This lecture draws on the work of Dan Ariely to demonstrate the psychological impact of a $0 price point. It also considers some of the consequences of that impact.
2. Overview
Pricing is all about perception
Ariely and Shampanier
- Free chocolate experiments
- The exuberance of Free
The Penny Gap
- The flip-side to Free exuberance
3. Pricing perception is not
always rational
Cold beer on a hot day
1. From a grocer
2. From a Resort Hotel
"Reasonable" price for (2) is
nearly twice (1)
Even worse when it comes
to Free
4. Studying Free
Zero as a Special Price: The
True Value of Free
Products – Ariely and
Shampanier
9. Conclusions
Overwhelming positive over-reaction to Free
- Small reductions in price – no effect
- Go to free – adoption shoots up
Zero is a disruptive price
Why?
- We focus on downside of a transaction
- What is we don’t spend the gift card?
- Free eliminates the downside
- Cognitive transaction cost
- Is it worth the price?
- Act of asking the question
Purpose of this class
To study effective business models that leverage this phenomenon
10. Assumption
Corollary: The Penny Gap
Josh Kopelman
- http://redeye.firstround.com/2007/03/the_first_penny.h
tml
Challenge of Freemium
- not $5->$50M, biggest gap is
free to $0.01
Flip side of Free Psychology
Free -> disproportionate
demand
Demand
Price
$0
$0.01
The Penny Gap
Reality
11. Paying for shopping bags
2013 - 67 of 88 Municipalities
in California
- Ban on plastic bags
- Min $0.10 charge for
paper/reusable bags
Huge change in shopper
behavior
Its not the cost – the small
charge is a trigger
- Our brain recognizes the cost
- Extrapolates the
environmental cost
12. Summary
Pricing is all about perception
Ariely and Shampanier
- Free chocolate experiments
- The exuberance of Free
The Penny Gap
- The flip-side to Free exuberance