The Magic of Zero

Hopefully you’ve already heard of the work of Dan Ariely. If you haven’t, click on this link to his website as every modern-day pricer and/or marketer should become familiar with his studies. Dan has PhDs in cognitive psychology and business administration. He’s currently the James B. Duke Professor of Psychology and Behavioral Economics and teaches at Duke University. He did a lot of his early work at MIT, may alma mater, which only makes him that much dearer to my marketing heart.

In his seminal book, Predictably Irrational, Professor Ariely dedicates an entire chapter to a very special price--$0.00. Everybody loves a good discount, but it turns out that FREE is something truly special. In one of his experiments, he set up a chocolate sale booth. He offered Lindt truffles (Lindt chocolate is a particularly fine European brand) and Hershey kisses at a significantly reduced price. Customers were allowed to only buy one, either the truffle at 15 cents or the Kiss at 1 cent. Prof. Ariely reports that about 73% chose the truffle and 27% the Kiss—proving that MIT students generally recognize quality and are willing to pay for it.

But a funny thing happened when they lowered the price by just a penny, the same penny, each. With truffles at 14 cents and Kisses now FREE, 69% chose the Kiss and only 31% the truffle—showing even smart MIT students can’t resist the Siren allure of FREE. Lest the notion of students not wanting to deal with change on a 14 cent purchase or just not having money on them be the cause, they tried the experiment at the student cafeteria where the purchase would just be added to their meal—the results were the same.

So what does that mean for us in pricing and marketing multi-family housing units? Obviously we can’t offer our product for free! But how do we promote units—particularly specials? On a $1200 a month one bedroom, clearly this lesson would tell us that promoting “one month free” would be more powerful than “$100 off each month’s rent.”

Do you ever have a situation where larger units aren'’t renting as well as smaller units? Instead of just lowering the rent, how about taking the 550 sqft unit and selling it at the same price as the 520 sqft unit—and promoting it as “30 square feet of living space FREE”? Or “FREE balcony” or “free” anything else you can think of that still makes economic sense for you? It’s not quite like giving the chocolate away for free, but it’s much closer than allegedly more “rational” promotions on the exact price reduction.

Standard economic theory treats 0 as just another price point slightly below 1. But experiments like those describe above have proved that 0 is actually a very special cost that people respond to disproportionately favorably than the mere utility of zero cost would otherwise predict. We behave irrationally according to the standard theory —but very PREDICTABLY so. So what are you doing to take advantage of this? I’d love to hear you share your practical experiences with us.