The 1¢ figure perplexed me. I understand why phone companies might want to give you a free phone if you sign a three-year contract for phone services. But why charge 1¢? From a revenue standpoint, the 1¢ must be inconsequential to Rogers. Isn't free more attractive?
The ad brought to mind a chapter from Predictably Irrational by Dan Ariely, one of my favourite behavioural economics books. The third chapter, The Cost of Zero Cost: Why We Often Pay Too Much When We Pay Nothing, examines this issue directly. The chapter describes a series of experiments Ariely did with Kristina Shampanier and Nina Mazar, which show people tend to place way more value on free products — much more than when a product is 1¢.
To illustrate this, the researchers set up a chocolate stand at MIT, selling Lindt truffles and Hershey's Kisses. Roughly every 45 minutes, they changed the prices for the chocolates. Sometimes, the truffles cost 15 cents and the Kisses cost one cent, sometimes it was 14 cents for a truffle and free for a Kiss, and sometimes it was 10 for a truffle and free for a Kiss. Students could only choose one type of chocolate. When the Kisses were free, people chose them far more often than when they were 1¢.
Ariely tries to explain the result in Predictably Irrational:
"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."Given the results of Ariely's research, I am curious why Rogers' marketing team decided to price their phones at 1¢ rather than make them free (I sent them an email asking this, but they did not respond). Did Rogers make a bad business decision? Or is Ariely's research missing something, which Rogers has been able to pick up on?
Addendum: I emailed Ariely to see if he had any insights as to why Rogers might choose to go with 1¢, and he was kind enough to respond with a voice message: "Our research suggests they are making making a mistake, that it's not right. Maybe they are trying to make it sound different than what other companies are doing — I'm not sure what their logic is. But the basic finding from our research shows that they might not be choosing the right thing."
There are several differences between Ariely's study and what Rogers is offering.
ReplyDeleteFirst, whether Rogers is offering a phone for free or for 1¢, in reality it costs much more as part of a bundle which Rogers is offering, and almost all of its potential customers realize this. While in the study at MIT customers were able to legitimately get a Hershey's kiss for free or for 1¢, the same is not true for Rogers. When deciding whether to buy a Hershey's kiss for 1¢, the buyer has to consider whether he really wants a kiss, and whether it is worth 1¢. The decision is much easier if it's free. By contrast, the Rogers customer will realize, after considering the situation, that a free phone is really the same as a 1¢ phone because to get either he will have to pay several hundred dollars for a phone plan.
Second, people are not used to buying single Hershey's kisses, whereas potential Rogers customers are likely familiar with phone carriers offering them seemingly good deals with unexpected catches. Offering a Hershey's kiss for free or 1¢ probably intrigued people, but Rogers knows that offering a phone for free will make many potential customers wary and skeptical. Rogers probably figures that by offering phones for 1¢ instead of for free, they will interest potential customers with their unusual behaviour, and remove some of the stigma associated with offering "FREE*" products.
Third, the people who frequent the MIT campus are not at all representative of the North American population.
might be some kind of legal or contractual restriction against making it free free?
ReplyDeleteAlso, when choosing between chocolates for that study... think about the HASSLE of buying something for a cent if you don't have a penny in your pocket. Of COURSE free will win out over expecting 99 cents worth of coins in change.
ReplyDelete@carpo: Not sure I completely buy your first explanation. If people overreact to free products, that overreaction would probably extend to Rogers' situation to some extent. Maybe not as much as the chocolate situation, but I don't think every consumer is going to carefully do a full costing in their head of the phone plan (if they did, there would be no point in offering subsidized phones in the first place). I like your second explanation. As for your third, I have never been to the MIT campus but appreciate your sense of humour.
ReplyDelete@Anonymous: Hadn't thought of that. But upon further examination, I doubt this would explain Rogers' strategy, because other phone companies appear to offer free phones:
http://www.fido.ca/web/Fido.portal?_nfpb=true&_windowLabel=PhonePlanBuyFlowControllerPortlet_1_3&PhonePlanBuyFlowControllerPortlet_1_3_actionOverride=%2Fcom%2Ffido%2Fportlets%2Fhandset%2FphonePlanBuyFlow%2FgetPhoneDetailsPage&PhonePlanBuyFlowControllerPortlet_1_3PhoneId=GW300FDWHTF&agreement=MP2Y
http://www.bell.ca/Mobility/Products/Samsung_Entro
http://www.telusmobility.com/en/ON/iphone3gs_8gb/index.shtml?INTCMP=DealsILCC3iphone3gs
@adewade: Excellent point. However, as with my response to carpo, presumably the hassle of buying something would also apply, to some extent, to cellphones as well. I also went back to the study to see if they address your concern, and they tried to. They ran another experiment selling chocolates in the school cafeteria, where there wouldn't be any extra hassle since customers were already buying something before being presented with the chocolate choice. "Thus, the transaction costs in terms of payment remained the same whether a customer purchased a chocolate, got a chocolate for free, or purchased nothing, because he or she still had to pay for the main purchase," the study notes. Again, they found that people flocked to the free chocolates far more than the 1¢ chocolates.
It all depends on the Roger how he deals.But one thing must be kept in mind if he deals well then he will easily market their price if he is not then he failed and success in marketing.
ReplyDeleteIndividuals would likely be more wary when receiving a 1cent Hershey Kiss from a peer than a free one, this is because the only way price actually factors into the decision making process is when the individual considers the intention of the offer/sale.
ReplyDelete*"Free" items are offered everywhere and frequently; 1cent (1cent to 10cent) items are relatively rare.
*Why am I buying something for 1 cent when this is clearly undervalued? Is there something wrong with these chocolates? Are they old? (it would be interesting to interpret responses of purchasers/receivers in this study)
Most importantly,
*Why are these people charging 1cent and not offering the candies for free? They must be either foolish, or trying to mess with me.
Combine this with a short temporal opportunity to weigh the decisions and bounded rationality suggests that:
The idea of Free candy indicates an act of benevolence, while the idea of 1cent candy indicates an act of mischief, manipulation malice, etc.
When making a contractual, somewhat-lengthy, personal business decision, the above logic is reversed, as Carpo elaborated in his second point above.
Thus, "free" when offered by a human being is a kind, welcoming and social gesture that is likely to be accepted; "free*" from oligopolistic corporations known for price gouging is viewed with skepticism, and rightly so.
Their marketing people may have just thought that 1* (sorry, too lazy to search for the cent sign) pops better on the poster. Regardless, I think this misses the really big issue:
ReplyDeletePeople chose a free Hershey's Kiss over a 14 cent truffle? What the hell is wrong with people!?!
It has to do with contract law, especially the legal term of "consideration". Certain risk is being averted with a price, even one as low as $0.01.
ReplyDelete