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Let’s say you had the option between a luxurious Lindt truffle and humble Hershey Kiss. We’ll go ahead and price the Lindt truffle at fifteen cents and the Hershey Kiss at one cent. Based on perceived value I imagine the majority of us would choose the more luxurious Lindt truffle priced at fifteen cents as opposed to the Hershey Kiss priced at one cent. Most would agree that the Lindt Truffle is a better deal. But what if each price was lowered by one cent? The relative price difference didn’t change so our choice of chocolate would also remain unchanged, right?

Dr. Dan Ariely, the best-selling author of “Predictably Irrational,” implemented this question in an experiment he ran on college students at MIT. As you may imagine, during the first test (fifteen cents, one cent) 73% of participants chose the Lindt truffle, which doesn’t come as much of a surprise since the expected pleasure is higher than that of a Hershey Kiss. Based on the concept of standard economics it would be appropriate to assume this result would remain unchanged as long as the relative price difference remained at fourteen cents. Contrary to what standard economic theory would suggest, when the prices were discounted by one cent, making them fourteen cents and free, the 27% that had originally gone with the Hershey Kiss grew to 63% percent.

The lure of free, Dr. Dan Ariely argues, causes us to forfeit the benefit of what we actually want. Our perception of utility for a product becomes skewed when “FREE” gets involved; our inherent ability to perform a cost benefit analysis goes out the window.

“FREE” can be an ace in a marketer’s hand, if played appropriately. “FREE” holds a great deal of power and triggers an emotional hotspot when consumers are confronted with it. Being able to keep the consumers best interest in mind while utilizing “FREE” can be a challenge but knowing when and how to implement this tool can provide positive benefits for both the marketer and the consumer. Beware, however, the use of ‘FREE” can also skew consumers perceived value of a product. Once an item is marketed as “FREE,” it is difficult to re-market that product at a cost higher than “FREE.” As stated by Byron Sharp, author of How Brands Grow, discounting a product can be satisfying in short term but it has negative impact on the long-term relationship between the product and the consumer. It is important that brands consider the long-term reputation of their product and keep customers perceived value of a product high.

~Ethan Melvin

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