Make something free, and rationality disappears. You can recoup the money elsewhere.
- Free as an incentive to buy: Around 40% of e-commerce transactions have free shipping. To differentiate further, some companies such as Nordstrom and Zappos also offer free return shipping. Free shipping is obviously a strong persuasive force. During Q3 2010 the average order value for transactions involving free shipping was 41% higher than transactions without free shipping. Higher volume can quickly make up for lower margins.
- Free with the cost moved elsewhere: Amazon’s Prime service offers free 2-day shipping for $79/year. So it’s really not free at all. In direct terms serious shoppers may well save money by subscribing to this service, but that discounts the value that Amazon accrues from the additional purchases those individuals make as a result of the “free” shipping. The siren call of “free” probably also encourages many people to sign up for the service despite not actually accruing $80 of shipping costs in one year.
- Free with the cost disguised: As a user, if you aren’t paying to access the service, you’re most likely the product, not the customer. The implicit contract with companies like Facebook, Instagram, Twitter and the like is that users provide their eyeballs and behavioral data in return for use of the system. In turn, the companies sell that information to advertisers, who are their true customers.
People respond differently to “free” than they do to simple price reductions. As Dan Ariely points out in his book Predictably Irrational, the move from cheap to free is much bigger than the move from expensive to cheap, so making something about the transaction free removes any remnants of rational thought from the shopper’s mind. It seems that people do not simply subtract costs from benefits. Instead, they see free products as having more benefits.
Ariely explains that when buying things, consumers compare the upside and the downside. When something is free, the downside disappears. You can’t lose anything from making that choice, even if you ultimately end up with something that is less suitable for your needs.
How to use the power of free
- Free has a magnetic attraction. Offer free shipping, but only on orders above a certain amount so that shoppers add more to their cart. The free shipping doesn’t even have to be of the same quality as the paid-for shipping, so you can still show differentiation, which gives you the chance to upsell (for instance from free economy shipping to two-day or overnight shipping).
- Ensure that “free” items you give have an obvious value. Gifts must have value to be seen as an incentive.
- Instead of discounting the cost of your product or service, add an accessory or additional service for “free.” The additional emotional response of “free” creates more value than a straight discount.
- Use the lure of a free service to attract a secondary audience who provide the incentive for your primary audience to use your product. For instance, Facebook’s secondary audience is their user base, which provides eyeballs for their primary audience’s ad impressions.