Here’s an observation: the gap between “FREE” and “$0.99” on the App Store somehow feels exponentially larger than the same $1 gap between the $11.99 and $12.99 that I’d pay for an album off iTunes.

Here’s another 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. And then conversations 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

free stuff

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:

  • Google
  • Gmail
  • Facebook
  • Twitter
  • Skype

But what would happen if one of these suddenly started charging a subscription after I’ve been used to having it for free?

I tell you what would happen – we’d be inundated with chain whatsapp messages from people getting real panicky and “It can’t hurt anyone – so just in case” justifications.

whatsapp_embed_real_thumb

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”.

But either way, free stuff makes us crazy.

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.