Definition 

The Power of Free or “Zero Price Effect” describes the phenomenon that people tend to choose a product if it includes a free element even though it has little inherent value.

Explanation

The zero price effect is a psychological effect stating that a customer is more willing to buy something if something for free can be received - even if it is only minimally cheaper. People appear to act as if zero pricing of a good not only decreases its cost, but also adds to its benefits. Thus, customers may also be willing to spend more on a product just to save the price of another one.

What to watch out for 

❌ It can elevate your costs: The zero price effect can be expensive, especially for buy-1-get-1-free promotions! Make sure you use these measures sparingly to avoid cannibalizing your revenues.

❌ It does not work for every business model: The Power of Free is no one-size-fits-all. Depending on your product or service you can add features, upgrades or additional products. Select carefully given your business model, costs, and strategic goals.

❌ It differs in countries and industries: If customers distrust the free element, the effect can also have a negative impact. Additionally, the effect is smaller in industries where customers make more frequent decisions and gain experience of what they need (e.g., mobile plans).

Sources & further reading

Nudge: Improving Decisions about Health, Wealth, and Happiness by Richard H. Thaler & Cass R. Sunstein 

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"Key Behavioral Pricing Effects"