When it comes to today’s UK marketplace, using the dictionary to grasp the meaning of the word ‘free’ is often useless. The use by supermarkets of ‘buy one, get one free’ (BOGOF) offers to boost customer consumption of alcoholic drinks — and thus, their bottom line — triggered a backlash. Such a marketing strategy, many said, encouraged excess drinking and exposed the general public to the dangers of widespread inebriation. In response came proposals to require a minimum price of 40p per unit on alcoholic beverages.
And it’s not just alcoholic drinks that have been affected by ‘free’ offers. The Daily Mail recently reported that “one in five shoppers regularly ends up binning goods bought on supermarket buy-one-get-one-free offers.” The problem? A lot of that food sat on home shelves past the sell-by date; as a result, consumers spent an average of £165 per year on foodstuffs they did not use.
Something for nothing?
‘Free’ is a powerful word. The allure of something for nothing is clear. For example, telecom providers offer plans with ‘free’ minutes instead of charging for every minute — and banks offer a set number of ‘free’ cheque-writing privileges instead of billing per check. They do this because consumers generally respond to free products or services differently from the way they respond to the same good if the firm charges for it.
For the consumer of such services, the old adage “there is no such thing as a free lunch” still applies; however, for the providers of such services, a substantial ‘free lunch’ is often achieved.
In an article for a forthcoming issue of the Journal of Marketing Research, Anja Lambrecht and Naufel Vilcassim, Professors of Marketing at London Business School, along with Eva Ascarza, a Professor of Marketing at Columbia University, examined the way firms in various sectors are complementing or replacing their two-part cost structures (a regular, often monthly, access price and a usage price for every unit of consumption) with three-part pricing plans in which the usage price applies only to consumption in excess of a usage allowance chosen by the customer. Within the allowance there is no individual usage charge for minutes used: customers are told that the usage within that allowance is ‘free’.
In order to determine the effects of the concept that usage already paid for should be characterised as ‘free’, they examined data on pricing choice and usage of customers of a South Asian mobile phone company. The data included a random sample of 5,831 individual customers over the course of a year. During their observation period, the company introduced three-part plans in addition to the existing two-part plans already in place, which allowed them to observe the same set of customers under two different pricing regimes.
The article, ‘When Talk is ‘Free’: The Effect of Tariff Structure on Usage under Two- and Three-Part Tariffs’, showed that customers do indeed attach additional value to ‘free’ consumption. When it comes to three-part plans, 83.9 per cent of customers had a greater valuation of the service than they had under the two-part plan. Yet the party that gained the most was quite probably the phone company. Three-part plans significantly increased the provider’s revenue: it accounted for 19.7 per cent of the revenue generated from three-part plan customers.
Pluses and minuses
The professors’ study then evaluated policies the provider could implement to further increase revenues. The research showed that by reducing the fee charged for switching between plans, the provider could increase total revenues by 3.9 per cent. Moreover, it provided evidence to the effect that the provider could further increase revenues by increasing customers’ three-part plan choice preferences, for example through marketing activities or by discontinuing the option to switch to another two-part tariff.
There are definite lessons for marketing managers to learn from this study:
- A company that utilises per-item or per-minute pricing would be wise to conduct field tests before implementing new pricing plans. This study shows that customers will often change their behaviours based on what they perceive to be a good deal.
- A company should decide how it can appropriately use the word ‘free’. The study supports how a company can boost sales by emphasising any ‘free’ aspects.
- A company that has limited capacity to meet the public’s demand for ‘free’ items should be careful not to promote such programmes too aggressively.
- Lastly, a company that employs nonlinear pricing plans, as the professors note, “not only determines the cost to the customer but also alters the perceived characteristics of the service, and so influences customers’ choice and usage.” This is a new dimension of pricing research, as it has been widely assumed that customers use or buy only what is affordable, per the dictates of their budget.
Markets, banks, phone companies — the word ‘free’ has been free for each to use. Perhaps the larger question that this study raises goes beyond the scope of the professors’ research. Is the time coming when government will try to interfere with the use of the word ‘free’ in corporate marketing plans? For the marketplace, only time will tell whether ‘free’ becomes a four-letter word.