(Stanford BUS-21)
Martin Westhead
Mastering Marketing
The Psychology of Free
How to make money
by giving things away
Overview
 Pricing is all about perception
 Ariely and Shampanier
- Free chocolate experiments
- The exuberance of Free
...
Pricing perception is not
always rational
 Cold beer on a hot day
1. From a grocer
2. From a Resort Hotel
 "Reasonable" ...
Studying Free
 Zero as a Special Price: The
True Value of Free
Products – Ariely and
Shampanier
1. Photo Survey
Pay vs. Pay Pay-1 vs. Pay-1 Free vs. Pay-2
Ariely and Shampanier
45%
40%
90%
40% 40%
10%
0%
10%
20%
30%
40...
14%
42%
40%
36%
19%
12%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1 2 3
Hershy's
Lindt
2. Real purchase: Money
where your mout...
8%
31%
30%
13%
0%
5%
10%
15%
20%
25%
30%
35%
1 2
Hershy's
Lindt
3. Removing Transaction
Costs
$0.01 $0.14 $0.00 $0.13
Pay ...
29%
64%
100%
71%
36%
0%
0%
20%
40%
60%
80%
100%
120%
1 2 3
$10 card
$20 card
$7
4. Gift Cards
$5 $12 $1 $8 $0
Pay vs. Pay ...
Conclusions
 Overwhelming positive over-reaction to Free
- Small reductions in price – no effect
- Go to free – adoption ...
Assumption
Corollary: The Penny Gap
 Josh Kopelman
- http://redeye.firstround.com/2007/03/the_first_penny.h
tml
 Challen...
Paying for shopping bags
 2013 - 67 of 88 Municipalities
in California
- Ban on plastic bags
- Min $0.10 charge for
paper...
Summary
 Pricing is all about perception
 Ariely and Shampanier
- Free chocolate experiments
- The exuberance of Free
 ...
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The Psychology of Free

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This lecture draws on the work of Dan Ariely to demonstrate the psychological impact of a $0 price point. It also considers some of the consequences of that impact.

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The Psychology of Free

  1. 1. (Stanford BUS-21) Martin Westhead Mastering Marketing The Psychology of Free How to make money by giving things away
  2. 2. Overview  Pricing is all about perception  Ariely and Shampanier - Free chocolate experiments - The exuberance of Free  The Penny Gap - The flip-side to Free exuberance
  3. 3. Pricing perception is not always rational  Cold beer on a hot day 1. From a grocer 2. From a Resort Hotel  "Reasonable" price for (2) is nearly twice (1)  Even worse when it comes to Free
  4. 4. Studying Free  Zero as a Special Price: The True Value of Free Products – Ariely and Shampanier
  5. 5. 1. Photo Survey Pay vs. Pay Pay-1 vs. Pay-1 Free vs. Pay-2 Ariely and Shampanier 45% 40% 90% 40% 40% 10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1 2 3 Hershy's Ferrero $0.02 $0.27 $0.01 $0.26 $0.00 $0.25
  6. 6. 14% 42% 40% 36% 19% 12% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 1 2 3 Hershy's Lindt 2. Real purchase: Money where your mouth is $0.01 $0.15 $0.00 $0.14 $0.00 $0.10 Pay vs. Pay Free vs. Pay-1 Free vs. Pay-2 Ariely and Shampanier
  7. 7. 8% 31% 30% 13% 0% 5% 10% 15% 20% 25% 30% 35% 1 2 Hershy's Lindt 3. Removing Transaction Costs $0.01 $0.14 $0.00 $0.13 Pay vs. Pay Free vs. Pay-1 Ariely and Shampanier
  8. 8. 29% 64% 100% 71% 36% 0% 0% 20% 40% 60% 80% 100% 120% 1 2 3 $10 card $20 card $7 4. Gift Cards $5 $12 $1 $8 $0 Pay vs. Pay Pay-1 vs. Pay-1 Free vs. Pay-2 Ariely and Shampanier $10 $20 $10 $20 $10 $20
  9. 9. Conclusions  Overwhelming positive over-reaction to Free - Small reductions in price – no effect - Go to free – adoption shoots up  Zero is a disruptive price  Why? - We focus on downside of a transaction - What is we don’t spend the gift card? - Free eliminates the downside - Cognitive transaction cost - Is it worth the price? - Act of asking the question  Purpose of this class To study effective business models that leverage this phenomenon
  10. 10. Assumption Corollary: The Penny Gap  Josh Kopelman - http://redeye.firstround.com/2007/03/the_first_penny.h tml  Challenge of Freemium - not $5->$50M, biggest gap is free to $0.01  Flip side of Free Psychology  Free -> disproportionate demand Demand Price $0 $0.01 The Penny Gap Reality
  11. 11. Paying for shopping bags  2013 - 67 of 88 Municipalities in California - Ban on plastic bags - Min $0.10 charge for paper/reusable bags  Huge change in shopper behavior  Its not the cost – the small charge is a trigger - Our brain recognizes the cost - Extrapolates the environmental cost
  12. 12. Summary  Pricing is all about perception  Ariely and Shampanier - Free chocolate experiments - The exuberance of Free  The Penny Gap - The flip-side to Free exuberance

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