One Reason Companies Don't Do 'Free': They're Scared Of Pissing Off Those Who Bought?

Free

from the could-be... dept

Behavioral economist Dan Ariely, whose experiments with how people value “free” we’ve discussed before, has a fascinating column in the Harvard Business Review, explaining why companies don’t experiment, where the basic answer is that they’re afraid that some consumers will get a less acceptable experience during the experiment compared to others. For example, Ariely had worked for a while with a company to get them to put in place a series of experiments to see if offering things for “free” worked — but eventually the company balked:

Several months later, right before we were due to go live, we had a meeting about the final details of the experiment–this time with a bigger entourage from marketing. One of the new members noted that because we were extending differing offers, some customers might buy a product that was not ideal for them, spend too much money, or get a worse deal overall than others. He was correct, of course. In any experiment, someone gets the short end of the stick. Take clinical medical trials, I said to the team. When testing chemotherapy treatments, some patients suffer more so that, down the road, others might suffer less. I hoped this put it in perspective. Fortunately, I said, price testing household products requires far less suffering than chemo trials.

But I could tell I was losing them. In a sense, I was impressed. It was a beautiful human sentiment they were conveying: We care about all customers and don’t want to treat any one of them unfairly. A debate ensued among the group: Are we willing to sacrifice some customers “just” to learn how the new pricing approaches work?

They hedged. They asked me what I thought the best approach was. I told them that I was willing to share my intuition but that intuition is a remarkably bad thing to rely on. Only an experiment gives you the evidence you need. In the end, it wasn?t enough to convince them, and they called off the project.

I’m not actually convinced Ariely is correct on the reasoning here. It might not be this “beautiful human sentiment” where they “don’t want to treat any [customer] unfairly.” I suspect that it’s the same reason why dynamic pricing often gets shunned by companies: because if customers find out that someone else got a better deal, even if they were happy with the original deal they suddenly change their minds and believe they got ripped off. It’s because we tend to judge things relatively, rather than in absolutes, and companies that have been caught charging different prices to different customers often have found that the backlash is worse than the benefits of differential pricing.

However, it is interesting that many companies fear experimenting and prefer to just make a decision and go with it. I think this is less true in some tech companies. Google, for example, is infamous in their ridiculous level of experimenting and detailed A-B testing on things before going live with a final decision. But for companies that are worried about how any sort of “experiment” is viewed by consumers, you could see them being afraid to even try a concept like “free.” I’m not convinced this is really a strong enough effect to keep companies from using “free,” but it could be one explanation for why legacy companies are often so resistant to the idea.

Filed Under: dan ariely, economics, free, harvard business review
Companies: google