But a team of Kellogg researchers wondered if this “zero price” strategy could be counterproductive at times. Xiaomeng fanformer Kellogg PhD student now at ShanghaiTech University and former visiting scholar Fengyan Cindy Cai, had observed the opposite in their native China. For example, in many Chinese cities, elderly residents can get free flu shots, but Fan knew that many of them opted for non-free shots.
So the two teamed up with marketing professor Kellogg Galen Bodenhausen explore how zero pricing can actually work against a company sometimes. They found that there are, indeed, times when people would rather pay a small price for something than get it for free.
It comes down to the question of ancillary costs, such as how much time or effort is required to buy, or whether the purchase seems particularly risky. The researchers found that when something with a high incidental cost was offered for free, it elicited extra scrutiny from consumers. This led them to insist more than usual on this cost and ultimately led to lower demand for the product. But when the same product was priced low, even extremely low, it didn’t trigger the same scrutiny of ancillary costs.
This meant that there was actually more demand for a low-priced version than a free version of the same product when the product had high ancillary costs—the so-called zero-pricing boomerang effect.
“We wanted to know, what are the limits of the zero price offer?” says Bodenhausen. “We wanted to show that even though it seems intuitive to offer a product for free, it’s not always in the best interest of merchants to offer a zero price. There are some cases where a low, non-zero price can do a better job of increasing demand.”
When a product is free, consumers will control the time and effort
Most purchases involve incidental costs—which may include the time and effort involved in making the purchase or the risk associated with the purchase. Think of the hours it takes to wait in line for the latest sneaker drop, or the social risk of the potential embarrassment of buying lice shampoo at your local drugstore.
For many consumers and marketers, these non-monetary costs are not the focus. While customers are certainly aware of them, they are often so small compared to a product’s sticker price that customers may choose to ignore them.
But Bodenhausen and his colleagues suggested that those costs might come under higher scrutiny if the product were free. That is, if the main feature that customers generally focus on – monetary value – was not present, then their attention may be directed to a different cost element.
In a series of studies, the team tested their hypothesis and found some surprising results.
In one study, 205 college students in the US completed an online survey that described a stress management course. Some participants were told that the course would be held online. Others were told it would take place about 40 minutes away. In both of these groups, some students were told the class was free and others were told it would cost $2. Participants then indicated their interest in attending the class and wrote down their thoughts on participation.
The results confirmed the researchers’ hypothesis. For those who were told that the course would be online, which had fewer incidental costs, a free course generated more interest than the low-cost course.
But for those who said the class would be in person, a free class generated less interest than a low-cost class. In the survey, participants expressed more concern about the time it would take to travel to class in the free condition, compared to the $2 condition.
To prevent control, keep consumers mentally engaged
If free loans make us more aware of the associated costs, is there a way to prevent this extra scrutiny? To find out, the researchers looked at whether a high cognitive load would change consumer preferences.
They conducted another study in which they told 306 Chinese students that they were participating in a study that included a class on mindfulness. This time, all participants were informed that the class would be in person, at a location approximately 60 minutes away from campus. Some were told it would be free. Others were told it would cost less than $1.
Before being told about the class, participants were asked to recall a number. Half of the participants were given an 11-digit number (giving them high cognitive load), while the other half were given a 3-digit number (low cognitive load). They then all read the course description and were asked to rank their interest in the course.
Those with low cognitive load behaved like consumers in the previous study: the zero price reduced demand. But those with high cognitive load acted differently: the zero price actually increased demand for the class, even though there was a high associated cost of travel time.
“If you interrupt this control process, then you no longer have this boomerang effect,” says Bodenhausen.
Consumers do not scrutinize low-cost goods
Each of these studies included the cost of time. What about other types of incidental costs?
In another study, researchers focused on effort expenditure. They gathered 192 Chinese participants and gave them information about a resume writing webinar. The seminar required participants to submit an initial draft of their resume before the course began. Some participants were told the course was free. Others were told it would cost the equivalent of 1 cent.
The free price increased interest among those who already had a resume written. But those who didn’t have a resume ready—and therefore would have to put in the effort to create one—were less interested in the free class versus the ultra-low-cost class.
Not only does this finding demonstrate that the effect extends to the incidental costs associated with effort, but it also shows how powerful the number zero really is. “This shows that the boomerang effect involves a consumer response that is unique to zero prices,” says Fan. “The effect doesn’t happen with extremely low prices.”
The researchers were surprised by this, Bodenhausen adds. “I thought that maybe people would be suspicious of a 1 cent price, that maybe it might cause more scrutiny, but it was still much more effective than a zero price.”
The researchers also studied whether this boomerang effect would apply if the associated costs involved risk.
They asked 376 Chinese students to read a paragraph containing background information about hepatitis C, and then told the students that a pharmaceutical company had developed a vaccine for the disease. Some participants were told that the vaccine had been on the market for a while and was working as expected. Others were told the vaccine was not yet widely used, so authorities were still closely monitoring its performance. In each group, some participants were then told they could get the vaccine for free, while others were told it cost less than $1.
Once again, the control hypothesis was maintained. Among participants who were told the vaccine was not yet widely used—which apparently made it seem more dangerous—there was more interest in the low-cost vaccine than the free one.
The researchers wanted to rule out an alternative explanation, that the participants were skeptical of the company for offering a free vaccine. But when asked, participants said they were not skeptical of the pricing strategy, suggesting that a zero price does not make a product or company less trustworthy.
Merchants can price according to the associated costs
Bodenhausen, who has studied number perceptions, says that zero holds a special place psychologically. The understanding of zero comes later in the child’s development than the understanding of small numbers, and zero as a number and as a concept arose later than other numbers in Western culture.
“In monetary terms, the difference between 0 and 1 is incredibly small, but psychologically, it’s very different—it’s the absence of something versus its presence,” says Bodenhausen.
While future researchers may want to further investigate the control that zero pricing induces, the current results already have implications for marketers.
The zero value should be avoided when the associated cost is high. This is often the case in offline channels, where costs such as travel time or exposure to COVID-19 may arise. Marketers could even consider segmenting pricing into different groups based on incidental costs or at different stages of the product life cycle. Maybe a free price isn’t the best for a new vaccine, but it could work for a well-established one.
Regardless, this control can be mitigated by keeping potential consumers cognitively engaged. “Of course, socially responsible marketers should consider consumer welfare when deciding whether and how to increase cognitive load,” say Fan and Cai.