I Want to Break FREE: The Neuroeconomics of Discounts and Business Strategy

FREE

FREE. It's not just another discount.

As workers poured into the lobby of an office building one morning they encountered a candy sale of sorts. On the table were two kinds of chocolates for sale. One of the chocolates offered were Hershey Kisses. The price tag on the Hershey Kiss was $0.01 (one cent). The other chocolates offered were Lindt truffles – a high quality chocolate renowned for its flavor. The Lindt truffle was priced $0.15 (fifteen cents). Overwhelmingly, 75% of people purchased the Lindt truffle recognizing the value in the price for such a high quality chocolate. This chocolate sale was actually the experiment of MIT economist Dan Ariely and he wanted to find out how discounts affect our decisions.

The next time around Ariely decided to lower the price of both chocolates by one cent. This meant the Hershey Kisses were now $0.00 (FREE) and the Lindt truffles were now $0.14 (fourteen cents). So what happened? The preference for chocolate was actually reversed. The Hershey Kiss was now chosen 69% of the time. The price difference was exactly the same between both chocolates, but it seems the word FREE may have had something to do with the dramatic role reversal of chocolate preference.

predictably-irrational-dan-ariely

The Neuroeconomics of FREE

FREE isn’t just another discount. The word FREE when encountered in purchasing decisions is loaded with emotion, and surprisingly, emotions are responsible for more of our decisions than logic.  Economists have long thought that logic and logic alone is what guided our behaviors and decisions when in the purchasing process. However, Neuroeconomics teaches a more up-to-date approach of how we make our financial decisions, and as it turns out more often than not our emotions are what guide our behaviors. As humans, and as consumers, we make think logically but we act emotionally. So when you’re shopping and you encounter FREE it impacts you in a way that other discounts cannot . We all share the common belief that FREE is good (most of the time), and the added positive emotional boost that you get from FREE just can’t be achieved through any other numerical discount. I’m also willing to guess there is a physiological boost from just seeing FREE.

FREE is the Future of Business

We live in the digital age, and as a result FREE is becoming more and more common. This is possible because the falling costs of digital technology lets companies make as much stuff as they want for devastatingly low costs, and when you can make stuff for low costs that enables you to give it away for FREE. Chris Anderson, author of Free: The Future of Radical Price, made a great point in saying “Give a product away, and it can go viral. Charge even a single cent for it and you’re in an entirely different business…The truth is that zero is one market and any other price is another.”

free-chris-anderson-thumb-300x445-90541

Companies can make a lot of money by giving stuff away. Businesses like Google have made large amounts of money by giving away FREE email services, however on the backside they’re increasing their revenue by selling advertising on that space. Amazon was able to boost online sales world wide by offering FREE shipping on orders over a certain amount, and because one item alone wouldn’t typically reach that required amount for FREE shipping consumers ended up adding another item to their shopping carts just to attain the benefits (both financial and emotional) of FREE.

Leveraging FREE in Marketing and Sales

Like anything there is a skill required in utilizing FREE in your business strategy to create success. Amazon leveraged FREE shipping to gain additional sales that otherwise would have not been there. Google used GMail to gain exposure to millions of users so they could sell advertising space to other companies. The strategic use of FREE allowed Google and Amazon to increase their revenue. These are just a few examples of how FREE is used in business everyday.

Apple was able to boost iPod sales initially by giving away the software program iTunes. This FREE program allowed Apple to gain familiarity with consumers and at the same time opened the door for them to easily purchase downloads and hardware to enhance their media experience. Taking it a step further the iTunes Store offers a FREE download each week and all you have to do to get the FREE song is sign up for an iTunes account. Free used properly is brilliant.

FREE can be good for businesses but it can also be bad. YouTube for example has failed to make Google any money thus far. In fact it’s draining money from Google. YouTube lets people upload and download videos as much as they want for FREE, and that is the problem. An estimated 75 billion videos will be served up by YouTube this year. Even though technology costs are almost near zero for YouTube, any fractional number multiplied by 75 billion is going to be a lot. In fact a recent report by Credit Suisse estimates that YouTube’s bandwidth costs in 2009 will be $360,000,000. [Gladwell, New York Times July 2009] YouTube’s continual FREE transactions are costing Google dearly because the user has no restrictions on FREE. For YouTube to turn a profit they need to find a solution that properly leverages FREE in their business plan and strategy.

Purchasing FREE: Buyer Beware

Hopefully after reading this post you will be more attuned to how businesses utilize FREE to influence your purchasing decisions. People love FREE. However, FREE sometimes is not the best option because we can emotionally overreact to FREE leading us to make poor decisions. Dan Ariely talks about purchasing a car a few years back. Because he has two children he thought logically and came to the conclusion that he should buy a minivan. Given his situation it was the most sensible option, but when he got to the dealership he was distracted by this beautiful Audi coupe that advertised FREE oil changes for the first 30,000 miles. Mislead by his heightened emotions to regain his youth and the FREE oil change offer he abandoned his logic and paid more for the Audi. Although the Audi is a nice car, Ariely regrets his decision because he knows the minivan would have been the best choice. In addition to practicality, Dan estimated his FREE oil change expenditures to be near $150 hardly worth his initial response to FREE the first time around.

Some FREE Advice

As I am finishing writing this post I just noticed that I am sipping a calorie FREE can of Diet Squirt. Over my shoulder my television is playing and I just heard a commercial for a fast food chain that is advertising Zero (FREE) Trans Fats in their food. It would appear that FREE is all around us urging us to purchase. Next time you set out to make a major purchase keep FREE in the back of your mind and make sure it’s truly the best decision for you in the long run.

Advertisements

Face Time

Let’s begin with this brain fact: our brains unconsciously perceive people by actively scanning their mannerisms at speeds that are so fast they are undetectable to our conscious thought. None-the-less, our unconscious perceptions of people plays a vital role in governing our social interactions because more often than not these split second perceptions are spot on. For anyone who has ever muttered the phrase, “I don’t know, I just had a bad feeling about him/her.” you know exactly what I’m talking about because your unconscious processes were trying to tip you off that something, or someone, wasn’t right. Off all the things your brain unconsciously scans for facial expressions are by far the most important and telling.

This Blog Post is inspired by the book, Blink, written by Malcom Gladwell, a personal hero of mine.

This Blog Post is inspired by the book, Blink, written by Malcom Gladwell, a personal hero of mine.

What’s In a Face?

Our faces are canvases of emotion. In most situations a person doesn’t even have to speak to convey their feelings. Happiness, sadness, anger, disgust, etc. these feelings are painted all over our faces as we work through these emotions. This is a distinctly human trait. Babies, for example, when confused with a task, will look to the facial expressions of their parents for guidance. There is actually a wealth of information to suggest that facial cues played a major role in the successful development and evolution of our species, and it continues to.

Social Intelligence, Communication, and Facial Cues

Conversation and communication is 90% non-verbal.  An overwhelming majority of the human brain is dedicated to vision and perception. Taking that into account the ability to accurately detect facial cues is vital to communicating. Studies have been conducted where subjects were shown different pictures of people’s facial expressions and the subject had to guess the proper emotion. The people who scored highest in accuracy correlated with a higher level of social intelligence.

Looking at autism, this takes to the other side of the spectrum in regards to social interaction. Most children that are autistic suffer from an inability to successfully navigate social interactions and communicate because their brains have been rewired in a way that doesn’t allow them focus on facial cues. Autism is often linked with Asperger Syndrome, which is when children lack nonverbal communication skills and demonstrate limited empathy with their peers. If you can’t read a face, you can’t detect emotion, and that severely limits your ability to form an emotional bond and understanding with a peer.

The Naked Face

No two researchers have done more for the field of emotional psychology that Silvan Tomkins and Paul Ekman. Tomkins was among the first researchers to focus on the link between facial cues and emotion. Ekman was the researcher who traveled the world to find out if facial expressions were universal to all humans. Ekman traveled from Europe to Asia and even met with remote tribes of the Middle East and the jungles of Africa. To crudely sum up his research: Facial expressions are the same all over the world and convey universal emotional cues. When these two minds got together they did some powerful work and completely reshaped how we look at nonverbal communication with facial expressions.

The first thing they did was strip the face down to examine the muscles that allow us to make our facial expressions. The result is that we have five muscle groups in our face that allow, in combination, for over 10,000 different facial expressions. However, only about 3,000 of the potential 10,000 facial expressions are actually meaningful. The other 7,000 are the kind of faces you made as a kid when you were being silly. These works allowed Tomkins and Ekman to catalogue the range and meaning of nearly 3,000 facial expressions and link them with emotion.

Mind Reading and Facial Expressions

Today, Paul Ekman is in his late 60’s, but over the years of research he has developed a unique ability to pick up people’s facial expressions at speeds that most people would miss. These are referred to as micro expressions. The face cannot hide emotion. At some point in conversation a person’s facial cues will tip their true intentions or emotions even if their words suggest otherwise. Ekman often video records a speech and rewatches it in slow motion to help him detect a micro expression. In fact the first time he saw former president, Bill Clinton, speak in the 1992 Democratic Primaries he detected a facial cue that to him suggested that Clinton was a “bad boy” and a guy who “wants to get caught with his hand in the cookie jar and have us love him for it anyway.” [Bilnk, Gladwell 2005]. All these years later it looks like Ekman was pretty accurate.

Most of our facial expressions can be made voluntarily. If you want to make a face right now odds are you can make it. However, our facial expressions are also governed by an involuntary system that we have no control over and detecting those expressions is a gold mind for actively communicating and reading people on a deeper level. It has been said that a person’s eyes are a window to their soul. I maintain that a person’s face is a billboard for their brain. Take the time to attune to others in social interactions by examining their facial expressions; it can only benefit you by enriching your interactions.

The Difference between Fake and Real Emotions

This is a facial comparison of two smiles from the same night. As you can see the one on the right is me smiling in laughter, a genuine emotion.

This is a facial comparison of two smiles from the same night. As you can see the one on the right is me smiling in laughter, a genuine emotion.

Here is an example of how facial expressions can convey the difference between faking an emotion and actually experiencing an emotion. Here are two pictures on the same night of me smiling. The one on the left is me “fake smiling” for a picture with a friend. The other picture on the right is a picture someone took while I was in the middle of a laugh – an honest emotion for joy. Smiling is a facial expression everyone can do on a whim. If I asked you to smile right now you could do it, and you would do it by flexing your zygomatic major (cheek area muscles around the mouth). However if you were to genuinely laugh or smile you would flex your zygomatic major, but you would also tighten your orbicularis oculi, pars orbitalis, which is the muscle that circles the eye.

Voluntary tightening your orbicularis oculi, pars orbitalis, is almost impossible, and that is the tell sign for a genuine facial expression, or a lack there of. I circled the wrinkle next to my eye (post orbital bar area) in the photo on the right to show you that it’s only present in a genuine smile. If you look at the photo on the left you will see the skin is smooth and not wrinkled suggesting a face smile. We have two smiles here – one is fake and one is real, but either way I am still really ridiculously good looking (kidding). This is an example in still frame. Can you imagining detecting this in real time as you’re speaking with someone? Your brain can probably do it and you are not even consciously aware of it.