There is one behavioral economics experiment that has been in blogs and mainstream media more than any other, it is the Hersheys and Lindt experiment done by Dan Ariely, Professor at Duke and author of Predictably Irrational. It is quoted as unassailable evidence by every article extolling the virtue of the so called “freemium” model.
For those who are fortunate enough to not know about this magical experiment and its far reaching implications on pricing here is a quick summary,
In a busy food court, where people already come everyday to make lunch purchases, Ariely and team did two tests. Tests were conducted at the check out counter, when customers pay for the food. I will let Ariely summarize the rest
in one trial of one study we offered students a Lindt Truffle for 26 cents and a Hershey’s Kiss for 1 cent and observed the buying behavior: 40 percent went with the truffle and 40 percent with the Kiss. When we dropped the price of both chocolates by just 1 cent, we observed that suddenly 90 percent of participants opted for the free Kiss, even though the relative price between the two was the same. We concluded that FREE! is indeed a very powerful force.
This finding from one trial, the 90% conversion is enough for most. And we are not stopping to do the expected value math on giving a free product to 90% of customers.
Success and popularity of two startups, Dropbox and Evernote, add to this madness. I wrote about cognitive biases in making a case for freemium and making blanket statements like, “free is free marketing”. Even now we see articles that base their case for giving our products away for free on Hershey’s.
Much has been written about the Psychology of Free. Two books that looked specifically into the subject are “Free” by Chris Anderson and “Predictably Irrational” by Dan Ariely. Putting it simply, Free is an emotional hot button that immediately reduces the mental barriers for the customer. Free makes people think that they have “nothing to lose” since many ignore time as an investment.
How relevant is one trial to every possible pricing situation out there? It is not enough to say we are in San Diego just because we see white sandy beaches. What are the variations of the experiment that model the webapp and iOS app worlds? Since they are not looking for it, let us look at other variations of the experiment and see how solid and relevant that one trial is for basing pricing model of web startups. (Consider these experiments in the context of thousands of webapps and iOS apps out there)
- Run the experiment with Lindt and with a no name brand of chocolate offered free. Will free win over Lindt’s brand and value proposition?
- Run the experiment with Lindt and Hershey’s and 20, 50, or 100 different no name brands. What will a no name brand’s share be compared to Hershey’s?
- Run the experiment with Lindt and 20, 50, or 100 no name brands. Will the 90% conversion still hold? What will each brand’s share be?
- Run the experiment with Lindt and some thing else that is not labeled as chocolate. Test participants should not be told what that second item is. It is just that it was offered free. Will the mystery item find bigger taking than a product whose value proposition is clear?
- Lastly, don’t run the experiment in a food court where there are already people. Run it in the middle of no where. Will free still mean free marketing?