How do consumers respond to free

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Consumers respond to free differently depending on many different situations. Rebecca Hamilton, Associate Professor of Marketing at the Robert H. Smith School of Business at the University of Maryland summarizes her own research and that of others on this topic.

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How do consumers respond to free

  1. 1. How do consumers respond to “FREE”? Rebecca W. Hamilton Robert H. Smith School of Business University of Maryland
  2. 2. TRUE or FALSE? • Consumers will always want more of a desirable item when the price is lower.
  3. 3. Free is often very attractive • A few minutes ago, we asked you to choose between Hershey’s and Lindt chocolates. We varied the prices as follows: VS. $.01 $.14 FREE $.13
  4. 4. Free is often very attractive • When participants chose between Hershey’s and Lindt, which was the better seller? % 60% 30% 8% $.01 $.14 Nothing Hershey’s Lindt Shampanier, Mazar and Ariely (2008)
  5. 5. Free is often very attractive • When participants chose between Hershey’s and Lindt, which was the better seller? % 56% 31% 13% FREE $.13 Nothing Hershey’s Lindt Shampanier, Mazar and Ariely (2008)
  6. 6. Free is often very attractive • Many consumers really hate to pay for add-ons like shipping (Schindler et al. 2005) • Data from online book purchases showed that customers were twice as sensitive to the price of shipping than to the price of the books (Smith and Brynjolffson 2001)
  7. 7. Yet consumers don’t always want more if it’s free • Consumers offered Starburst candy for $.01 each purchased about 4 pieces • However, most consumers offered free Starbursts took only 1 piece (Ariely et al. 2006) Different “norms” apply to the exchange.
  8. 8. Free can make consumers feel uncomfortable • Consumers tend to respond very favorably to free shipping. • However, they’d rather pay a small amount for labor than get it for free (Hamilton and Srivastava 2008). Research suggests that free labor will not win.
  9. 9. Consumers prefer to pay less for low-benefit components shipping labor labor shipping Low-benefit component parts parts parts parts High-benefit component 71% 29% 69% 31% Customer Preferences for Customer Preferences for Parts and Shipping Bundles Parts and Labor Bundles Hamilton and Srivastava (2008)
  10. 10. However, free can make consumers feel uncomfortable labor shipping parts parts Low-benefit component parts parts High-benefit component 66% 34% 43% 57% Customer Preferences for Customer Preferences for Parts and Shipping Bundles Parts and Labor Bundles Hamilton and Srivastava (2008)
  11. 11. How does a free trial affect subsequent purchase? • Free trial reduces consumer uncertainly about the quality and features of the product – This is most important for expensive products • Free trial versions can build up the user base, increasing the value of the product – Important when there is a significant network effect • Free trials may cannibalize sales of the product – Especially when free trial is very similar to the product Cheng and Tang (2010)
  12. 12. How does product form affect WTP? • Information products vary in content and form – Hardcovers/softcovers and pdfs have the same content but differ in form – Different forms of the product may be most valuable in different usage situations, e.g., browsing on the train vs. search for specific info • Willingness to pay (WTP) is a function of – Reference prices and perceived price fairness (Kannan and Kopalle 2001; Thaler 1985) – Usage situations (Koukova, Kannan and Ratchford 2008)
  13. 13. How does product form affect WTP? • Product forms can be either substitutes (only content has value) or complements (distinct values across forms and usage situations) • Emphasizing distinct usage situations in marcomm increases consumer WTP for multiple product forms (i.e., bundling product forms will be attractive) Koukova, Kannan and Ratchford (2008)
  14. 14. Discussion & FREE chocolates

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