The Power of Free
A theme running through a lot of these videos – and a good place to look if you haven’t seen it yet is the one about System 1 and System 2 – is that many businesses are set up on the assumption that customers are basically rational. That they will buy up the pros and cons of different sites, different products, different offerings, and choose the one that gives them the most of what they want for the lowest price. But the real world isn’t like this. People are actually pretty bad at rationally weighing up the fors and againsts of different options – their decision making is actually based much more on emotions and intuitions.
In today’s video, I’m going to talk about one particular type of irrationality that is very relevant for e-commerce. It actually comes from a book called Rationally Irrational by a Psychologist called Dan Ariely, which I really recommend. So, in the book, he talks about a lot of different experiments that he’s done with his research team, and one of the most interesting ones is this: What they did was to set up a temporary chocolate stall in the University – but it only sold two things. One was Lindt truffles. You’ve probably seen them, they’re those chocolate balls that you get in a red box. You normally get them at Christmas, or if someone wants to give you a nice thank you present. The other thing they sold was Hershey’s kisses. They don’t really do them in the UK, but if you’ve been to America and had Hershey’s chocolate, you’ll know they’re not that great.
So, this was a special offer discount stall and the Lindt chocolates cost 15p (when they’re normally about 50p), and they Hershey’s ones cost just 1p. Most people bought the Lindt ones, because they were getting a really big discount on some really nice chocolates – in fact, 74% of people bought the Lindt ones. But then on another day, they did it slightly different- everything was the same, except that both prices were reduced by just 1p. So, the Lindt chocolates cost 14p instead of 15p, and the Hershey’s kisses were free instead of 1p. So, you’d think that customers would show pretty much the same pattern, right? After all, it’s just like before except with 1p taken off all the prices. But actually, this changed their behaviour completely. Now only 30% of customers chose the Lindt chocolates – even though now they were an even better bargain than they were before – and 70% chose the Hershey’s.
This is why they call it “The Power of Free”. If people were rational, offering something at 1p would be almost the same as offering it for free. But they’re not rational, so it’s totally different. The word “Free” is like magic: people will give up the much better deal to get the thing that is FREE.
So, think about how you can harness this power of free for your own site. For example, offering free shipping or a free gift is usually going to be more enticing than offering a discount on the main item, even if – in purely rational terms – the overall discount is less. So when you’re putting together your site, don’t picture a rational consumer who’s cooly tallying up the total cost of the order; picture someone who – like all of us – gets irrationally excited about getting something for free.