For a while now, I’ve been wanting to write a post on the economics of free stuff. Because empirically speaking, the gap between “FREE” and “$0.99” is exponentially larger than the same ±$1 gap between the $7.99 and $8.99 that I’d pay for an album off iTunes.
I’ll give you an example: I’m a big user of the pro-HDR app on my phone. It’s one of the first apps that I ever purchased – and it has made every holiday and food-outing since a better, brighter and more braggable experience. But whenever I show someone a pro-HDR photo, and I tell them what app I used, the first question I get asked is “Was it free?”
“No,” I say, “but it was the best $0.99 that I’ve ever spent on this phone. Download. Download it now. It will change the way that you have holidays.”
At which point: vacillation.
There is conversation about whether it’ll be used enough, and whether it’s worth it, and aren’t there any free apps that work in a similar way, and “I don’t really take that many photos anyway” [Well obviously – because your photos don’t look nice. If you used a better camera app, then you’d take nice photos, and then you’d take more of them.]
Eventually, the decision is taken to delay making a decision, and we order another G&T instead. Which usually costs about six times the price of the pro-HDR app. #ButItsFineBecauseWe’reOnHoliday.
What Should Happen, and What Actually Happens
Economist Dan Ariely, famous for his faith in our irrationality, often talks about the following experiment:
- He set up a stand in a busy cafeteria to sell chocolates
- He was selling Lindt chocolate truffles for 15 cents, and Hershey kisses for 1 cent each.
- People could choose only one type of chocolate.
Because the Lindt chocolate truffle was particularly excellent and highly discounted (it normally retails for 50 cents), 73% of the people that came to the table opted to pay the premium and buy the Lindt chocolate.
A short while later, he dropped the price of both products by 1 cent – the Lindt chocolate truffle now cost 14 cents, and the Hershey kiss was free. And despite the fact that the discount on the Lindt chocolate truffles was the same, demand reversed and 69% of people opted for the Hershey kiss.
Which seems oddly irrational – if our preference is for Lindt chocolate truffles at the discounted price, then 1 cent should make no difference. And yet there was a major shift in demand between 1 cent and “free”.
Of course – there is a possible flaw in Mr Ariely’s experiment. It’s entirely possible that the demand shift was a result of a changing market. When cost was involved, you only got real chocolate lovers at the table. When one of the chocolates was suddenly free, the market expanded to include everyone that wouldn’t normally pay for chocolate but would quite willingly take it for nothing.
Yet even that flaw would reinforce the irrational mania around the concept of “free”. If you wouldn’t pay 1 cent for a chocolate – why flock to have one if it’s free? Clearly, they’re not important to you. So why the sudden personality shift?
How That Translates Into Real Life
A list of services that cost nothing:
Question: what would happen if one of these suddenly started charging a subscription after I’ve been used to having it for free?
Even consider Whatsapp – new users are asked to pay a subscription after the first year, but the older users that downloaded it when it was free are never going to be charged for it. Because if we were, we would just stop. We’d maybe start using iMessage a bit more. Or BBM. Even though the real cost of doing that would be high (not everyone has iMessage or BBM, we’d have to use multiple messaging programs for a while, and so on).
So How Do Companies Transition From Free To Not Free?
They offer supplementary services for a fee. You get in-app purchases for more options; or you can buy boosters in Candy Crush; or Skype allows you to call landlines and mobiles if you buy Skype credit.
I think that’s why we tend to look for “the catch”.
The real question is how Facebook plans to monetise Whatsapp…
My guess – in the same way as Skype. Free calls and Whatsapp credit. And then maybe there will FINALLY be an application that can successfully cross between my lap top and my phone.
As long as it’s still mostly free.