The high cost of charging pennies rather than free

By Steve Outing

My friend Pete Welter passed along some fascinating research about consumer behavior when it comes to free vs. paid products and services. There are some lessons for the newspaper industry as it debates things like micropayments vs. free news content on the web, and how it will handle charging for news (or not) on mobile devices.

“I’ve been reading Predictably Irrational by behavioral economist Dan Ariely — I’m really enjoying his stuff lately — and he has an interesting chapter on the psychological weight of ‘free’ vs. ‘not free’ that would seem to play into the whole micropayment vs. free discussion in the newspaper industry.

“The essence is that FREE is a category unto itself — not just 5 cents less than a nickel, but a very distinct and powerful category when people make economic decisions.

“A few experiements/examples he cites:

  1. “At a table in a grocery store, they have an offer to let you buy a single chocolate: either one Lindt truffle (high end chocolate) for 15 cents, or one Hershey’s kiss for 1 cent. 73% choose the Lindt, and 27% choose the Kiss. Now, reduce the price of each by a penny to 14 cents for the Lindt and free for the Hershey’s Kiss. The result: 69% for the Kiss, and 31% for the Lindt.
  2. “Given an offer of either a free $10 Amazon gift certificate, or a $20 gift certificate that would cost you $7 — overwhelmingly people will take the $10 certificate even though economic sense says otherwise.
  3. “When introduced, Amazon’s Super Saver shipping (free shipping over for orders over a certain dollar amount) caused a rise in order sizes worldwide, except France. Why France? Because for whatever reason, their Super Saver was a 20-cent shipping cost and not free. When they changed it to free, they fell in line with the increased sales of the rest of the world.

“So, if this data holds for journalism, people will be very willing to take the free news even at reduced quality over paying even a few cents for high-quality journalism.”

Ariely also has a blog, and it’s going on my RSS reader. Fascinating stuff. His latest post talks about an experiment at a gas station convenience store, where customers received a $1-off coupon as they filled up. Some coupons had a $6 minimum purchase to get the $1 discount; others had a minimum purchase of $2 for the discount; average store sales had been $4. Result: The $6 minimum-purchase dollar-off coupon raised the average store purchase total to over $4, while the $2-minimum coupons lowered the average amount spent per customer to be below $4.

Before newspapers go too much further on schemes to charge for news content, publishers may want to consult with Ariely or conduct some behavioral economics research.

Here’s a video of Ariely speaking at Google. Be sure to take a look at 27:50 where he talks about an experiment with pricing for The Economist’s print edition and website.

Author: Steve Outing Steve Outing is a Boulder, Colorado-based media futurist, digital-news innovator, consultant, journalist, and educator. ... Need assistance with media-company future strategy? Get in touch with Steve!