Sunday, November 6, 2011

How to introduce a charge for a free service

SmartCompany's exploration the other week week of News Limited's introduction of a paywall included my thoughts on how the newspaper giant could use behavioural economics to transition their service from free to paid.

To round out this discussion, I thought it was worth looking at what makes "free" so alluring in the first place, so that you can consider whether and how to give away products or services without charge.

So let's start by looking at chocolate.

The persuasive power of "free"

In an experiment outlined in Dan Ariely's Predictably Irrational, participants were given the choice of two chocolates: higher quality Lindt or Hersheys.
Through the course of various experiments, the price of each brand was manipulated to see how consumer rationality was affected. In other words, what was the point at which price changed our judgment of what we were willing to experience from our consumption of chocolate. When the Lindt was 15 cents and Hersheys one cent, 73% chose Lindt. Makes sense. We are willing to pay more when we receive a quality experience.
But then life got interesting. Prices were dropped by on cent. Lindt was therefore 14 cents and Hersheys, free. Suddenly Hersheys gobbled up 69% of the custom, reversing the earlier trend. Was it the one cent price drop? No. It was the impact of "free". The majority of participants were now willing to act in spite of the lower level of anticipated pleasure just because the chocolate was free.
It seems that "free" dramatically impacts our assessment of what we are willing to experience.
Ariely goes on to speculate that the reason we are so swayed by "free" is that there is no downside. In most transactions, we weigh up the pros and cons, rewards and risks, but when something is "free", there is only upside.
This is the behavioural principle of loss aversion, where we are wired to avoid loss more than seek gain. In the case of chocolates, participants were unwilling to trade Hersheys for Lindt even when they had only to pay one cent for the lower quality brand. The risk was still too great. Take away that risk by making Hersheys free, and the game changed.

Introducing a charge for a free service

That's fine for chocolate, but what does it have to do with a paywall where News Limited are trying to introduce a fee? After all, it's a bit like charging for Hersheys when we are used to pigging out for free.
It shows how difficult a task News Limited have ahead of them because "free" is one of the most persuasive of forces. So here are some thoughts on how to reverse engineer free in order to transition to a paid service:
1. Differentiate the product – if a brand wants to charge for something that they have previously given away for free, they need to change the product. For chocolate, it may mean changing the ingredients or packaging, or emphasising something new about the product that people didn't know (eg. now from sustainably managed cocoa suppliers). For News Limited, it means re-skinning the online experience, introducing new content and/or features, and new marquee journalists.
2. Reframe the pricing – News Limited customers will be paying between $2.95 and $7.95 instead of zero. These are small amounts relative to most things, but not relative to free, so News Limited needs to contextualise the price for its customers. For example, less than a gym membership, less than a zone two train ticket, less than what you spend on lunch per day to get 24/7 access to real-time Australian news.
3. Introduce decoys – Pricing decoys are a very effective behavioural technique because we assess prices relative to others. At the moment on News Limited's subscription page for The Australian they are offering a digital pass for $2.95/week, digital plus weekend papers for $4.50 or digital plus Monday-Saturday papers for $7.95. Here it would have been helpful for them to also offer a "decoy" seven day print subscription on the same sign up page. Why? It sets a value for the print subscription that makes the print and digital bundles look more attractive. (On The Australian's offers page which is buried a few clicks in they have moved in this direction but made the mistake of making print look the better deal at $2/week).
4. Get it over quickly – the behavioural principle of adaptation means we get over bad news more quickly if we are not reminded of it. News Limited will have to be careful how it treats its customers throughout the sign-up, sign-in and billing process, with the aim to have the pricing recede in the customer's consciousness. They are currently offering a digital pass three month trial. My suggestion would be that the pass defaults to payment as part of the terms and conditions rather than reminding people at the end of that period that they have to pay up.
5. Demarcate the process – anyone who has used iTunes may have noticed that the payment is confirmed a few days after your purchase. Apple are effectively disconnecting the process (purchasing music) from the pain (payment), which means we are less likely to remember that our downloads have cost us. News Limited should likewise consider how it finalises the payment process with the customer.
6. Guilt – don't underestimate how guilt can turn freeloaders into paying customers. Of course there will always be some people who take without giving, but most of us are susceptible to contra-free loading. This is our innate desire to work for reward rather than just get rewarded. Don't scoff. A recent move by the Indiana Museum of Art to move to free entry resulted in a 3% increase in paid memberships.
The key lesson to take away from this discussion of chocolates and paywalls is this; offering something for "free" changes the game. It comes with significant behavioural implications that can work well for your business to stimulate volume, but can also change how your product is perceived. While not impossible to reengineer a free service as paid, it is extremely tricky and therefore should be used with due consideration to your longer-term and competitive goals.

This article was originally published by Smartcompany,

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