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

from the could-be... dept

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.

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

Behavioral Economist Dan Ariely Explains The Problem With The NY Times Paywall

from the anchored dept

David alerts us to behavioral economist Dan Ariely's take on the NY Times' plan for a paywall, noting that people are unlikely to pay for what they've been able to get for free in the past:

The main problem of this approach is that over the years of free access, the New York Times has trained its readers for years that the right price (or the Anchor) is $0 -- and since this is the starting point it is very hard to change it....

Because we're not very good at figuring out what we are willing to pay for different products and services, the initial prices that new products are presented with can have a long term effect on how much we are willing to pay for them. We basically can't figure out how much pleasure the New York Times gives us in terms of $ -- so we go back and pay the same price we have paid before. This means that getting people to pay for something that was free for a long time will be very challenging, but it also means that if the New York Times were to offer some new service at the same time that they start charging, they might be more likely to pull it off.

Indeed. It's a point that we've tried to make in the past as well. It's nearly impossible to successfully charge for something that was once free, but it's absolutely possible to charge for something new, something scarce, that is separate from (or perhaps enhanced by) the free stuff. That's why we had hoped the NY Times would be smart enough to set up a business model around offering something else of value, rather than just a paywall, but it chose to go in the other direction.

Filed Under: anchor prices, behavioral economics, dan ariely, economics, paywalls, value
Companies: ny times

How 'Free' Has Even More Value Than People Think It Should

from the and-so-it-goes dept

Earlier this year, we pointed to some of the psychological reasoning for those in the RIAA/MPAA's of the world (and their supporters) for arguing against giving stuff away for free, even when there was evidence that they could make more money doing so. In that case, psychological experiments showed that people don't act rationally when they think something is "unfair." That is, they'll take a worse absolute result, just to make sure that they're relatively better off.

Now there's a new book that just came out that highlights a related irrationality. This one is by behavioral economist Dan Ariely. Someone had told me a year ago to look out for Ariely's book, which I had forgotten about, but now that it's out, it appears to include discussions on some very interesting experiments. If you listen to the audio interview at that link, Ariely discusses an experiment he ran with children at Halloween. He first gave them all three Hershey kisses. Then he held up two Snickers bars -- one tiny one and one large one. He offered to trade them the small one for one kiss and the large one for two kisses. Most kids quickly made the trade for the larger Snickers bar -- which is a perfectly rational move.

He then changed the terms of the experiment. He offered to give kids the small Snickers bar for "free" or the large one for one Hershey kiss. Most kids now took the free small Snickers bar -- even though they are worse off in that case. Having two Hersheys kisses and the big Snickers bar providers more chocolate than three kisses and the small bar -- but the impact of "free" got them even more interested. Ariely ran more similar experiments (economist Tyler Cowen wrote about one recently) and found that again and again people overpay for free.

This is certainly an interesting finding, given all that we talk about the use of free in economics. If anything, this (bizarrely, I'll admit) makes the case even stronger for using free as a part of any business model. It suggests that people value something that's offered for free more than they should. That has enormous implications for the promotional value of "free." If you're using it that way, it actually increases the value relative to other things, despite the myth some people still have that if something is "free" it means it has no value. Anyway, Ariely's book, Predictably Irrational is now available. Ariely has also put up a blog about the book, though there's not much info there just yet.

Filed Under: behavioral economics, dan ariely, free, value