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, 

http://www.smartcompany.com.au/behavioural-economics/20111031-how-to-introduce-a-charge-for-a-free-service.html

Image from http://cdn.besttechie.net/wp-content/uploads/2010/07/paywall.jpeg

Smartcompany interview on News Limited's introduction of a paywall

Last week I was interviewed by Smartcompany on News Limited's introduction of a paywall for The Australian news service.  To put it simply, charging for a service that was previously free is problematic because it requires behavioural change.

Here is the interview and my tips for businesses seeking to change the game.

http://www.smartcompany.com.au/media/20111025-can-you-get-people-to-pay-for-something-they-used-to-get-for-free-behavioural-economics-expert-explains-challenge-of-news-limited-s-paywall.html

I will be following this piece up with a discussion on why 'free' is so persuasive, so stay tuned.

Time we reimagined time?

We have cars to expedite travel, microwaves to speed food preparation, computers to process information, the Internet to provide immediate answers, and smartphones to make answers portable and immediate. So where's the abundant leisure time promised by technology? 

Time and all that it represents is on my mind because last week I watched a "busy families" focus group through the two way mirror.  Given the segment, it was no surprise that claims of being 'time poor' came up as the short-hand label for the state in which they found themselves, so this got me thinking about why we become victims to time. It is as if time is controlling us and we are left powerless to change. And as a marketer, this is why promises of 'time saving', 'convenience', 'simplicity' and 'freedom' are so often trotted out to our stressed and harassed audience.  Buy this and you will be able to live the life you want!

   

So time seems to be one of the most important concepts of the modern age, at least in developed nations, and yet we often do not reconsider what time means. Till now.  Enter two product concepts that caught my eye because both are reimaginings of the very representation of time - the clock.

Progress
The first is the Progress Clock by Brett M Westervelt that uses the behavioural principle of loss aversion as a call to action. As Brett explains,

"Many clocks are circular, conveying the sense that time starts over, or completely digital, giving the current time but not much more. Time is in fact fleeting, and once this day (hour, minute) is gone, it's gone. The Progress Clock is an attempt to help the user not so much focus on the exact time, but on how much time is left; with the hope of inspiring people to take advantage of any given moment."

Progress Clock by Brett Westervelt

The clock is effectively asking, are you making the most of each moment every day?  Unlike an hourglass where time is eroded as sand buckles to the relentlessness of gravity, this clock forces you to consider what you will do with the time you have left in this unique and precious day.  Confronting, isn't it?

The Present
The other is a clock called "The Present" that takes 12 months to complete its cycle. Designed by creative firm m ss ng p eces to keep people in the present by focussing on seasons rather than moments, Fast Company suggests that "...our obsession with small increments of time often keeps us from focusing on the bigger picture. The clock takes a year to complete a single cycle...Different colors represent changes in seasons--the winter solstice (top) is marked by pure white, pure green represents the shift into spring, pure yellow marks sun, and red marks the autumn equinox."  In a sense, The Present deliberately disorients our convention of measuring time in seconds, minutes and hours and as a result racing to complete tasks that are able to measured in such small units, to instead concentrate on creating experiences of real and substantial value.

The Present by m ss ng p eces

 So we have two different reimaginings of the measurement of time, both with the aim of helping us make more of now. The Progress Clock confronts us with how much time is left on the clock at this moment, and The Present focuses us on now in the context of the cycle of life.

Behavioural principles
Both clocks are being used to explore the behavioural principles of;

• loss aversion, where we spend time doing the dishes and managing the routine because we are fearful of the chaos that may ensue if we trade the known for the unknown
• status quo bias, where our current state is what we are used to and hard to break away from
• framing, where convention is that time is displayed a certain, in-exhaustive way that perhaps frames our tendency to be wasteful. 

Will owning either of these clocks help busy families to make more of the present moment?  Probably not because both require contemplation and ultimately, reconsideration of the decisions that are creating the situation of time pressure.  And who has time for that?  But as marketers, can we use what these clocks are attempting to do to move beyond the usual rhetoric of 'time saving'? I hope so because it is important to our market.  Let me know your thoughts.

Keeping abreast of customer lapse

A reminder to us all that a serious message can sometimes be best conveyed using humour; say hello to the "Your Man Reminder" app that has been released by Rethink Breast Cancer to encourage women to check their breasts regularly.

The genius is that the reminder is not a dull outlook alarm or exclamation on the calendar, it's your choice of "hot guy" that will talk you through the process.

According to Rethink Breast Cancer, "Your Man Reminder App includes the following fun features:

• Customize – Update the App to fit your personal liking, with features that let you chose your man, his pose and more.
• Hot Messages – You’ll love the attention your man gives to you, with messages like “Any guy would be lucky to have you” and “Give your breasts some TLC.” 
• Reminders - Tailor your calendar schedule with settings for weekly, monthly or surprise reminders directed by a sexy man of your choice.
• Education - The App includes a special “signs and symptoms” tab to hone in on the importance of early detection. 
• Get Checked – Use a variety of scheduling options such as doctors’ appointments and many more."

There are two key lessons from the Your Man Reminder app.  First, the app is an evocative example of how to overcome inertia by creating an entertaining, enjoyable experience.  And the same technique can be applied to any subject.  Car tyres, taxation, health checks, superannuation...the opportunity is to link typically dull but necessary tasks with something fun or unusual. 
Perhaps a slightly less fun example, but the "Change your clock, change your smoke alarm battery" campaign has proven to be an effectuive way in Australia of triggering a low awareness need (battery replacement) with an event (daylight savings) to overcome inertia. 

For your business, this can make a difference to your cash flow by minimising the risk of customer lapse. Imagine the positive impacts for a car mechanic who gets people to turn up for their annual service rather than procrastinating for 14-18 months (over three years that can mean securing one additional service)? Or a dentist that has clients returning every 6 months rather than every 3 years? 

The second lesson from Rethink Breast Cancer is in how they have structured their donation section to take advantage of our tendency to accept status quo.  Note how the donation is defaulted to monthly rather than once off which would improve their chances of that option being accepted.  They could have taken this a step further and defaulted the amount to $20 rather than $10 to encourage higher donations through our tendency to accept the default terms.  Further, they could have also applied the behavioural principle of herding to influence the amount donated. To take advantage of this they could have shown that the average donation was, for instance $25 (as long as it was truthful of course), and kept a running count of how many people made a donation.  Seeing how many others had donated and what they had spent would have been very persuasive.

So hopefully those clever Canadians at Rethink Breast Cancer have inspired you to use behavioural strategies to tackle business objectives. I am certainly looking forward to seeing more apps like the one they have created. 

For more information on the app (and the guys) check out the clip on YouTube www.youtube.com/watch?v=VsyE2rCW71o

The app is available http://itunes.apple.com/us/app/your-man-reminder/id467911146?mt=8

Getting ripped not ripped off at the gym: Price anchoring at work

I walked away.  Her best offer was $16.50 a week for gym membership, better than the $18 I was already spending as a casual member, and yet I turned down the offer. Why? 

Pricing psychology is such an important part of every business and behavioural economics can go along way towards understanding why customers react to deals the way they do.  Here are eight lessons from how my gym botched the deal.

Over the past few months the gym had sent me text messages offering $18 a week memberships, the same price as my weekly Zumba class.  This was their attempt at winning me over by saying "you may as well because that's what you're spending anyway".  Why didn't it work? Commitment to 12 months. Lesson 1. Don't ask your customer for a commitment without rewarding them beyond what a 'casual' customer would receive.  And because the offer was texted to my phone, any other benefits of membership (better change rooms for instance) were not explained.  If using this strategy, parcel the benefits with the price in each and every communication. A text saying "Unlimited Zumba plus full access to pool, yoga + sauna no add cost" might have been better.

So now $18 was anchored as my membership price expectation.  Lesson 2. Whatever deal your customer first sees is vital because it is the offer against which all others will be judged.  This of course can work very well for a savvy business because it sets an upper limit against which you can offer discounts. 

The other important aspect here is that $18 anchored the price in context.  The $18 for gym membership was seen as relatively expensive and yet I have spent more on that in yogurt in the last 2 weeks. When I was later comparing a cheaper deal to that anchored price, I was judging them relative to gym prices only, not other lifestyle costs. Lesson 3. Take the opportunity to broaden your customer's frame of reference with other price anchors to influence how your pricing is perceived.  And the other anchors don't even have to be relevant! Duke University's Dan Ariely has demonstrated that numbers as random as the last four digits of a social security number can influence the price people are willing to pay for wine. My gym could have cited average costs per week of Internet, train travel or something else just to broaden the context in which I was judging the value of the membership.

The gym next texted me a deal for $16 per week.  Hmmm, that was getting more like it; I would be saving on my Zumba!   Note how I thought about it as saving money rather than spending less money; this is the concept of sunk cost where people fixate on the incremental change (saving $2) rather than the outlay (paying $16).  Lesson 4. Sunk cost is extremely powerful because your customer's mind will be busy calculating the differential value rather than worrying about the actual cost. 

But another week elapsed before I took action and the offer reverted to $18. So I now had an upper price anchor of $18 and a lower price anchor of $16.  This is another useful technique for savvy businesses because you can help your customer understand that the deals are not forever, and they need to act when one crops up.  The concept at play here is loss aversion, where it hurts to lose a potential discount.  Lesson 5. Sequencing favourable and less favourable deals can help drive take up.  Petrol pricing is typical of this behaviour where we rush to buy petrol at its low ebb during a particular day of the week.

So then it came to my next offer. A rep from the gym called me and offered $13 per week.  Well, that was too good to refuse.  I had rejected $18, so this saved me $5, and I had missed out on the great value $16 offer, so I was ready to sign. And the fact that a rep called me rather than texted probably didn't hurt either because it distinguished the deal from others.  Lesson 6. Make sure killer offers cut through as special and close the deal.

Having arranged to meet the rep at a specific time and had that confirmed by him via text that day, I was a bit confused when told he had gone home for the day.  Lesson 7. Customers hate being bounced and it can jolt them from a future focus (I'm going to me a gym member) to current focus (if this is how they treat prospective customers...). Confirming an appointment only to sub in a colleague who does not have full background information gets your customer in a negative frame of mind when you want them to be thinking "yes!".

Fifteen minutes later his colleague met with me with the latest offer.  Here's how our conversation went;

• Gym rep - "For a commitment-free membership we can offer $22 a week. Otherwise, you can take our special deal of $16.50 per week for 12 months"  (Note nice use of anchoring at higher casual rate before mentioning contract rate)
• Me with puzzled expression - "I'm confused. Your colleague offered me $13"
• Gym rep - "I'm sorry, that deal has expired"
• Me - "I wasn't told it would expire, and had arranged with your colleague to sign up for that"
• Gym rep - "As I say, that deal expired and the best I can offer is $16.50."
• Me - "Ummm. Can I think about it?" (when confused, delay)
• Gym rep - "Well unfortunately I can only offer that price tonight"  (Nice pressure. Tapping into my loss aversion") 
• Me -"I'm going to have to think about it" (preparedness to walk away because I felt that I has been lured to sign through misleading representations, but also because I had previously 'walked away' from $16 by not acting on that deal, so I knew I could live without it.)

 So I walked away. 

The gym almost had me, and had used different anchoring techniques to finally get me to a position of commitment. Spooking me with a more expensive deal was a mistake they could have easily avoided by clarifying the deadline for the $13 offer.  

However, the most surprising part of this is that had they come back and offered me a deal somewhere between $16.50 and $13 I would have signed.  Whilst $14 or $15 was more than their best deal, I could have worn the fact that that offer was for a limited time and I was still doing better than $16.50.  What's going on here?  Think back to sunk cost. By turning up ready to sign, I had psychologically 'spent' $13, so anything that was closer to my end of the pricing spectrum ($13) than the gym's ($16.50), was acceptable. Lesson 8. Just because you've anchored the price low doesn't mean you necessarily have to go there to win the business.

In actual fact they called and honoured the $13 deal so I am now a paid up, committed member. Fair to say there were some bumps and turns in how the local gym influenced my decision to do business with them, and it didn't need to be so clumsy. I trust you will be able to apply these eight lessons to engage your potential customers.

1. Don't ask your customer for a commitment without rewarding them beyond what a 'casual' customer would
2. Whatever deal your customer first sees is vital because it is the offer against which all others will be judged
3. Take the opportunity to broaden your customer's frame of reference with other price anchors to influence how your pricing is perceived 
4. Sunk cost is extremely powerful because your customer's mind will be busy calculating the differential value rather than worrying about the actual cost 
5. Sequencing favourable and less favourable deals can help drive take up
6. Make sure killer offers cut through as special and close the deal
7. Customers hate being bounced and it can jolt them from a future focus to current focus
8. Just because you've anchored the price low doesn't mean you necessarily have to go there to win the business

Image from Foster City, and no it's not me!

Time market research got real: How beer and banking show us how

 I don't drink beer. I don't follow rugby. I am not into gaming.  So why on earth have I become addicted to the Heineken Rugby World Cup iPhone game?

Gap between intended and actual behaviour
Sure, addicted is probably putting it too strongly, but my affair with Heineken got me thinking about the gap between intended and actual behaviour   You see had I been invited to a market research group and asked about my gaming, beer and rugby behaviours, there is absolutely no way I would have predicted my own slavish usage of the final product.  I mean, who has the time or interest in pretending to punt a ball over an imaginary goal post?  I just doesn't make rational sense.

And that's the rub for product marketers. We spend a lot of time researching what our market think of our widget or brand, but we often get results based on intended rather than real behaviour. 

Here's where Behavioural Economics comes in. 

Behavioural Economics gets to the truth of behaviour
Behavioural Economics is based on behavioural studies rather than attitudinal ones, so in my scenario the research would have tested the efficacy of different techniques to stimulate download - from memory, I downloaded from an ad on a newsite, the user flow for download, any inhibitors to sign-up (eg asking for date of birth might have been too sensitive), and so on. Traditional market research would more likely have spent time defining the target market (i.e. not me) and predicted take-up based on reported intent.

As to uncovering what would influence me to download the game, common theories would revolve around the creative's call to action, the perceived value of the user benefit, maybe even personal recommendation.  If I had been asked, I probably would have said a combination of these factors. But what really influenced me? Whilst of course I had to see and understand the ad, I could have ignored it like I have every other.  What made me download the App was that I was looking for examples of how brand's were applying social media to engage their customers.  That's right, a virtuous professional reason!  Behavioural Economics would have used tested techniques to influence downloads - herding (doing what others do) and completion (my willingness to step up and kick for Australia) amongst them. 

How Westpac NZ has used behavioural economics

An example that's fast becoming a classic illustration of closing the gap between intended and real behaviour is the Westpac New Zealand Impulse Saver App. Developed on the insight that people have till now had the mechanisms to impulse buy (money, credit cards), but not impulse save, the App allows customers to add money to their savings at the touch of a button. The bank's objective is to grow the penetration of savings accounts beyond 49% of population.  Did the insight come from discussions with a focus group?  I don't believe so. Whilst market research quantified the volume of savings accounts and no doubt other market sizing elements, the key insight was instead based on observation of actual behaviour.  New Zealanders impulse spend $16.1m every day.

Behavioural Economics can overcome short comings of Market research

So am I bagging market research? No, I think the more time we can spend understanding our market the better. But I do believe market research techniques that concentrate solely on intended and predicted behaviours have serious short comings.  Sophisticated researchers use different techniques to try and dig beneath hyperbole (I particularly like image based metaphors to untap emotional and cognitive associations, and there's some merit in ethnographic observation), but behavioural economics can take it so much further by translating insights about actual behaviour into...well, actual behaviour.  And as a marketer, that's our goal!

For more on Westpac's App check out

http://www.bankingreview.com.au/2011/05/acting-on-impulse.html

 

And for the Heikeken game, http://itunes.apple.com/au/app/heineken-rugby-clubhouse/id450375998?mt=8

It's not me it's you: Dropping a customer who doesn't spend enough

We've all been there. That customer who soaks up an inordinate amount of time and energy without spending enough for you to justify the level of resourcing.  And now it's crunch time - how should you move a customer who had face to face sales representation to a less frequent cycle and/or telesales account management without losing their business?  Here are some pointers from behavioural economics to change your service mix.

You don't know what you've got till it's gone...aka "Endowment effect"
You can be sure that the customer took face to face (F2F) representation for granted when they had it - but now that it might be taken away it's seen as a catastrophe. Endowment effect is our tendency to overvalue what we own - in your customer's case, they "own" the level of service they have been used to.

Tell them they can have F2F representation again...but they need to meet the criteria and to do that they can work with their very smart new telesales account manager who will help them get there. Will they like it? Most possibly not because it will be seen as personal affront. But guess what, you're in business and are entitled to treat customers who spend more differently. 

Business Class vs Economy, it's your choice
Procedural fairness explains our tendency to accept a judgment if it has been fairly considered and you know the rules.  If you've ever flown Business Class and then had to go back to Economy, you will know which you prefer, but you also know what it takes to get back to Business Class - money.  Do your customers know what it takes to get F2F representation?  Share the decision and the objective criteria (eg spend more than $5,000 pa...) to help them understand that they are actually in control of their servicing - all it takes is increased spend. 

But I'm special!  I'm an important account!
This type of change reminds the customer that they are one of many, upsetting their sense of uniqueness. Talk to the customer about what makes their business special and why you see a continuing relationship with them, albeit through a different channel.

Don't think about it as losing something
We hate to lose more than we love to win. In this case, the customer may react badly if they perceive the service mix as losing something so do everything you can to frame the change as a gain. Can they get more frequent attention via the phone for example? Do they get the resourcing support of a whole team rather than one individual? Will shorter appointments save them time?  Mark out potential reasons why F2F may not have been the best method of contact from that customer's perspective and consider how to use it in your justification. A word of caution though, the change will most probably be seen as cost cutting, so don't go too heavy on the "it's better for you" angle unless you can actually prove a better service level.

Quick like a bandaid
With unpleasant news, get it over quickly because we adapt more readily if we are not constantly reminded of what has changed. Handover the accounts (and do this properly by thoroughly briefing the new rep and telling the customer) and move on so the healing can begin. 

Still scared to act?
If you are still procrastinating about making the changes, know that you are falling into the trap of loss aversion - you are more fearful of losing the business of some difficult customers than motivated by the gains you can make by having your F2F sales reps concentrate on the accounts with most potential.  And you may well lose some customers.  So to get over this mental hurdle, do some number crunching. How much does it cost you to service those accounts, what's your margin, and what's the opportunity cost between these accounts and the potential accounts your rep could be growing?  Overcome your reticence with a good dose of fear busting.

By no means is changing service mix an easy thing to do, but it is an important aspect of managing your business. If you want to take it a step further and fire a customer, you may want to check out "Firing a Customer - what holds us back?".  Until next time, happy dropping!

Picture from http://www.officialpsds.com/images/thumbs/Roped-off-psd65892.png