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Kamis, 04 Desember 2008

Free, Good or Bad?

Adapted from Dan Ariely's Predictably Irrational
Chapter 3: The Cost of Zero Cost: Why We Often Pay Too Much When We Pay Nothing

We are always lured by free products. If a product is discounted 50%, you may or may not buy it. If it is discounted 75%, you may or may not buy it. Even if it is discounted 80% or 90%, you still may or may not buy it. If it is discounted 100%, however, you bet! Have you ever been in a long line just to get a free cone of ice cream? If yes, you are like most people. In certain communities, people are willing to jump, cheating the line, and cause a sort of chaotic crowds just to get a small amount of free cash. O... how sad!

Dan Ariely says that a free or zero price is not just another price. For us, humans, it is a hot button. When perfectly pressed, it can turn us into a different personality. Sure, some free products are good deals. Nevertheless, if preventing us from better alternative deals, free products are certainly not good deals. Dan's experiments in this topic provide hard evidence of the truth. Simple examples from our own lives may already intuitively prove it. How many free pencils from seminar did we collect just turning waste in our homes? How many free t-shirts from radio stations do we pile also just turning waste because we did not really like them? So be careful when encountering free!

There is an upside of all things, including a zero price. If we can devise a way to exploit its power, we probably can enhance many aspects of life. This is especially true if we are ones of public policy makers. At least, we can exploit the power of zero for satisfying our own interests. If hybrid cars or electric cars are the choice of a government, because of their better environmental value, the government can go even further by lifting the whole tax for the cars. If a salesperson wants to boost a new product's sales, s/he can lure the customers by packaging the new product with a free. In the downside, however, Dan Ariely himself bought a car he did not really want just because he was lured by free oil change for a year.

One experiment conducted by Dan Ariely and friends was when they offered two options of chocolates for people in a mall. The first was a small and cheap chocolate offered for 2 cents. The second was a larger and more delicious chocolate offered for 27 cents. Both prices were already good deals compared to market prices. Dan collected the stats of the buyers of both chocolates. Then they made a slight change. Prices offered were changed to 1 cent and 26 cents respectively. Dan again collected the stats of the buyers. The proportion of the first chocolate buyers and the second chocolate buyers basically did not change. Then they offered zero price for the first chocolate and 25 cents for the second. What happened? The proportion changed significantly. The buyers of the free chocolate jumped to the roof. Zero turned people into different personalities! Irrational! Zero prices prevent us from making better deals. See?

Dan conducted another experiment to kids coming to his door asking treat or trick during Halloween. A typical kid responded smartly when a zero price was not introduced. First, he gave the kid five 1-ounce hershey kiss chocolates and asked him to hold. Second, he offered the kid an exchange of two 1-ounce chocolates for a 10-ounce sneaker bar, OR an exchange of one 1-ounce hershey kiss for a 5-ounce sneaker bar. Smartly the kid made the best deal. The bigger Sneaker bar! Then Dan changed the offer. First, he gave a kid coming to his door five 1-ounce hershey kiss. Second, he offered the kid to exchange one hershey kiss for a 10-ounce sneaker bar, OR a smaller, 5-ounce sneaker bar for free. Wo-o-o. Free indeed changed the kid's behavior. He went for the small sneaker bar. Dan tried this experiment also for a number of bigger kids, even his MIT students. The result? They were all the same. We are too. Irrational!

Dan offers an explanation in his book. Free is perceived without downside at all. We cannot lose in any way. That is why free is so hot that we hardly avoid it. Compare free product with priced product even the price is only 1 cent. The price of 1 cent entails risks, even it is very small. Since we are afraid to lose, we are easily lured by no risk bargain. Here is the point where we should be careful. If there is no alternative deal, free is a reasonable choice. If there are alternatives, however, free is probably not a good guy. It prevents us from better deals. Watch out!

Apart from Dan's book, we certainly have to thank God for free air we breathe, for free sun warming us, for free life we live, etc. No risk at all since there is no better alternative. Or would you be better off if you are never born? Hmm...

Next: Do You Believe in Market?
Prev: The Law of Supply and Demand Sucks

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