Free goods have extra magnetic power. Before consumers buy a product, they usually investigate its value as well as the price. But when something is offered for free, it forces them to step away from their regular decision-making process.
The zero price effect is based on an irrational consumer's behavior to value free goods over products priced slightly above zero. People tend to have lower expectations attached to free products, so it’s relatively easy to surpass them.
The logic is simple. For most consumers, the zero price effect takes away the difficulty of deciding on a purchase. Instead of having to solve the difficult problem of weighing the benefits vs. the costs of different product alternatives, a free option allows them to choose the one without the hassle i.e., no costs. A free product means no effort or time has to be invested in the decision.
Moreover, science has shown that a ‘free’ offer may completely reverse the usual preference for the same commodity. In an experiment, two types of chocolates were offered in a cafeteria, Hershey for 1 cent and Lindt for 14 cents. At these prices 8% of people chose Hershey and 30% chose Lindt. However, when one cent was reduced so that Lindt cost 13 cents and Hershey - free - the demand for Hershey almost quadrupled to 31%. This irrational preference for free things is what we call the zero price effect or the Power of FREE!
We have seen consumers line up for hours to grab a free coffee offered by a trending coffee brand, even though they buy a similar coffee every day at a very low price somewhere else. Surveys suggest that they are willing to take unusual measures to get the free product and that they value it more highly, simply because it costs nothing.
After realizing the true power of zero, many companies have spent a big budget developing free products. As we said before, free goods have extra magnetic power. By choosing the right product and time, and making informed decisions with data, companies can create a sentimental value that can deepen customer loyalty.
However, it's not just enough to figure out the zero price effect but also the customer behavior and conversion strategy. Unlike the first step, where the consumers move past the product selection stage without a cost barrier, converting consumers to pay for the same product later can prove to be a bit of a hurdle. Once a brand gets a customer used to free products or services, it’s tough to get them to pay for the same service or product later on.
In our recent Buynomics’ global behavioral pricing parametrization study, we AB-tested the power of zero price effect. Two groups of consumers each in three different countries were given a choice between two data tariff plans.
In the first case, a customer had the choice of 3 GB or 5 GB data at €1 per month for a period of 6 months. In the second case however, the 3 GB plan was offered for the same price, but the 5 GB plan was offered at zero, for the same time period.
Objectively, the 5 GB plan was more attractive in case 2 compared to 1 (no payment for the first 6 months vs. €1). Given the current science on the power of zero, the 5 GB plan should have been preferred substantially more often. However, the result was much more mixed:
In Spain and France, 64% and 46% of customers preferred to pay €1 for both data rates, respectively. In Germany, on the other hand, 10% of consumers switched to the free plan.
This raises the question: Is the zero price effect still a valid concept?
Given the experiment, the answer appears to be much more nuanced than popular science will have you think. Contexts like product, culture, and industry have a huge effect on the validity of this effect.
At Buynomics we are constantly adding further behavioral traits to the repertoire of the virtual customers on the Buynomics platform. Virtual customers make purchase decisions just like real customers when shown potential offers — single products or portfolios, at different price points, and with or without competition. This allows users of the Buynomics technology to find the offer that optimizes sales, revenue, or profit. Among a range of other behavioral traits, Buynomics’ virtual customers can also be susceptible to the price of zero.