Monday, January 2

Marketing value of 1¢

A few months ago, an ad in the newspaper caught my attention:

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."