Thursday, July 02, 2009

Gladwell at it again   posted by agnostic @ 7/02/2009 01:22:00 PM

In the new issue of The New Yorker, Malcolm Gladwell reviews some book about using the appeal of FREE to grow your business. This is supposed to apply most strongly to information, so that as more and more of a firm's product / service consists of information, the more it can use the appeal of FREE to earn money.

What both Gladwell and the reviewed book's author, Chris Anderson, don't seem to realize is that the appeal of FREE creates pathological behavior.

Gladwell even cites a revealing behavioral economics experiment by Dan Ariely:

Ariely offered a group of subjects a choice between two kinds of chocolate -- Hershey's Kisses, for one cent, and Lindt truffles, for fifteen cents. Three-quarters of the subjects chose the truffles. Then he redid the experiment, reducing the price of both chocolates by one cent. The Kisses were now free. What happened? The order of preference was reversed. Sixty-nine per cent of the subjects chose the Kisses. The price difference between the two chocolates was exactly the same, but that magic word "free" has the power to create a consumer stampede.

In other words, FREE caused people to choose an inferior product more than they would have if the prices were both positive. Thus, in a world where there is more FREE stuff, the quality of stuff will decline. It's hard to believe that this needs to be pointed out. And again, this is not the same as prices declining because technology has become more efficient -- prices are still above 0 in that case. FREE lives in a world of its own.

If you're only trying to get people to buy your target product by packaging it with a FREE trinket, then that's fine. You're still selling something, but just drawing the customer in with FREE stuff. This jibes with another behavioral economics finding -- that when two items A and B are similar to each other but very different from item C, all lying on the same utility curve, people ignore C because it's hard to compare it to the altneratives. They end up hyper-comparing A and B since their features are so similar, and whichever one is marginally better wins.

So if you have three more or less equally useful products, A B and C, where B is essentially what A is, just with something FREE thrown in, people find it a no-brainer to choose B.

An exception to the rule of "FREE leads to lower quality" might be the products that result from dick-swinging competitions, where the producer will churn out lots of FREE stuff just to show how great they are at what they do. They're concerned more with reputation than getting by. Academic work could be an example -- lots of nerds post and critique scientific work at arXiv, PLoS, as well as the more quantitatively oriented blogs.

But in general, you can imagine the quality level you'd enjoy from a free car or an all-volunteer police force. Even sticking with just information, per Chris Anderson, look at what movies you can download without cost on a peer-to-peer site or whatever -- they mostly all suck, being limited to the library of DVDs that geeks own. Sign up for NetFlix or a similar service, and you have access to a superior library of movies, and it hardly costs you anything -- it's just not FREE. Ditto for music files you can download cost-free from a P2P site vs. iTunes, or even buying the actual CD used from Amazon or eBay.

Admittedly I don't know much about computer security, but just by extending the analogy of a voluntary police force, I'd wager that security software that costs anything is better than FREE or open source security software.

To summarize, though, Gladwell's discussion about FREE misses the most important part -- it tends to lower quality. I don't want to live in a word of lower quality of items that aren't of major consequence, and (hopefully) the people in charge of high-consequence items like the police and my workplace's computer security will never be persuaded to go for FREE crap in the first place. This aspect alone answers the question he poses in the sub-headline, "Is free the future?" However, wrapping your brain around the idea that FREE tends to lower quality is discordant with a Progressive worldview, which explains why Gladwell just doesn't get it.

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