The Zero Price Effect
Discover how Zero Price Effect shapes consumer behaviour and transforms marketing strategies in today's fast-paced world.
What a fast world we live in nowadays, right? It seems to me, day after day, that with this fast lifestyle, there are only a few marketing strategies left that do not need a lot of “out-of-the-box” thinking, and yet have proven that they deliver results. I kept scratching my head to narrow down to “The One” strategy that always works, and I could not find anything better than the Zero Price Effect! This psychological phenomenon explores how people perceive and respond to how we (the marketers) price our goods and services, and it unfolds an interesting part of our human psychology: the tendency to assign higher value to products and services offered for free compared to those with even a nominal, non-zero price tag.
It is interesting and crucial for marketers, as it shapes and channels the customer decision making process and influences their purchase behavior. In this article, I will explore with you the origin of the Zero Price Effect and the implications it has on the real world and day-to-day events. But first, let me give you a context and some background on the history of the Zero Price Effect.
Historical context and background
From an economic theory point of view, the concept of “Free” has always been a special one. Many great scholars, including the one I am currently fascinated by Daniel Kahneman worked on the notion of zero cost as a powerful buying motivator. Economists have spent many sleepless nights with questions surrounding consumer preferences, utility maximization (utility is how happy you are with buying things), and the role of price perceptions from the eyes of consumers that shape the market dynamics daily.
Psychologists have found this very interesting too, but not from utility maximization, rather, from a loss aversion point of view (you can read further about MIT Dan Ariely research outcome). People want to try stuff for free to make sure they do not lose if they buy it with money. Early studies in psychology, notably by Daniel Kahneman laid the groundwork of understanding how people assign value to things and make choices in the face of uncertainty.
It’s all psychology
For instance, let me start with loss aversion, as I mentioned it earlier. This is one of the most fundamental mechanisms. It suggests that people are more sensitive to losses than gains. Simply, you can be very happy to win 100$ in the lottery, but you will be furious to lose 50$ on a handy light that does not work. When you give someone a free product, they do not see it as anything but a “gain”. This asymmetry in the perception of gains and losses leads people to assign disproportionate value to free items, as they strive to avoid the perceived loss of missing out on the opportunity.
Another mechanism is mental accounting. There is a cognitive process that people use to categorize and evaluate the economic benefits of transactions. Free products usually occupy a distinct mental category that separates those free from the Monterey exchange inputs. Means, it is easier to accept a free item as you do not need to use the cognitive mechanism of evaluating the economic value of it (because it has no cost). As a result, the perceived value of free items transcends their objective utility, driving more demand and engagement.
So, we try to make gains, but we are happier to avoid losses, and we don’t need to use our mental accounting for free stuff. Let me add one mechanism to that, which is the concept of perceived value. It refers to the subjective assessment we make regarding the benefits derived from products and their related costs. Traditional economic theory suggests that higher prices denote higher quality, and the absence of a price tag challenges this heuristic (or motivator). In contrast to this, consumers interpret free products as signaling generosity or goodwill from the provider, leading them to assign value to the offering. This perceived value amplifies the appeal of free products, driving customers’ interest and influencing their decisions.
Those three mechanisms interplay together,r and marketers can unlock the secrets of the zero-price effect to drive consumer behavior. Armed with this knowledge now, we can craft compelling offers, design competitive pricing, and create better connections with our target audience.
The marketing and psychology together
For marketers, the zero-price effect emerges as an important tool for brands that seek to attract consumer attention (which is already, as we all know, very short nowadays). Offering free products or services can strategically leverage business outreach and attract, retain, and delight customers. There are several ways to do that, so let me briefly go through some concepts.
- Free samples and trial periods: Of course, one of the most prevalent applications of the zero-price effect in marketing nowadays. Who has not got a free trial to Netflix, Apple Music, or a free class at your local gym? Free Trials offer consumers a risk-free opportunity to experience the benefits of your products. By removing the barrier of entry and allowing people to test-drive and try your products before deciding to make a purchase or not, brands can instill confidence and trust and bring customers toa more positive zone of decision to purchase it.
- Freemium Concept: This is one of the most popular concepts nowadays. It is mainly used by digital apps and software. I mean the app stores are filled with apps that you can download for free, experience some part of it for free, but you need to pay to use the full version. The upgraded version will offer more features, better functionality, and so on. This is a powerful tool to introduce offerings to consumers while they try the free version (some offerings could be tailored to each user via personalization techniques).
- Branding and outreach: Free Zero effect goes beyond only selling to people and maximizing the relationship with the consumer. It can also boost your branding equity and outreach to new audiences. I mean, come on, how many times have we encountered a free drink by a new brand at the bar? Or a cup of coffee at a pop-up store in the mall? This is such a powerful way to strengthen branding and introduce brands to new audiences. You can think of it as you have been offered a free webinar about digital marketing by a digital marketing course provider in a chance to convince you of their strong teaching models and case studies etc. it is the carrot of all carrots.
Freemium Music Account, yes!
It is also important that we bring an example from real-life that can reflect on what we have discussed by now. And what comes to my mind now is what I have just encountered with Spotify (the streaming platform).
As a pioneer in the streaming industry, they have revolutionized the way consumers access the services and enjoy them through their freemium model. With their free tier offering, they offer users the ability to listen to music, but the catch is that an ad will interrupt you every while, and then, you can’t shuffle the music in an orderly manner, and you can’t create playlists (among other limitations). Spotify allows users to explore its platform without an upfront cost. This zero-pricing strategy not only attracts a broad user base but also serves as a gateway to their premium subscription playlists. I hate it if my music keeps cutting to listen to some ad (especially if it’s your favorite track! Right?). Think of how many people would access for free and find the real benefits that lie behind the premium subscription, just to turn into a monthly active user who pays to have access to millions of tracks, playlists, and new artists!
Nothing for free, nothing is perfect
As much as I am fascinated with this concept, I’m also a firm believer that there are always pros and cons for everything in life! You know, nothing around us is perfect, right!? Let me put some thoughts on the pros and cons of the Zero Pricing Effect concept, though.
As I can reflect on what we have discussed so far, zero pricing strategies are effective tools to achieve challenging marketing objectives as they offer better customer engagement, loyalty, and revenue growth. If we think about it from a strategic point of view, it offers customers lower barriers of entry, and for sure attracts new ones! With this in mind, many opportunities for up-selling and cross-selling become possible.
As we discussed the compelling benefits and opportunities for businesses, these strategies could not go unnoticed with some of their drawbacks. It’s important to address this concern to ensure the ethical and sustainable implementation of those initiatives.
One of the primary criticisms of zero-pricing is the perceived evaluation of products and services. Usually, if items are received for free on a good sort of frequency, it is assumed to be lower quality or less valuable compared to the priced counterparts. This will endanger long-term brand equity and would rather turn against any branding objectives. Also, Zero Pricing could be unsustainable for small to medium-sized companies (and of course to startups) as offering products for free is not actually free for the company (it was produced and delivered to the customer, right?) and there is a cost to take in. If the company is not financially able to hold such a kind of aggressive method, it is better to avoid doing it from cost cost-accumulation point of view.
To conclude
Understanding consumer psychology is rather challenging homework; however, breaking down concepts like Zero Pricing and trying to understand its practical effects on our market can be a game-changer. Please be careful, a detailed feasibility study, strategic objectives alignment, and KPI settings are important homework to do.
