Consumers respond to free differently depending on many different situations. Rebecca Hamilton, Associate Professor of Marketing at the Robert H. Smith School of Business at the University of Maryland summarizes her own research and that of others on this topic.
1. How do consumers
respond to “FREE”?
Rebecca W. Hamilton
Robert H. Smith School of Business
University of Maryland
2. TRUE or FALSE?
• Consumers will always want more of a
desirable item when the price is lower.
3. Free is often very attractive
• A few minutes ago, we asked you to choose
between Hershey’s and Lindt chocolates. We
varied the prices as follows:
VS.
$.01 $.14 FREE $.13
4. Free is often very attractive
• When participants chose between Hershey’s
and Lindt, which was the better seller?
%
60%
30%
8%
$.01 $.14
Nothing Hershey’s Lindt
Shampanier, Mazar and Ariely (2008)
5. Free is often very attractive
• When participants chose between Hershey’s
and Lindt, which was the better seller?
%
56%
31%
13%
FREE $.13
Nothing Hershey’s Lindt
Shampanier, Mazar and Ariely (2008)
6. Free is often very attractive
• Many consumers really hate to pay for add-ons
like shipping (Schindler et al. 2005)
• Data from online book purchases showed that
customers were twice as sensitive to the price
of shipping than to the price of the books (Smith
and Brynjolffson 2001)
7. Yet consumers don’t always
want more if it’s free
• Consumers offered Starburst candy for $.01
each purchased about 4 pieces
• However, most consumers offered free
Starbursts took only 1 piece (Ariely et al. 2006)
Different “norms” apply
to the exchange.
8. Free can make consumers
feel uncomfortable
• Consumers tend to respond very favorably to
free shipping.
• However, they’d rather pay a small amount for
labor than get it for free (Hamilton and Srivastava 2008).
Research suggests that
free labor will not win.
9. Consumers prefer to pay less for
low-benefit components
shipping labor
labor
shipping
Low-benefit
component parts parts
parts parts
High-benefit
component
71% 29% 69% 31%
Customer Preferences for Customer Preferences for
Parts and Shipping Bundles Parts and Labor Bundles
Hamilton and Srivastava (2008)
10. However, free can make consumers
feel uncomfortable
labor
shipping
parts parts
Low-benefit
component
parts parts
High-benefit
component
66% 34% 43% 57%
Customer Preferences for Customer Preferences for
Parts and Shipping Bundles Parts and Labor Bundles
Hamilton and Srivastava (2008)
11.
12. How does a free trial affect
subsequent purchase?
• Free trial reduces consumer uncertainly about
the quality and features of the product
– This is most important for expensive products
• Free trial versions can build up the user base,
increasing the value of the product
– Important when there is a significant network effect
• Free trials may cannibalize sales of the product
– Especially when free trial is very similar to the product
Cheng and Tang (2010)
13.
14. How does product form affect WTP?
• Information products vary in content and form
– Hardcovers/softcovers and pdfs have the same
content but differ in form
– Different forms of the product may be most valuable
in different usage situations, e.g., browsing on the
train vs. search for specific info
• Willingness to pay (WTP) is a function of
– Reference prices and perceived price fairness (Kannan
and Kopalle 2001; Thaler 1985)
– Usage situations (Koukova, Kannan and Ratchford 2008)
15. How does product form affect WTP?
• Product forms can be either substitutes (only
content has value) or complements (distinct
values across forms and usage situations)
• Emphasizing distinct usage situations in
marcomm increases consumer WTP for multiple
product forms (i.e., bundling product forms will
be attractive)
Koukova, Kannan and Ratchford (2008)
