Whenever we shop for anything online, we begin by browsing. If we find something we like we probably add it to the cart and go see if we can find a discount code. Then? We check the shipping. It’s free, right? Or at least it can be? We figure out how to hit some (often arbitrary) threshold and if we can’t, that may very well be enough to abandon a purchase. We need something free out of this transaction, otherwise it doesn’t feel worth it. That is the power of free. The word FREE is one of the most effective forms of copy a marketer has at their disposal. It catches the attention more than any other word. More than NEW or DISCOUNT or BESTSELLER. It’s hard to beat free. But what makes free so effective? For that, let’s take a look at the research.

Priceless Chocolate

The best example demonstrating the power of free is probably through a set of simple experiments conducted by behavioral economist Dan Ariely. As described in his bestselling book Predictably Irrational, Ariely offered subjects something desirable, in this case chocolate, at a variety of prices. The options were a Hershey Kiss vs a Lindt Chocolate Truffle. The Kiss was inexpensive and generic, the Lindt was expensive, and the higher-end chocolate. In the first experiment, Ariely offered the Kiss for 1¢ and the Truffle for 15¢. Approximately 3 out of 4 people chose the Truffle (73%). This established that the Lindt Truffle was the superior product and worth the extra money.

The second experiment is where things get interesting. In this iteration, Ariely offered the Truffle for 10¢, but the Kiss for free. From a numbers perspective, Ariely had decreased the price of the Truffle by 5¢ vs the Kiss by 1¢. In theory, the Truffle was a much better deal, but that’s not how we evaluate free. This time, approximately 2 out of every 3 people chose the Kiss (69%)!¹

The value of free, something for nothing, won out dramatically, especially when compared to the results in the first experiment. This is despite the clear difference in quality and the lower price. Free won. There are flaws to this experiment, the most prevalent being convenience. What if the customer didn’t have money to pay, so they defaulted to the free option? Sounds plausible, but yet another experiment tested for this edge case. This time, the same price experiment was executed in a cafeteria line, where the chocolate was more of an addition to a meal, rather than the only item to purchase. Even in this case, the free Kiss was the overwhelming choice.²

So what’s happening here? Ariely pinpoints this behavior as an aversion to loss. In essence, free items carry no risk – we lose nothing by going for the free Kiss, while you do part with money if you choose the Truffle, even if it’s a bargain. This phenomenon can be explained by the Zero Price Effect. Essentially, this principle outlines how the price of zero is not accounted for by a linear utility model. In simpler terms, zero breaks the traditional relationship between price and demand. Normally, as the price decreases, demand increases in an expected way. That is until you reach zero or free. Free has an outsized impact on demand.³

When you assess if an item is worth purchasing, it is based on the cost and its benefit to us (i.e. cost-benefit analysis). When things are free or priced at zero, it tempts us to discard our regular decision-making process – it becomes irrational. Our perception is distorted because the cost side of the analysis is thrown out the window. Instead, the benefits are magnified and the downsides are largely disregarded.⁴

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.

Dan Ariely in Predictably Irrational⁵

The cost-benefit analysis of FREE is skewed completely. This overvaluing of free happens for several reasons:

• Loss aversion: free eliminates any loss
• Perceived value: free always feels like a deal, so we assign higher value than worth
• Cognitive simplicity: when free, it is easier to decide by removing risk and mental load
• Affect heuristic: able to use social mindset over transactional (price is no longer a factor)

Long story short, free has a strong influence over how we make decisions and that is no less true in the world of e-commerce. One of the most impressive examples of free comes from Amazon and their ‘free shipping’ initiatives which disrupted the industry at the time and can be partially attributed to their meteoric rise.

Amazon and Free Shipping

It all started over the holiday season in 2000, when Amazon was looking at what to promote during their busiest time of year. One hypothesis was that shipping was a barrier to purchase and so they were considering ways to overcome that. An employee from the finance team had the following insight:

Greg Greeley mentioned how airlines had segmented their customers into two groups — business people and recreational travelers — by reducing ticket prices for those customers who were willing to stay at their destination through a Saturday night. Greeley suggested doing the equivalent at Amazon. They would make the free shipping offer permanent, but only for customers who were willing to wait a few extra days for their order. Just like the airlines, Amazon would, in effect, divide its customers into two groups: those whose needs were time-sensitive, and everyone else. The company could then reduce the expense of free shipping because workers in the fulfillment centers could pack those free shipping orders in the trucks that Amazon sent off to express shippers and the post office whenever the trucks had excess room. Bezos loved it. “That is exactly what we are going to do,” he said.⁶

This eventually resulted in Amazon offering free shipping to customers with orders over $99. Essentially, customers who were willing to wait a few days to receive an order were also the ones who had cost as a barrier, so they optimized around this. If they wanted it faster, they could pay.

“Amazon introduced the service, called Free Super Saver Shipping, in January 2002 for orders above $99. In the span of a few months, that number dropped to $49, and then to $25. Super Saver Shipping would set the stage for a variety of new initiatives in the years ahead, including the subscription club Amazon Prime.⁶

Today that idea has evolved into same-day or two-day shipping and what we now know as the Prime Membership. This mechanism alone was a huge driver of growth for Amazon.

Customers were enticed to continue ordering because of free shipping, which led to more spending, which led to behavior change, which led to online shopping outpacing big box retailers. Amazon is one of the most well-known examples of just how powerful free can be when it comes to e-commerce, but let’s explore some of the other prevalent applications in this space.

Applications of Free in E-commerce

We see ‘free’ a lot when it comes to online shopping, largely driven by various types of promotional messaging, but there are other use cases as well.

Free Shipping

This is table stakes nowadays – if you don’t offer free shipping in some form, you aren’t going to get very far. It isn’t as simple as just offering free shipping though. You need to understand what makes it profitable for the business and beneficial to the customer – similar to how Amazon created Super Saver Shipping. This is where testing various thresholds and offering different types of shipping options becomes key.

BOGO

Another common tactic leverages the two-for-one model, or buy one get one free. This free item can entice customers to buy, but again this should be implemented strategically. The threshold or offer of one item should have a high enough margin to cover the costs of the secondary free product, making it a win for the business.

Free Samples or Gifts with Purchase

Similar to BOGO in the idea that you’re getting another item for free, but rather than a typical product, these are often lower-priced goods that the business can afford to give away. Sample sizes of core products or complementary products useful for consuming the products are common here. And at times, if the brand is strong, even swag works well as a GWP. Ideally, these products enhance the experience, ignite brand loyalty, or promote repeat purchases through trial.

Free Returns/Exchanges

A different type of free, which is probably also table stakes in today’s world, is free returns/exchanges. This provides a level of trust in the brand but also protects against future hidden costs that could prevent customers from making an initial purchase. Highlighting this sort of trust messaging at points of conversion is valuable, as it adds another powerful reason to make a purchase.

Free Services & Trials

There are also several service-based offers brands can offer, like a free consultation with an expert, exclusive memberships/subscriptions, or help getting set up with a new product. These types of offers can feel like huge benefits, especially if you effectively communicate the value they are getting for free.

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These are some of the most prevalent use cases of ‘free’ in the world of e-commerce today, but it’s a lever that also needs to be used with some logic. Simply offering ‘free’ incentives may gain initial conversions, but hurt the overall health of the business. Here are some considerations for when to not leverage ‘free’ in your marketing.

When To Not Use FREE

Free comes with risks. It is amazingly effective at getting conversions, but you need to consider the flip side. There are outcomes you need to protect against the best you can, to make sure that in the long term, the strategy is helping, not hurting your bottom line.

Overconsumption

A major challenge can be getting the wrong type of customer that inflates the demand with no upside. Think of giving away a free product. It will convert well, but many of those users are only engaging with your brand because that product is free. They are not the right customer. To protect against this type of situation, always try to integrate some way for the customer to have skin in the game. This can be done with thresholds (i.e. Amazon Prime), time limitations (7-day trial), or other rules that mean they are committed on some level.

A great example of this is found with many subscription programs. They offer a deeper discount, free shipping, and potentially other benefits, but you have to make a purchase AND you have a subscription created that you need to manage. The customer has skin in the game, making the trade-off worthwhile. Always consider this give and take when working with free.

Devaluation

Another concern is how giving away free products or services impacts the credibility of the brand and the worth of its other products. You don’t want to get into a situation where you are heavily focused on promotions and free initiatives to drive customer engagement because it becomes a race to the bottom.

It hurts your brand, it hurts your effectiveness in converting without promotions, and it can turn into a vicious cycle where you’re consistently trying to one-up the last offer. Use free initiatives strategically and with certain end goals in mind. Don’t give away core products or make the threshold to acquire them high enough. Only use them occasionally and try to target specific segments (i.e. new vs returning) that will be more valuable in the long term. And always try to implement offers that would lead to trading up or getting repeat purchases.

Crowding Out

Similarly, the free offer may compete or negatively impact other promotions or benefits you provide. If a free offer canabilizes another promotional strategy, you aren’t truly making positive gains. Think about how your promotions and free initiatives work TOGETHER and not within silos.

The best way to understand this dynamic is consistent AB testing around promotion and discount strategies. Testing and analyzing how different promotions impact not only conversions but also repeat purchases within cohorts, will give you true insights into what is and isn’t working. It is very possible to find that a percentage-off offer converts worse than a free product initiative, but has much better retention. In the long term, the percentage-off strategy is the correct choice.

Now Everything is Free

In a world where everything races towards free, it is important to consider the hidden costs of such strategies. Are you killing your own promotions? Are you attracting the right customers? Are you hurting your brand’s credibility?

When used well, free can unlock massive growth. When done poorly, it can destroy a business before it gets off the ground. Its not so simple, but one thing is clear – ‘free’ is a powerful strategy that impacts customer behavior, for better or worse. 

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Citations

1. Ariely, D., & Shampan’er, K. (2006, October). How Small is Zero Price? The True Value of Free Products. FRB of Boston Working Paper No. 06-16. 44 Pages. Posted: 14 Dec 2006. Duke University – Fuqua School of Business; Massachusetts Institute of Technology (MIT) – Sloan School of Management. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=951742

2. Shampanier, K., Mazar, N., and Ariely, D. (2007). Zero as a Special Price: The True Value of Free Products. Marketing Science, Vol. 26, No. 6, 742–757. Retrieved from https://people.duke.edu/~dandan/webfiles/PapersPI/Zero as a Special Price.pdf

3. The Decision Lab. (n.d.). Zero Price Effect. Retrieved from https://thedecisionlab.com/reference-guide/psychology/zero-price-effect

4. Hossain, M. and Saini, R. (2015). Free indulgences: Enhanced zero-price effect for hedonic options. International Journal of Research in Marketing, 32, No. 4, 457-460. Retrieved from  https://www.sciencedirect.com/science/article/pii/S0167811615001172

5. Ariely, D. (2008). Predictably Irrational: The Hidden Forces That Shape Our Decisions. HarperCollins.

6. Stone, B. (2013). The Everything Store. Little, Brown and Company.