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When Research and Business (Don’t) Collide, Marketing Edition…

July 26th, 2010 · 9 Comments
Advertising · Behavioral Econ

Bear with me as I take you on a pictorial journey through my day last Friday. (I swear there is a point to all of this.) I gave a talk to a marketing company in Minnesota, so much of my day consisted of schlepping halfway across the country and back on about 2 hours of sleep. My first observation was that Minnesota and Boston look very different, even from the air:


(I will leave it to the reader to determine which is which. Also, if I ever get banned from flying, you can be pretty confident that it’s because I didn’t heed the no electronics on takeoff and landing bit. But really, if my iPhone camera is enough to bring down a Boeing 747, then it is very statistically unlikely that it hasn’t happened yet, and I therefore reject the null hypothesis of “personal electronic devices cause airplane chaos.”)

Anyway, I had some time to kill after my talk and before my flight back to Boston, so my gracious host dropped me off at, where else, the Mall of America. I mean, how can I study behavioral economics and consumer behavior and not be entirely too curious about this shrine to consumerism? I mean look, even in photos it looks like it’s being blessed by some higher power:

The effect is just a coincidence, of course, since we all know that God prefers Wal-Mart. As it turns out, the actual stores in the mall aren’t particularly interesting, so I went in search of a late lunch instead. And by lunch I mean booze, obviously.

I generally take opportunities like this to do some reading, so I pulled up Dan Ariely’s Predictably Irrational. Now, much of what’s in these sorts of books isn’t new to me, since I’ve already seen most of the academic papers that these sorts of books draw from, but I still feel the need to read them in order to see what information is actually getting out to the non-academic world.

I just so happened to be reading the chapter about the power of a zero price, and I learned/was reminded of a few things:

  • As a couple of you have pointed out, Dan does in fact use the specific example of Ben & Jerry’s free cone day to illustrate the appeal of free stuff. I had no idea that I was totally ripping off his example, so I am retroactively giving credit where credit is due. 🙂
  • It really does appear that the notion of free has a pull on people that a very low but positive price does not. For example, Ariely shows that changing a tradeoff between a 15-cent item and a 1 cent item into a tradeoff between a 14-cent item and a free item can move consumption significantly toward the free item, even though the underlying tradeoff hasn’t changed much.
  • Ariely and his colleagues were able to replicate his findings in various contexts, including one experiment that he performed on kids coming to his house on Halloween to trick-or-treat. While he learned that kids are also irrationally drawn to free stuff, I learned that it’s not necessarily a good idea to live next door to an economist. (For this reasons as well as others.)

An ungated version of the paper that the book chapter is based on can be found here. In his book, Ariely concludes the discussion on the power of a zero price with the following:

Zero is not just another discount. Zero is a different place. The difference between two cents and one cent is small. But the difference between one cent and zero is huge!

If you are in business, and understand that, you can do some marvelous things. Want to draw a crowd? Make something FREE! Want to sell more products? Make part of the purchase FREE!

That is probably why I was so amused to see, not more than 10 minutes later, the following sign as I was walking around the mall:

Sigh. If research falls in a forest and no one’s around to hear it, does it make a sound?

Dear Wet Seal: YOU’RE DOING IT WRONG. That is all. xoxo, econgirl

Tags: Advertising · Behavioral Econ

9 responses so far ↓

  • 1 Rob // Jul 26, 2010 at 7:21 pm

    Wetseal may or maynot have it wrong as I believe that there are some jurisdictions where it is against the law to give something away for free, thus the nominal penny. the question is, in these jurisdictions, is there any difference between the penny and free?

  • 2 Bryan W // Jul 26, 2010 at 7:51 pm

    considering that a penny doesn’t even get you a gumball anymore I’d say you’re right…there is no difference between free and a penny. However, in this case, free may actually have more value than a penny.

  • 3 Peter M // Jul 26, 2010 at 8:44 pm

    I prefer 50% off sales (assuming it is a real sale) because the rationalist in me says I may not need two of the item.

    Bad sale idea: JC Penneys (and others) give an added 15% off to those using their JC Penneys card. I don’t want an extra credit card, so I avoid shopping when such a sale is offered.

    All in all, I refer shopping at “every day low” places that have few, if any sales.

  • 4 tamara // Jul 27, 2010 at 2:26 am

    I’m glad you made a comment regarding this book, which I just read and I gave a nice insight of behavioral economics 😀
    This “sales” they have in any store anywhere in america are deciving for example:
    last week I went into Hollister (what’s with the light in that place, do they dont want me to look at the items properly or what? O_o and how come is suppose to be a like house on the beach and it’s dark -_-, anyway) there was this deal get one jean and the other half off, of course, the rational in me told me to get the better deal and I did needed the two jeans so it wasn’t like trick me on that one, however, when I paid for it it was almost $80 O_O wtf is this suppose to be a deal? what they do is simple: they make the first jean twice the price and it comes out even more expensive.. because the first item is $50 and the second is half off so add $25, you end up $75… that you otherwise will not pay for a couple of jeans ¬¬
    btw I bought them but I felt so ripped off that I returned them the next day -_-

  • 5 Joao Pedro Afonso // Jul 27, 2010 at 4:34 pm

    If there is no law against dumping, there is surely against comment recycling. But this post is so much like another I commented no so long ago (at http://rationalreactor.com/2010/06/18/the-hidden-cost-of-free/#comments), that I don’t resist to quote myself then. About the second quote from Ariely book:

    “My second comment is about how we explain the cafeteria experiment. “There” was “surprise” there because the demand grew up much more for the “became-free” product than the other, despite the price reduction to be the same. Because that demand was considered anomalous and a very different reaction for the “same” reduction, we elected the change of status of the free product from priced one as the motive for it… and end discussed why free products are special.

    However, I don’t think that’s a good conclusion for the experiment. We stressed the equal reduction of absolute price, but that induces an error: they didn’t experimented an equal reduction in “price”. For the intelligent consumer, what’s matter is not what is the absolute price of the goods, but how much he can acquire with what he has. A reduction of price to zero means he can acquire an infinite number of goods more than before. Opposite to that, a reduction of 15 to 14 means he can buy only 7% more. Of course he will focus on the first product, he is much more cost effective to have. The surprise here is not the level of demand of the kisses but why they didn’t dominated completely the demand. If there are something apparent here is that, to be “free”, is detrimental, not beneficial”

    I follow-up expressing my conviction I wasn’t seeing the all picture of the experience. Was there some ration scheme to avoid scarcity? Could it be deforming the experiment results? Back then I had an excuse of knowing the book, but now with the link to the paper, I haven’t. But I’m too lazy to read it.

    A second point I made then (actually, it was my first back then) is that, unlike products with a fair price, free products has its rarity to offer. It is not only the scarcity of a good opportunity to buy them but the story around it, which is also rare, and like a good fisherman story, appreciated. This helps to circumvent or mask eventual hidden costs, like to confront mobs in search of the same commodity or transport costs, or… If I’m right on this, then the power of the “free” product will wane if the offer is too much repeated.

  • 6 Timmy // Jul 28, 2010 at 10:52 am

    So if stores want to increase sales without doing anything, they should advertise: “Buy one item double-price, get a second of the same item FREE!”

  • 7 tamara // Jul 29, 2010 at 4:39 am

    @timmy, maybe not in those words but it is their strategy and it works… i ended up returning because the econ in me was nagging me to do so xD it wasn’t optimal or rational… i feel that once youre at the register ready to pay and they check the items and the guy is just waiting for you to pay or give him your credit card and you ask something like “but i didn’t know that was the price” the salespersons just looks at you with a get the hell out here you cheap bastard xD and you kinda of feel some peer pressure and ended buying -_-
    i did return the items at a different time so i wouldn’t find the same guy who sold them to me… so that’s probably why i got them cuz believe me it thought they were far too expensive when i paid for them ¬¬

  • 8 Friday Links | Vicki Boykis // Jul 30, 2010 at 7:19 am

    […] Jodi on marketing and how it affects us […]

  • 9 Marsh // Feb 2, 2015 at 7:39 am

    When we talk about business then research are so important. I have done so much research when I started doing Forex trading and it was not so much with this business but with the company that I selected, it was OctaFX broker that I preferred since it has low spread of just 0.2 pips, high leverage up to 1.500 and also excellent trading platform where I was able to execute all my trading orders instantly without any kind of delay or requotes.

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