, if I delete cookies the prices on Amazon go down - WTF ?") there was an outcry.

I bought a book once and found myself on the author's mailing list (for reasons unrelated to my book purchase). In less than a year I had been sent a free eBook of the same title as a taster to get me to spend money on something else. So I figured this guy is happy to hand out free eBooks. When I saw another of his books for free download as a PDF, (on a site that with hindsight may not have been authorised to offer it) I was not morally worried about downloading because the author is in the habit of giving these away and probably set this up too.

To put it more briefly, I subconsciously value his eBooks lower now (even though they are good books).
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Anonymous Coward, 13 Apr 2010 @ 2:54pm

Everytime my wife sees a Verizon ad about the low price, she asks why we pay more for our plan. Everytime I have to explain that low price is for new customers, not existing ones. Soon we will be ex Verizon customers.
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- Anonymous Coward, 13 Apr 2010 @ 7:58pm
  
  Re:
  you are obviously uninformed. the masnick says this is not important. cheaper or even free should not lower what you value in their service that you pay for. these are the laws of masnick
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Anonymous Coward, 14 Apr 2010 @ 6:19am

This is the same reason that companies don't like employees talking about how much money they make. You can receive your paycheck and be perfectly happy with it until you find out the person in the next cubicle that does the exact same thing as you do makes twice as much.
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Joel (profile), 14 Apr 2010 @ 9:22am

Price?
They don't do free but they drop and raise prices on products like if it was nothing to be pissed off about! They are right saying people would be mad but they need to understand that someone is always going to have a problem with what you do; and why are they looking to be liked by everyone? They already have their customers and whoever keeps buying from them does it because they believe in that product or that brand!
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