To a neo-classical economist zero is just another price. To the average consumer it brings the magical connotations of free. We are always trying to get something for nothing so if something is free then consumers impulsively take the option. Ariely shows how this impulse comes with hidden costs that debunk the myth of rational consumers. Whether it’s from eating too much free food or accumulating worthless free pens, clickers etc, people are always trying to get a free lunch.
As usual (this is what is so great about the book) Ariely did an experiment to find the answer (neo-classical economists take note). He set up a stall with offering (one per customer) two piles of chocolates, the first being Lindt truffles (luxury chocolate) and the second being Hershey kisses (standard chocolate). He sold the Lindt for 15 cent and the Hershey for 1 cent. Due to their superior quality 73% choose Lindt and 27% chose Hersheys. So far, so good. An economist would say that Lindt was obviously a superior product and as the benefit from it outweighed its cost better than Hershey did, it sold better.
So Ariely knocked one cent off the price of each chocolate, so that the Lindt truffle cost 14 cent and the Hershey kiss was free (people were still limited to one). If Lindt was a superior product then it should hold its place as its relative price hadn’t changed, it still cost 14 cent more than Hershey. Sure the proportions had changed, but one cent is the same amount in your pocket regardless of proportions. You don’t buy goods in proportions; you buy them in absolute amounts. Any textbook will tell you that all decisions are done on the basis of cost-benefit analysis, so if the benefit of the chocolate outweighs the cost, then consumers will buy it. Seeing as the benefit (pleasure) of eating Lindt didn’t change and the cost relative to Hersheys also didn’t change, we should expect the same result. Instead the numbers were flipped and 69% choose Hersheys and only 31% choose Lindt.
Most of the time, choosing the free option doesn’t do any harm. However, when we have to choose between two options (like the above experiment) choosing the free option can make us worse off. Another example is Amazon who noticed that by adding the offer of free shipping to an additional purchase, got people to buy something they wouldn’t have otherwise bought. Some people may not have even wanted the extra product but the magic word free was too enticing. This slight change greatly increased sales, except in one country, France. That’s because instead of offering free shipping, the French division charged one franc. Although it was essentially free, it didn’t contain the magic word and therefore people didn’t fall under its spell.
Quick fire experiment. If you had the choice between a gift voucher worth $20 that costs $7 or a gift voucher worth $10 for free? Answer quickly and impulsively!
Which did you choose? Odds are you choose the free voucher, even though it was the wrong answer. The $20 voucher that costs $7 leaves you with a net of $13 and is better option, but most people are swayed by the prospect of getting something for free.
The magic allure of getting something for free can blind us to its hidden costs and lead us to make bad decisions. We buy the more expensive car because it comes with a free oil change (something that doesn’t cost much especially relative to a car). We choose the credit cards that are initially free before hidden costs kick in. Zero calorie or sugar free drinks feel like the healthy option, more than even one calorie drinks. Simply adding the prospect of free can greatly boost sales. This can also be used for public policy. Want to encourage people to get a health check, use environmentally friendly transport or get more education? Then don’t make it very cheap, make it free.