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How offering a product for free can backfire

It seems counterintuitive, but there are times customers would rather pay a small amount than get something for free

Published: May 4, 2023 11:18:28 AM IST
Updated: May 4, 2023 12:45:10 PM IST

How offering a product for free can backfireIf freebies make us more aware of incidental costs, is there a way to prevent that extra scrutiny? Image: Shutterstock

For companies looking to attract new customers, offering people the first item for free seems like an intuitive—and successful—marketing strategy.

But a team of Kellogg researchers wondered if this “zero-price” strategy could be counterproductive at times. Xiaomeng Fan, a former Kellogg doctoral student now at ShanghaiTech University, and former visiting scholar Fengyan Cindy Cai, had observed the opposite in their native China. For example, in many Chinese cities, older residents can get free flu vaccines, but Fan knew that many of them chose non-free vaccines instead.

So the two teamed up with Kellogg marketing professor Galen Bodenhausen to investigate how zero pricing might actually work against a company sometimes. They found that there are, indeed, times when people would rather pay a small price for something than get it for free.

It comes down to the question of incidental costs, such as how much time or effort is involved with the purchase, or whether the purchase seems particularly risky. The researchers found that when something with high incidental costs was offered for free, it elicited extra scrutiny from consumers. This led them to dwell more than they ordinarily would on these costs and ultimately led to lower demand for the product. But when that same product had a low price, even an extremely low price, it did not trigger that same scrutiny of incidental costs.

This meant that there was actually more demand for a low-price version than a free version of the same product when the product had a high incidental cost—a so-called “boomerang” effect of zero pricing.

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“We wanted to find out, what are the limits of the zero-price offer?” Bodenhausen says. “We wanted to show that even though it seems intuitive to offer a product for free, it’s not always in the marketers’ interest to offer a zero price. There are certain circumstances where a low, nonzero price can do a better job of increasing demand.”

When a Product Is Free, Consumers Will Scrutinize Time and Effort

Most purchases include incidental costs—which can include the time and effort to make the purchase, or the risk associated with the purchase. Think of the hours required to wait in line for the latest sneaker drop, or the social risk from the potential embarrassment of purchasing lice shampoo at your local drugstore.

For many consumers and marketers, these nonmonetary costs are not top of mind. While customers are surely aware of them, they are often so small when compared with the sticker price of a product that customers can choose to ignore them.

But Bodenhausen and his colleagues proposed that these costs might receive higher scrutiny if the product was free. That is, if the main feature that customers generally focus on—the monetary price—did not exist, then their attention might turn to a different element of cost.

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In a series of studies, the team tested their hypothesis and found some surprising results.

In one study, 205 college students in the U.S. completed an online survey that described a class on stress management. Some participants were told the class would be held online; others were told it would be held about 40 minutes away. Across both of those groups, some students were informed the class was free and others were told it would cost $2. The participants then indicated their interest in attending the class and wrote down their thoughts about attending.

The results confirmed the researchers’ hypothesis. For those who were told the class would be online, which had fewer incidental costs, a free class elicited higher interest than the low-cost class.

But for those who were told the class would be in-person, a free class elicited less interest than a low-cost class. In the survey, participants expressed more concern about the time it would take to travel to the class in the free condition, compared to the $2 condition.

To Prevent Scrutiny, Keep Consumers Mentally Busy

If freebies make us more aware of incidental costs, is there a way to prevent that extra scrutiny? To find out, the researchers examined whether a high cognitive load would change consumers’ preferences.

They conducted another study in which 306 Chinese college students were told they were part of a study involving a class on mindfulness. This time, all participants were told the class would be in person, at a site about 60 minutes away from campus. Some were told it would be free; others were told it would cost less than $1.

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Before being told about the class, participants were asked to remember a number. Half the participants were given an 11-digit number (giving them a high cognitive load), while the other half were given a 3-digit number (a low cognitive load). They all then read the course description and were asked to rank their interest in the course.

Those with the low cognitive load behaved like the consumers in the previous study: the zero price drove down demand. But those with a high cognitive load acted differently: the zero price actually boosted demand for the class, even though there was a high incidental cost of travel time.

“If you interrupt that scrutiny process, then you don’t get this boomerang effect anymore,” Bodenhausen says.

Consumers Don’t Scrutinize Low-Cost Goods

Each of those studies involved the cost of time. What about other types of incidental costs?

In another study, the researchers focused on the expenditure of effort. They recruited 192 Chinese participants and gave them information about an online seminar on resume writing. The seminar required participants to submit an initial draft of their resume before the class began. Some participants were told the class was free. Other were told it would cost the equivalent of 1 cent.

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The free price increased interest among those who already had a resume written. But those who did not have a resume ready—and would thus have to expend effort creating one—were less interested in the free class versus the extremely low-cost class.

Not only does this finding demonstrate that the effect extends to effort-related incidental costs, but it also shows how powerful the number zero really is. “This shows that the boomerang effect involves a consumer reaction that is unique to zero prices,” Fan says. “The effect does not occur with extremely low prices.”

The researchers were surprised by this, Bodenhausen adds. “I thought maybe people would be suspicious of a 1-cent price, that perhaps it might trigger greater scrutiny, but it was still much more effective than a zero price.”

The researchers also studied whether this boomerang effect would hold true if the incidental cost involved risk.

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They asked 376 Chinese college students to read a paragraph that included basic information about hepatitis C, and then told the students that a pharmaceutical company had developed a vaccine for the disease. Some participants were told that the vaccine had been on the market for a while and was performing as expected. Other were told the vaccine was not yet widely used, so authorities were still monitoring its performance closely. Within each group, some participants were then told they could get the vaccine for free, while others were told it costs less than $1.

Yet again, the scrutiny hypothesis held up. Among participants who were told the vaccine was not yet widely used—which presumably made it seem riskier—there was more interest in the low-cost vaccine than the free one.

The researchers wanted to rule out an alternate explanation, that participants were skeptical of the company for offering a free vaccine. But, when asked, participants indicated that they were not skeptical of the pricing strategy, suggesting that a zero price does not deem a product or company less trustworthy.

Marketers Can Price According to Incidental Costs

Bodenhausen, who has studied perceptions of numbers, says that zero holds a special place psychologically. The understanding of zero comes later in child development than the understanding of small numbers, and zero as a number and a concept emerged later than other numbers in Western civilization.

“In monetary terms, the difference between 0 and 1 is incredibly small, but psychologically, it’s much different—it’s the absence of something versus the presence of it,” Bodenhausen says.

While future researchers might want to further explore the scrutiny that zero pricing elicits, the current results already have implications for marketers.

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A zero price should be avoided when incidental costs are high. This is often the case in offline channels, where costs like commute time or exposure to COVID-19 could come into play. Marketers could even consider segmenting pricing to different groups according to incidental costs or at different stages in the product’s life cycle. Perhaps a free price isn’t best for a new vaccine but could work for a well-established one.

Regardless, this scrutiny can be mitigated by keeping potential consumers cognitively busy. “Of course, socially responsible marketers need to consider consumer welfare when deciding whether and how to increase the cognitive load,” Fan and Cai say.

[This article has been republished, with permission, from Kellogg Insight, the faculty research & ideas magazine of Kellogg School of Management at Northwestern University]