There is something special about free, we all feel it, we all kind of like it. That is unless you are a photographer or work in some other creative field that often sees the dark underbelly of free in the form of constant requests (and sometimes offers) to work for free. Free is radically different than affordable or even cheap. Free is in a class by itself and smart businesses learns to reign in free, to use it and not be trampled by it. Free distorts value in the minds of people and because of this it is powerful, dangerous, and occasionally useful.

While reading a little about pricing and value, I found two studies that talk about the nature of free by Dan Ariely, the James B. Duke Professor of Psychology and Behavioral Economics at Duke University. I'm not sure how or if they directly apply to running a business, but they are fascinating and should make one think hard when dealing with free.

The Lindt Truffle

The first study is recounted in his book Predictably Irrational: The Hidden Forces That Shape Our Decisions. In this study Ariely set up a situation in which people were offered a choice between two chocolates: a Lindt Truffle, which we all know is something quite special and a Hershey's Kiss, which is more ordinary. The Lindt was sold for 15 cents, the Kiss was a penny, and only one was allowed per customer. The price is a good value for either. Most people — 73 percent — chose the Lindt chocolate and 23 percent chose the Kiss. There is nothing surprising about this; people were willing to pay a little more for something they wanted more. Next, they lowered the price of each a penny. The Lindt now cost 14 cents and the Kiss was free. Everything else, including the price difference was exactly the same. The result was that now 69 percent of people chose the Kiss. If the Lindt chocolate was a good deal at 15 cents, it is even a better deal at 14 cents, but it couldn't compete with free even when people valued it more. Ariely provides a possible explanation:

WHAT IS IT about FREE that’s so enticing? Why do we have an irrational urge to jump for a FREE item, even when it’s not what we really want? I believe the answer is this. 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. Why? I think it’s because humans are intrinsically afraid of loss. The real allure of FREE! is tied to this fear. There’s no visible possibility of loss when we choose a FREE! item (it’s free). But suppose we choose the item that’s not free. Uh-oh, now there’s a risk of having made a poor decision—the possibility of a loss. And so, given the choice, we go for what is free. For this reason, in the land of pricing, zero is not just another price.

(This explanation fits very well with Prospect Theory for those looking to explore a little deeper.)

Tom Sawyer

The second study with George Loewenstein and Drazen Prelec, Tom Sawyer and the Construction of Value, starts with Tom Sawyer's famous solution to painting his Aunt's fence in which he talks his friends into paying him for the privilege of painting it. Twain describes Sawyer's insight:

[Tom] had discovered a great law of human action, without knowing it—namely, that in order to make a man or a boy covet a thing, it is only necessary to make the thing difficult to attain.

If Twain is correct then there are situations where people not only lack a sense of how valuable something is, they sometimes can't decide if it's worth paying for or being payed for—whether the same experience is to be desired or avoided. The study broke a group of students into two groups and looked into their willingness to attend a poetry reading by Professor Ariely—he would be reciting some Walt Whitman. (Incidentally, he's a captivating speaker: Ted.com) One group was asked if they would be willing to spend $2.00 to attend, the other half was asked if they would accept $2.00 as a payment for attending. Not surprisingly, only about 3 percent were willing to pay to hear the the reading, but 59 percent would attend if they were payed $2.00. Next, each group was asked if they would attend for free. Among those who were first asked to pay for the recital, 35 percent were willing to attend for free — up from 3 percent! Among the other group, who was originally offered payment for attending, now only 8 percent wanted to hear the free poetry reading. The initial question had a radical influence on how the respondents valued the free offer. The result fits with the idea of coherent arbitrariness which challenges the assumptions economists have long made about the underlying fundamental values of commodities and assets. Instead of having absolute values in mind, as traditional economists assumed, consumer valuation is much more arbitrary, even for simple pains and pleasures, and based on relative metrics of previous experience. To put it another way, you don't really know how people will value a good or service out of context and the context can be controlled in order to manipulate value.

As a side note, I need some work done on my deck this summer. If you are good with your hands and have experience, it will only cost you $200 for the privilege. Check back later for discounts and coupons.