September 23, 2013
How Valuable is ‘Free!’?
According to a new university study, giving away a free product as part of a purchase actually boosts the perceived value of the freebie.
Researchers at Monash University and the University of Maryland explored the practice of stores offering bonus products for free or at a low discounted price with a required purchase. For example, many cosmetics companies offer free gift-with-purchase.
The researchers found that, since consumers believe the value of a free product is likely to be "consistent with the value of the purchased product," pairing a free product with a high-end product may very well increase perceptions of its value.
In one study, participants were offered a free or discounted package of spaghetti with the purchase of a jar of organic tomato sauce for $8.95. They were then asked how much they would pay for the spaghetti individually. People offered free spaghetti were willing to pay an average of $2.95 for it, but those offered the spaghetti for 50 cents were only willing to pay an average of $1.83.
In another example, a bottle of wine with purchase given by a luxury jeweler was perceived with a higher value than when the wine came with an extra $1.00.
"Free offers may not devalue products at all when they are paired with an expensive purchase, as consumers will use the price of the focal product to estimate the value of the supplementary product," wrote the authors, the Mauricio M. Palmeira (Monash University) and Joydeep Srivastava (University of Maryland), said in statement.
A similar theory came from the 2008 bestseller Predictably Irrational: The Hidden Forces that Shape Our Decisions by Dan Ariely, a behavioral economist at M.I.T., although it also came with a warning to consumers not to be fooled by such freebies.
According to Prof. Ariely’s studies, while most purchases are based on the highest cost/benefit difference, the value of a freebie is often perceived as higher than a typical cost/benefit analysis. In the book, the professor writes that "FREE! gives us such an emotional charge that we perceive what is being offered as immensely more valuable than it really is."
As one stark example, he notes how people regularly don’t calculate the value of their time when waiting in line for a free item or free entry. Free shipping can also lead to irrational purchasing. But it also extends monetarily when consumers are enticed to buy something they don’t really want or need in order to collect a "free" gift.
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Discussion Questions
Do you agree that offering a “free” bonus item or other free perks distorts the typical cost/benefit purchasing rationale? Are you in favor of such “free” promotions as a tactic for marketers and retailers?
Poll
Free is one of, if not the most powerful word in marketing. It triggers something in the consumer’s mind like no other word. In his book, Dan Ariely writes extensively about the impact of free on purchase decisions.
I am not a college professor but have done research when working for a large retailer on various promotions including various bundling techniques. Offering two items for a lower price seldom produced the same lift as offering one of the two for free even though the cost to the consumer was the same.
If testing proves that it works for items involved then manufacturers and retailers would be foolish not to utilize it. However, like any promotion, if over used the risk is that it either no longer works or that consumers start to diminish the value of the promotion and/or the free item.
This would seem to be fairly predictable purchase behavior. When the bonus item is “free” consumers are able to assign any reasonable value to the item that they wish. The higher the value assigned, the smarter the purchase seems. Classic cognitive reinforcement.
When offered the bonus item for a pittance, the consumer perception of the value of that item is pegged as “low”. And the value of the deal is then “low” — leading to “that’s not such a great deal after all.”
The implication for retailers is pretty intuitive — let consumers decide what the bonus item is worth and they will naturally assign it a higher value.
I’d love to see a follow up study. How many of the consumers who said the box of “free” spaghetti would be worth $2.95 to them have actually ever paid more than 99 cents for a box of spaghetti?
Cynical you say? Hey, it’s Monday.
I think Ben Ball’s assessment is correct. The shopper has the ability to determine the value vs. being “told” what it is worth. Ben also points out that there is the danger of assuming that what the shopper SAYS and DOES may differ.
This study also seems to focus on “luxury” items — would the results change for less luxurious-seeming products?
“Free” definitely distorts purchasing rationale. Once free is added to a purchase, people’s perception of that item including the free item changes. For me, if I receive something for free, I don’t want to pay for the same thing going forward, so there’s a bit of spoiling there.
Giving free products as a promotion only works in certain retail environments. For example, the beauty retailer Sephora gives away free beauty products with accumulated points. It works for them because it allows people to try out different products without having to make a purchase. The same model wouldn’t be as successful at a Target, per se. Higher margin items can sustain the weight of “free” items because everyone knows the cost is buried somewhere in a retailer’s bottom line. Nothing is ever free.
Air and water are largely considered to be free and how we treat these resources gives one a good snapshot of the value of free as it is owned by the typical consumer.
Adding value to any product or service is in no way connected to value added sales. Adding value is typically done by demonstrating additional capabilities and or benefits of a product or service that may not be known to the prospect or client. The focus of this discussion and its attempt to measure the increased value of a product or service when adding additional incentives to buy demonstrates the need to understand these differences and to proceed with the marketing plan and measurements methods separately. I would be interested in reading any study that observes and addresses the thousands of consumers that just show up for the free stuff only.
“Free” promos always have boosted the overall value of promoted items. If the free item is perceived as a benefit for the shopper, then it will typically continue to drive overall category lift. Emotions should be taken out of this process, however, as there are plenty of effective tools that can determine the ROI for these promos.
I went to a gas station last week that from time to time has strange items free with an 8 gallon fill-up. This station is a Quik Stop franchised out through Kroger to a third party operator. The current offer was a free iPhone Hands Free Amplifier with the Quik Stop logo on it. I don’t have an iPhone but I still went in after fueling 9 gallons and claimed my free item. I had no use for it and am not sure what to do with it; maybe give to someone else.
I must be naive, but it strikes me that retailers would be a lot better off improving customer service, pricing goods fairly, providing higher quality products than their competition, and reducing gimmicks such as freebies like this.
There’s an old saying, “Birds of a feather flock together.”
There is great strategy to bundling. Done well, the impact is that the consumer perceives a a higher value for the dollar. And, the right free product with the right high-end product can give the perception that the product you’re giving away is more valuable, just by being aligned with the higher-end product.
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Free is one of, if not the most powerful word in marketing. It triggers something in the consumer’s mind like no other word. In his book, Dan Ariely writes extensively about the impact of free on purchase decisions.
I am not a college professor but have done research when working for a large retailer on various promotions including various bundling techniques. Offering two items for a lower price seldom produced the same lift as offering one of the two for free even though the cost to the consumer was the same.
If testing proves that it works for items involved then manufacturers and retailers would be foolish not to utilize it. However, like any promotion, if over used the risk is that it either no longer works or that consumers start to diminish the value of the promotion and/or the free item.
This would seem to be fairly predictable purchase behavior. When the bonus item is “free” consumers are able to assign any reasonable value to the item that they wish. The higher the value assigned, the smarter the purchase seems. Classic cognitive reinforcement.
When offered the bonus item for a pittance, the consumer perception of the value of that item is pegged as “low”. And the value of the deal is then “low” — leading to “that’s not such a great deal after all.”
The implication for retailers is pretty intuitive — let consumers decide what the bonus item is worth and they will naturally assign it a higher value.
I’d love to see a follow up study. How many of the consumers who said the box of “free” spaghetti would be worth $2.95 to them have actually ever paid more than 99 cents for a box of spaghetti?
Cynical you say? Hey, it’s Monday.
I think Ben Ball’s assessment is correct. The shopper has the ability to determine the value vs. being “told” what it is worth. Ben also points out that there is the danger of assuming that what the shopper SAYS and DOES may differ.
This study also seems to focus on “luxury” items — would the results change for less luxurious-seeming products?
“Free” definitely distorts purchasing rationale. Once free is added to a purchase, people’s perception of that item including the free item changes. For me, if I receive something for free, I don’t want to pay for the same thing going forward, so there’s a bit of spoiling there.
Giving free products as a promotion only works in certain retail environments. For example, the beauty retailer Sephora gives away free beauty products with accumulated points. It works for them because it allows people to try out different products without having to make a purchase. The same model wouldn’t be as successful at a Target, per se. Higher margin items can sustain the weight of “free” items because everyone knows the cost is buried somewhere in a retailer’s bottom line. Nothing is ever free.
Air and water are largely considered to be free and how we treat these resources gives one a good snapshot of the value of free as it is owned by the typical consumer.
Adding value to any product or service is in no way connected to value added sales. Adding value is typically done by demonstrating additional capabilities and or benefits of a product or service that may not be known to the prospect or client. The focus of this discussion and its attempt to measure the increased value of a product or service when adding additional incentives to buy demonstrates the need to understand these differences and to proceed with the marketing plan and measurements methods separately. I would be interested in reading any study that observes and addresses the thousands of consumers that just show up for the free stuff only.
“Free” promos always have boosted the overall value of promoted items. If the free item is perceived as a benefit for the shopper, then it will typically continue to drive overall category lift. Emotions should be taken out of this process, however, as there are plenty of effective tools that can determine the ROI for these promos.
I went to a gas station last week that from time to time has strange items free with an 8 gallon fill-up. This station is a Quik Stop franchised out through Kroger to a third party operator. The current offer was a free iPhone Hands Free Amplifier with the Quik Stop logo on it. I don’t have an iPhone but I still went in after fueling 9 gallons and claimed my free item. I had no use for it and am not sure what to do with it; maybe give to someone else.
I must be naive, but it strikes me that retailers would be a lot better off improving customer service, pricing goods fairly, providing higher quality products than their competition, and reducing gimmicks such as freebies like this.
There’s an old saying, “Birds of a feather flock together.”
There is great strategy to bundling. Done well, the impact is that the consumer perceives a a higher value for the dollar. And, the right free product with the right high-end product can give the perception that the product you’re giving away is more valuable, just by being aligned with the higher-end product.