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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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(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
The Penny Gap- The flip-side to Free exuberance
Pricing perception is not always rational
Cold beer on a hot day1. From a grocer2. From a Resort Hotel
"Reasonable" price for (2) is nearly twice (1)
Even worse when it comes to Free
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-2Ariely and Shampanier
1 2 30%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
45%40%
90%
40% 40%
10%
Hershy'sFerrero
$0.02 $0.27 $0.01 $0.26
$0.00
$0.25
1 2 30%
5%
10%
15%
20%
25%
30%
35%
40%
45%
14%
42%40%
36%
19%
12%
Hershy'sLindt
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-2Ariely and Shampanier
1 20%
5%
10%
15%
20%
25%
30%
35%
8%
31%30%
13%
Hershy'sLindt
3. Removing Transaction Costs
$0.01 $0.14 $0.00 $0.13
Pay vs. Pay Free vs. Pay-1Ariely and Shampanier
1 2 30%
20%
40%
60%
80%
100%
120%
29%
64%
100%
71%
36%
0%
$10 card$20 card
$7
4. Gift Cards
$5 $12 $1 $8 $0
Pay vs. Pay Pay-1 vs. Pay-1 Free vs. Pay-2Ariely and Shampanier
$10 $20 $10 $20 $10 $20
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 classTo study effective business models that leverage this phenomenon
Assumption
Corollary: The Penny Gap
Josh Kopelman- http://redeye.firstround.com/2007/03/the_first_penny.ht
ml
Challenge of Freemium- not $5->$50M, biggest gap is
free to $0.01 Flip side of Free Psychology Free -> disproportionate
demand
Dem
and
Price
$0
$0.01
The Penny Gap
Reality
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
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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