Free Is A Magic Number?
To start the year off, I’ve invited a guest blogger: Tim Baker of The Pricing Institute and Baker Richards in the UK. This an edited version of an article that appeared recently in “Arts Professional.”
When talking about price, it’s often easy to overlook one of the most important of prices: FREE! “Free” can be an incredibly powerful tool for generating demand, but may create more challenges than it addresses. This is particularly true for the arts.
From a customer’s perspective, there’s no better price than “free.” This might seem obvious, but “free” actually bends the demand curve (the relationship between a product’s price and the volume of demand) disproportionately. Demand at zero is substantially higher than demand at just 1 cent.
In Predictably Irrational, Dan Ariely demonstrates this with an experiment involving chocolate. When he offered university students the chance to buy a high quality Lindt truffle for 15 cents or a regular Hershey’s Kiss for 1 cent, 73% opted for the truffle. When the offer was repeated at 14 cents for the truffle and 0 cents for the Hershey’s Kiss, 69% chose the Hershey’s Kiss. Neither the quality of the chocolates on offer nor the difference in price (14 cents) had changed, but introducing ‘free’ reversed preferences. When we choose “free” there is no risk attached. There is no possibility of loss because there is literally no cost.
This perhaps explains why “free” is such an attractive pricing strategy for the arts. It appears to overcome the risk perceived in attending an unknown event. However, “free” is not without its problems, and not just because it generates zero income!
A prominent example of “free” as a pricing strategy in the arts is the free entry scheme to national museums introduced in the UK in 2001. The removal of admissions fees coincided with a 62% increase in the number of visits. However, an increase in visits is not the same as an increase in visitors. In a study conducted by MORI, the number of people claiming to visit increased by only one third. Thus, the majority of the increased visits were actually an increase in frequency of visits by people who were already visitors, rather than a result of much wider accessibility which was the aim.
More recently, “free” was used to encourage young people to try theater. The UK scheme “A Night Less Ordinary” (ANLO, which offered free theater tickets to those under the age of 26) had two primary aims: to increase the number of young people attending the theater for the first time, and for participating young people to continue to attending the theater beyond the project’s duration. However, evaluation research found that only 8% of respondents in a survey of young people taking up the offer were first time attenders. They also found that 80% said they would now be more likely to go the theater again, but would only be willing to pay up to £10 to do so!
This highlights the problem of using a “free” trial to create sustained demand. “Free” attracts big initial take-up, but the gap between “free” and paying full price is so large that retention of trial consumers is poor.
Academic research in the commercial sector concludes there is a 20% discount threshold. Reduce the standard price by 20% or less and the subsequent effect is positive. Reduce the standard price by more than 20% and the subsequent effect is negative.
When price is reduced (either partially or all the way to zero), it has the expected result of stimulating demand. Purchase rates of the product spike due to existing and new consumers purchasing more of the product and making those purchases on an accelerated timescale. However, such discounting focuses the consumer on price and makes them more price sensitive than they were before. Consequently, a new consumer will be more likely just to wait for another discount rather than purchase the product at full price.
In a recent book,Free: The Future of a Radical Price, Chris Anderson argues that where marginal costs are low “free” can be used as a strategy to reach the largest possible audience. But he also acknowledges that people don’t care as much about things they don’t pay for. When something is free, people tend to behave less responsibly. How often in theaters do we find it is the people with complimentary tickets who don’t turn up? Even the smallest payment represents a conscious investment.
This is for me the biggest problem with “free” as a pricing strategy for the arts. Art is the very definition of a high value experience. If we give it away for “free” we undermine its value.
Note: To read the full version of this article, visit:www.thinkaboutpricing.com.
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