The Power of Free!

Are you one of these people, that finds the word FREE, particularly when it is written in capitals, irresistible? Does it grab your attention and bring you into shops even when you had no intention of going there? Have you accumulated large volumes of free stuff that you never use, so you pass it onto your kids and they never use it either? And more worryingly, have you found that the word free has led you to actually spend more in a shop or on a website than you originally intended? In short, why is free such a seductive word?

If we have any doubts about its power, recent research findings should ally them. In his book Predictably Irrational, Dan Ariely reports the results of an experiment which shows the extent of the difference free makes. When consumers faced a choice between paying 15 cents for a Lindt chocolate and one cent for a Hershey’s Kiss, about 73 percent chose the former. When both were reduced by one cent in price to 14 cents and free, about 69 percent chose the Kiss. The relative price difference between the two had not changed but consumer behaviour flipped.

The reason of course that we consistently behave this way is that every purchase decision contains an element of risk. Free is a powerful antidote to this risk because there is no visible possibility of loss. And when it is mixed in with other prices, consumers will frequently make sub-optimal decisions because of its allure. The lessons in this are obvious. Free is one of the most powerful weapons available to businesses for attracting attention, creating enquiries, encouraging trial and generating sales or bulk sales. And when it’s your turn to be the consumer, watch out for its magnetic appeal.

Watch This!

The television industry is a really good example of the dynamics of modern marketing strategy. Not that long ago TV manufacturing had become a largely commodity business – the cathode ray tube was the primary technology and intense competition between large retailers had driven down margins to tiny levels. Then along came a disruptive technology – liquid crystal display (LCD) and large size, flat panel TVs hit our shops, tempting us to spend much more and upgrade our home entertainment systems. Good news for everyone you might think but not so fast!!

Yes the demand for flat screen products has been huge. In 2011, the world’s consumers spent $115 billion on flat screen TVs and a further $110 billion worth of screens has gone into smartphones, tablets and so on. But as recent research shows, none of the companies that make LCD panels are actually making any money from the activity (economist.com). Between 2004 and 2010, the industry suffered cumulative losses of $13 billion and that includes top firms like Samsung, LG and Sharp. In fact, Sony is about to lose money on its television business for the 8^th consecutive year and currently loses $80 on every TV it sells.

So manufacturers will complain about intense price competition and falling demand but what this case really shows is how difficult it is to win with a performance value proposition in some industries. Companies will sweat about improving picture quality or adding interactive features but the reality is that all TVs are good, cheap and do similar things. As the good people over at Apple have shown, it is not just about how the product performs. Pull the emotional levers and you will find the margins are much juicier.