My finances, my projects, my life
December 7, 2023

The true price of free

  Compiled by myLIFE team me&myFAMILY July 29, 2022 1090

Buy one, get one free; breakfasts included with your holiday package; a month’s free access to a streaming service without commitment… attractive offers everywhere we look. But beware, in economics, everything has a price!

We’re all drawn to offers involving free products, zero-cost promotions and all-inclusive packages. And we’re always on the lookout for free plans that help keep costs down. But did you know that getting things for free always has an emotional cost? This is an important point to bear in mind because it can affect your wallet. myLIFE helps you understand the effect of “free” so that you can see the difference between truly good deals and marketing tricks.

An illustrative example

To help us better understand the zero-price effect, let’s take an everyday example. You’re paying for your weekly fill-up at the petrol station and see a promotion on chocolate bars. You have a choice between your favourite brand and another bar of lower quality that costs, say, 40 cents less. If you’re like most people, you’ll choose your favourite bar, despite the price difference between the two options.

The following week, the same scenario, with even lower prices for both chocolate bars, but with the same price gap. The probability that you’ll choose your favourite brand is still very high. The third week at the checkout you notice that your favourite bar costs only 40 cents, but that the lower quality bar is on offer for free! Despite the same price difference, this time you’ll most likely choose the lower-quality chocolate bar just because it’s free.

According to classical economic theory, since the price gap remains the same, you should have chosen your favourite bar again. However, the fact that the lower quality bar is free seems to have completely changed your decision criteria. But why?

Free: a special price

According to classical economics, each individual consciously or unconsciously engages in an analytical exercise to determine the optimal cost/benefit ratio when making an economic choice between two options. According to this approach, a price of zero should be treated like any other price. But as our example suggests, zero is a special number that seems to interfere with our ability to evaluate options.

Behavioural economist Dan Ariely has discovered a zero-price effect that distorts our decision-making ability.

The chocolate bar experiment was carried out by renowned behavioural economist Dan Ariely, who has discovered a zero-price effect that distorts our decision-making ability. Instead of weighing the costs of free products against their benefits, we only see the benefits and overvalue them. It’s as if a price of zero generates a disproportionate increase in value for the free product. Even if the chocolate bar is of lower quality, it’s suddenly worth choosing because we get it for free. While this makes no sense rationally, it naturally speaks to all of us on an emotional level.

Free products therefore have an additional power of attraction. They make us happier, which is nice. But this happiness affects our decision-making process, which should put us on guard. We tend to magnify the item’s pros and ignore any cons (i.e. the mediocre taste of the cheap chocolate bar). This raises a very serious question: what does the free option cost? When blinded by a free option, it’s advisable not to make a decision without first trying to see what it hides.

A high emotional and real cost

The zero-price effect is well known to marketing professionals, who know how to take advantage of our emotional reaction to free items. Some companies use the zero-price effect to attract customers or get them to try out new solutions. Consider free trials for software programmes, express delivery services, fitness clubs or online publications before you have to pay to continue using them.

The idea is simple: associate the brand with the feeling of pleasure you get from receiving a gift, thus generating a positive image of the company. And it works! We’ve all been “happy” to receive a t-shirt, a mug, a USB stick or a reusable bag at a conference or event.

So far, all this seems very innocent, but it’s much less so when this zero-price effect is combined with the endowment effect (the tendency to value an item more when we own it than when it belongs to someone else.) This recipe allows the brand to acquire or retain customers using artificially created sentimental value. Blinded by the zero-price effect, we’re more likely to make poor choices.

“All-inclusive”, or how to hide the cost of free

Packages that include free services are popular. They can take the form of all-inclusive holiday packages or internet, telephone and TV bundles that seem very advantageous. But we should be careful to avoid being so blinded by the advantages on offer that we no longer assess whether the offer really meets our desires or needs.

On analysis, informed consumers may realise that they’re paying a lot of money for free services that they may never use.

On closer inspection, informed consumers may realise that they’re paying a lot of money for free services that they may never use. What’s the point of having a landline in your all-inclusive package if you never use it? And is the all-you-can-eat buffet included in your holiday package really so attractive? How good actually is the food? Are you really going to fill your plate five time at every meal to get your money’s worth and then spend the day sleeping by the pool to help everything digest, instead of sightseeing or socialising?

Taking the time to consciously carry out a cost-benefit analysis is beneficial. For example, a half-board package with a quality three-course meal is likely to be significantly cheaper, more in keeping with your habits, and healthier. The money saved might even allow for some extra excursions that will leave you with better memories than enormous meals. The same reasoning may be useful in the case of the insurance included in the holiday package, the real price of which you don’t really know and which covers a risk probably already covered by your family insurance.

Accepting cookies? Watch out for indigestion!

In economics, things we get for free often have a hidden cost. This is especially true in the digital economy. You may have heard the saying: “if you’re getting something for free, you’re the product”. The digitisation of our economy is generating large amounts of user data collected from the transactions we perform on our smartphones, tablets and computers.

Accepting all cookies from a site to access it for free actually comes with a cost: your data is collected and used as currency. You pay the real price of this free access later, when you’re swamped with targeted advertising generated as a result of this exchange. Is it really worth it?

The reason why the zero-price marketing or business model is so widespread is because companies know their customers are often unable to rationalise the price of each element of a package or react rationally to a product on offer. You now understand the importance of weighing up the pros and cons and thus taking back control over your emotions when faced with a supposedly free product.

Instead of systematically choosing the free product, opt first and foremost for what suits you. After all, it’s better to pay a few cents for a chocolate bar you enjoy than to pay nothing for one you don’t.