Have you ever considered: which ad works better?
The price of zero effect explained
The zero-price effect comes from a simplification many buyers make use of when 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 a downside – i.e., no costs.
Consumer testing has shown that the offer of a free product may completely reverse the consumer’s usual preference for the same commodity. For example, when consumers were offered a discount on Hershey chocolates and Lindt chocolates, more of them chose Lindt, despite the Hershey brand being offered at a much lower price. However, when Hershey chocolate had a zero-price tag, consumers switched preference.
Customers are even prepared to queue for hours to receive a free coffee offered by a trending coffee shop, although they buy a similar coffee every day at a very low price somewhere else. Surveys suggest that consumers are willing to take unusual measures to obtain the free product, and value it more highly, simply because it does not cost anything.
However, when consumers think carefully about the free item, its attractiveness declines, as they realize that there is a sacrifice attached to obtaining it. They must e.g. devote a lot of time and effort to identify the free product or browse through masses of irrelevant advertising. Then, once they identify the attractive zero-priced merchandise, they must wait in a queue to acquire it. These are all hidden costs to avoid paying for a product that may be of inferior quality to those available at a higher price than zero.
The high demand of free subscriptions to online content sites is a further example of the power of free. Signup rates for the free version are usually significantly higher than those for the low-priced alternative. While “freemium” users experience a severe loss in quality, paying subscribers can explore substantially more information and gather better data, ultimately enabling them to make better decisions in their business or regular lifestyle.
The price of zero effect works. The benefit of the free version, however, can be illusionary, for customers as well as suppliers.
Popular price models based on the price of zero effect
The zero-price effect is well known by many marketers and is used across many industries.
The tourist industry is one example, where the zero-pricing model is popular. Here, customers were traditionally offered a choice of multi-component packages, for instance half board and full board, or use of the Leisure Centre. The tourism owners calculated an attractive price for each of the available options. Recently, they have very successfully integrated zero-priced products into their offer because customers regard the free elements as indirect extra value. Research shows that these components are much preferred to an inexpensive offer that is not free. Guests are even willing to pay for additional products that enhance the quality of the free one. The psychological explanation for the success of the zero-pricing model is that customers are unable to rationalize the price of each element of the bundle of products and services. The addition of a free add-on simplifies the decision for the customer.
Another example of the zero-price effect is Amazon’s introduction of free shipping for purchases above €20 in Europe. In a simple test across different countries, this effect was obvious. In those countries that introduced the free shipping, most customers instantly added further products to reach a purchase value of €20 to get free shipping. Only France did not participate fully and instead of free shipping only offered a reduction in the delivery fee for purchases above €20. In return, most customers did not add further products to reach the €20.
Also, for product bundles, zero-priced components can play a decisive role in increasing sales. Research has confirmed that consumers are more tempted to buy a bundle with a zero-priced component than an alternative comprising all elements that must be paid for. It corroborated two key characteristics of the zero-price effect:
- Consumers take less time to make the purchase decision when a zero-priced item is included.
- The level of positive emotion resulting from the purchase is higher than experienced from buying a bundle without zero-priced components.
Particularly for online platforms and SaaS solutions, the freemium price model has become very popular. The underlying strategy is to offer the user a range of subscription packages from free to premium. Customers who opt for the free level are expected to be tempted to move up to the paid levels to gain access to further features. Although this approach has driven user numbers to higher levels, conversion from the highly subscribed free product to the premium versions is often relatively low.
To summarize, the phenomenon of the zero-price effect may be advantageous to both consumer and supplier. To make best use of it, it is crucial to understand and apply it correctly.
Master the zero-price effect on the buynomics platform!
Therefore, 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.
- The price of zero effect is strong
- Both customers and suppliers are sensitive to it
- To make the best use of it, the ability to properly assess its effects in a specific situation is key
The price of zero effect comes from an irrational consumer behavior to prefer less attractive free products over better ones priced slightly above zero. In this blog, we will explore the nature of the phenomenon and pricing models to exploit it.