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01.20.2010

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Harness the Power of Free

“When one's expectations are reduced to zero, one really appreciates everything one does have”

—Stephen Hawking

In US culture, where everything is said to have a price, zero is something of an outlier. For when it comes to matters of financial calculus (what we believe things are worth, how much we are willing to pay, etc.) zero behaves like no other number.

Zero, as they say, is in a class by itself.

Economic psychologists have long understood that a price of zero—FREE!—has an almost mystical quality about it that quite literally causes us to abandon any hope for rationality. When we encounter FREE!, we find ourselves in the same state of mind that leads one to believe that he or she truly can consistently beat the house in Vegas.

In his recent book Predictably Irrational, Dan Ariely puts it best:

“Most transactions have an upside and a downside, but when something is FREE! We forget the downside. FREE! Gives us such an emotional charge that we perceive what is being offered as immensely more valuable than it really is.”

Ariely believes the power of free is related to our intrinsic fear of loss, a belief that has been confirmed by Yale researchers. Specifically, they have found evidence that such fears are literally hard wired into our decision-making process, a development innate in primates that has existed “since before capuchins and humans split 40 million years ago.”

You see, there’s no worrying about loss when we choose FREE! Because it’s, well, free.

Not coincidentally, our own research once again confirms this finding. In our recent report—The New Value Paradigm—we asked consumers:

“Which one of the following practices or methods gives you, personally, the best feeling when you encounter them?”

Which of the following gives you the best feeling?		Percent*
Free Product		30%
Coupons		20%
Manufacturers lowering prices		15%
Advertised sale price		13%
Loyalty card savings		13%
Unadvertised sale price		10%

In addition to the fact that “Free product” clearly dominates the pack, the duo of “Manufacturers lowering prices” and “Advertised sale prices” combined still scores less than free products.

Now that we have unequivocally established the power of FREE!, the next logical questions regard execution—how it works, who's done it well (and who hasn’t), as well as how to successfully deploy FREE! for both retailers and manufacturers.

We believe the power of free products or services works on two levels. The first has to do with engendering a sense of surprise, delight and excitement. With all of the anxiety regarding the current economic climate, free products quite literally make the consumer feel good in a way that lower prices or sale prices cannot. Put another way, it’s the shopper’s job to hunt down the best prices, it’s the retailer’s job to surprise them and make them feel better. Finally, to our critics who offer the common chorus of “Sure…who doesn’t want things for free, but how can we afford that,” we offer the following observation: With few exceptions, the only lever retailers or manufacturers have managed to activate in the history of CPG retailing is price. Is this as good as it gets?

The other reason free succeeds is related to universal cultural norms regarding reciprocity. As most of us realize, the unilateral giving of a gift compels one to return the favor, however small the gift may be. And because this is a cultural thing, it is a very powerful force. By now most of us have endured the uncomfortable experience of being surprised by a gift—say at a holiday party—when we have brought nothing to “return the favor.” Extrapolating this effect to the retail level (i.e., bestowing a surprise gift upon a shopper) may seem less consequential, but there is an effect there, however subtle.

Now that we have established how FREE! works, let’s take a look at some examples of companies that have successfully harnessed the power of FREE!

• Pagliacci Pizza: This successful Seattle-area pizza franchise periodically comps a home delivery order for regular customers. What really works here is that there is no formula; no way to regularly predict when the free order will be bestowed upon the loyal consumer—it just happens, like magic. This maximizes the effect of surprise and delight.
• Google: Google recently announced a plan to offer free Wi-Fi to holiday travelers in 47 airports across America until January 15th. Users who connect to one of the wireless hotspots will encounter a greeting page giving them the opportunity to donate to one of three charities, with Google matching the donations. This is the best kind of FREE, something unexpected, very useful and entirely unilateral.
• The Fillmore Auditorium: This San Francisco landmark has hosted the music of everyone from Jimmy Hendrix and The Grateful Dead to, more recently, the likes of Black Flag, Primus and Big Star. But the one thing that has remained constant in the clubs 40+ years of existence is that every concert goer is offered an apple. As in, “Hey man, have an apple.” This combination of equal parts tradition, good vibes and the communal sharing of food is transcendent.
• Servus: Canadian credit union Servus recently began handing out CDN $200,000 in ten-dollar bills to its customers, encouraging them to create a so-called “feel good ripple” by giving the money to someone else. Some suggestions include: purchase flowers for the grocery cashier, buy a coffee for the person behind you in line, etc. Customers are then encouraged to write about their experiences on a website. In addition to the power of surprise and reciprocity, this represents a far richer, more meaningful channeling of sustainability than most traditional corporate efforts accomplish. As our research has consistently found, sustainability works best when it is both personally meaningful and local.

Before you can successfully harness the power of FREE!, you need to really grasp the nuance of what works and what doesn’t; the fine line between genius and gerbil. Here we comment on some of the less successful uses of FREE!

• KFC: Most are aware of the recent KFC fiasco. Partnering with Oprah, they offered downloadable coupons good for a two-piece meal. Not surprisingly, Americans responded by overwhelming the restaurants—stampeding, shoving, pushing and otherwise hollering “We wanted our free chicken!”, as if were written into the Bill of Rights. These kind of promotions offer little in the way of surprise or delight. More to the point, there is no sense of personalization or reciprocity in this incarnation of FREE. The coupons Oprah invited her audience to download functioned more like an invitation to an unruly mob.
• Punch cards: We are referring here to those cards that crowd our wallets and purses. If we somehow manage to (a) not lose them and (b) actually use them, we are rewarded such that every nth (usually tenth) purchase is “FREE.” There is nothing surprising or delightful about this free scenario. More importantly, the burden is on the consumer. When you have to actually work for your FREE gift it suddenly isn’t so free. Surely you can think of more creative ways to reward your loyal customers.

Finally, rather than complain about who gets FREE! wrong, we thought it appropriate to examine how best to execute FREE! in the CPG arena, both in retail and by manufacturers.

Retailers: Bounded region, random stores, random days, regular basis

To avoid the pitfalls encountered by KFC, and also drive the surprise and delight factor, we suggest that a subset of a given retailers’ stores within a specific geographical region offer customers their choice of a free item with purchase. FREE! should always require a purchase, not to drive incremental sales as much as to guard against mobs of disinterested customers. It would prove more effective to allow the consumer to choose between a selection of offerings, for the physical act of choosing reinforces reciprocity norms. While the products for consideration need not be extended to include luxury items, there is little point in offering banal commodities either. Importantly, FREE! should always occur at the POS or, even better, upon exit. Research consistently demonstrates that the last experiential memory always dominates our evaluation of that experience.

At the same time, marketing support should attempt to seed the local blogosphere—community blogs, so-called mommy blogs and any other local/regional blogs—with details of the offer (selection of items, store locations, etc.). The basic goal is to get the word out to as many people as possible, but give the feeling that this is still a “special,” “word of mouth” offering.

Finally, it is important to understand frequency. This is surely not a “one time only” strategy. But on the other hand, for FREE! to work it cannot be expected. So we suggest deploying this strategy periodically at different stores, on different days, within a geographically bounded space. The goal is to get customers to the point where they know it routinely happens, but they don’t know when, where and, importantly, how.

And once again to our detractors, consider the limited creativity demonstrated by most in this world—but pay equal attention to our comments below!

Manufacturers: Redirect conventional price and promotion strategies to FREE!

Because we are all aware of the conventional price and promotion strategies deployed by manufacturers and sales teams, we won’t bother to summarize and will keep our remarks brief. By FREE! we are not referring to new product introductions or sampling. FREE! does not work if it includes things consumers are not already familiar with. Likewise, FREE! is not accomplished by conventional “free” couponing. This requires extra work by consumers and is seen as an “expected game” rather than channeling surprise and delight.

Instead, we recommend working in tandem with retailers to harness the power of FREE!. While FREE! works for retailers, the halo also extends to the brand. So why not consider directing a given percentage of your pricing and promotions budgets to experiment with FREE!

It may take some tinkering to get things just right. And there may well be some bumps along the way. But to generations of manufacturers and retailers who have never managed to consistently move beyond the good old-fashioned pricing lever, why not give FREE! a chance?

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