Gladwell at it again
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.
Labels: Behavioral Economics, Economics, Media, Technology
“…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…”
This is so profoundly incorrect (in a field I know a lot about), it makes me question your other conclusions (in fields I know little about).
Your webpage is showing up as ridiculously wide on my screen. (I’m using IE6.)
[this is usually a problem with a div in IE (specifically the way blogger interacts with some web browsers in the edit box), but it doesn't seem an issue with IE 8 and i don't see the usual issue looking at the source code. since so few users IE 6 i will fix this problem if you tell me what the issue is specifically, but i'm not going to dig around -razib]
Edited By Siteowner
nmap is free. truecrypt also. and a bunch of other essential utilities.
Also if you start using free-as-in-beer, free-as-in-GPL, and open source interchangeably as if they were all the same thing, a certain set of people will start frothing at the mouth (and not entirely without justification… it’s sloppy if nothing else…).
Open source, certainly, is something I would regard as a big plus for security software. But it doesn’t mean the same thing as free.
Oh, and this seems vaguely relevant
Google Docs is an excellent example of something that is free but of poorer quality than paid apps. There’s no incentive for Google to improve it, either. And as Google tightens its belt, it has to focus on core projects–i.e. moneymakers–which means that apps like Docs fall even further by the wayside.
There are a couple of sides to this. You’re right to point out that people generally have no concept of opportunity cost and thus confuse “no price” with “no cost”, and that this can create a stampede to the bottom. This is why the internet is such a deadly productivity sink — low transaction costs combined with high, largely invisible opportunity costs.
But the other side is that sometimes kinks in demand curves prevent genuine improvements from occurring — for anyone who recalls the buzz about “micropayments” as a model for e-commerce, Ariely’s experiment is a demonstration of the reason they never really took off. Same reason you see things priced at $X.99.
These demand kinks are the critical points where the balance of psychological forces abruptly flips from one dominating to another. Of course the problem you’re hammering on trades on the availability heuristic — most people haven’t thought through their preferences enough to have habits based on an “objective” standard, as opposed to whatever is shoved in front of their nose. The other edge comes from quirks in the way people estimate magnitudes — not only are they naively taking price as a proxy for cost, but incidental features of the way it’s presented are biasing all of their measurements at a more fundamental level. Even Indo-Arabic decimals have their drawbacks.
Not really sure what to do about this, though, other than maybe cash in on it — there’s plenty of arbitrage opportunity out there for someone who makes it easier to make less stupid economic decisions.
Also of relevance.
Agnostic,
I haven’t seen so much jumping to conclusions since the last time I read a creationist’s spiel on the theory of evolution. What evidence do you have that more free stuff leads to a lowering of quality, or are you basing your conclusion on the fact that free stuff tends to be cheap.
Free stuff tends to be cheap because of cost. In those cases where the cost of providing the item is low, then free items need not be cheap. It comes down to a question of the sort of impression the provider wishes to give. In the case of computer files the cost is narrowed down to the person or persons who actually worked on the project, with storage and distribution taking up a miniscule part of the picture. It’s when, say, a PDF file is printed up, bound, and shipped that we start talking about real costs.
A number of book publishers give away electronic versions of their books, because it leads to hard copy sales. And we are talking about quality work for the most part. Then, as others have pointed out, there is the open source software movement. The Linux operating system is available on the web for free. Yet people pay good money for precompiled versions on CD or DVD. Because they see value in it. The point is, free does not mean things must degrade in value. What matters there is what we are talking about, and the value the manufacturer places on the item he is making available for free.
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.
the number of programmers interested in using a particular utility is going to be important. there are gillians of code editors, IDEs, etc. out there. GIMP is way inferior to abode’s products.
What evidence do you have that more free stuff leads to a lowering of quality, or are you basing your conclusion on the fact that free stuff tends to be cheap.
Read the article I’m talking about, and my comment about the experiment that Gladwell cites.
I’ll reiterate here just so you read it:
Price a low-quality chocolate at 1 cent and a high-quality chocolate at 15 cents. Ask people which they want. 75% choose the more expensive but high-quality chocolate. Now lower the price of each by 1 cent — 0 cents (FREE) for the low-quality one, and 14 cents for the high quality one.
The price difference is the same, so if 75% of people were willing to trade off 14 extra cents for superior taste before, they should continue to do so. But they don’t — only 31% do now. Others were so attracted by something FREE that it overrode their preferences, as revealed in the first part.
Therefore, making something FREE results in more crap in circulation. Making both prices positive would put a lot more high-quality stuff back into circulation, as people would no longer be blinded by FREE and would express how much extra money they’re willing to spend on a better product.
Paying 1 cent would still require the person to reach for their wallet, but taking a free piece of chocolate doesn’t. The transaction costs involved might be more significant than the value of the chocolate. A better experiment would use items that are worth more.
I think the best examples of this are in the public sector; where PS bureaucrats will always try to offer their product (health care, education, libraries and museums, festivals etc) free at point of use; thereby vastly inflating demand and allowing the PSBs to claims that they are giving the public what they want.
In the UK the National Health Service is mostly free at point of use, and dreadful quality is therefore tolerated. E.g. I know a wealthy middle class health care professional who waited around 6 months for an MRI scan of their back, rather than pay about 300-500 dollars to get this done privately.
This demonstrates the kind of irrational welfare-dependency which can be produced – even among the elite – by 60 years of state provision.
Of course the opportunity costs of the ‘free’ NHS treatment (in terms of prolonged disability) were vastly more than 500 dollars – and this supports Agnostic’s point that _free_ services are profoundly distorting and disorienting of incentives.
The computer security example was not a good one. Free (both as in speech and as in beer) tools are generally superior to purchasable tools in this context, as Don notes.
The quote excerpted from Gladwell is also bad, in its original context and as a signifying example– as previous posters have noted, there’s an immense difference between something which costs 1c and something which is free. Gladwell may assert that nothing should have changed since “The price difference between the two chocolates was exactly the same”- but there’s a huge overhead cost involved in evaluating the cost, reaching for your wallet, etc etc. Samskara makes this point effectively, I think.
I think agnostic and Gladwell are lumping too many things under the umbrella of ‘free’. There are now a large number of ways used to fund (or funnel resources into) ‘free’ products– think google searches and open-source software– that it’s really difficult to generalize about the quality of something based on its consumer cost (or lack thereof).
It could be interesting to break the analysis down into the different types of free, and try to correlate quality (or lack thereof) with the different ways something nominally ‘free’ was actually paid for or incentivized.
As-is, though, swing and a miss.
I’m skeptical of the chocolate example. Just because in this case the free chocolates were (subjectively reported as) low quality, it doesn’t follow that pricing schemes are rational on the mean or even the variance of taste in the target market. Expensive chocolates in real life cost more because of small production runs and high-cost ingredients, neither of which necessarily increase taste but which may (for many consumers) contribute to an irrational belief in their intrinsic quality.
Organic produce is another obvious example: it costs more and requires a rather elaborate belief system to get people to choose it in a store above better-looking non-organic produce.
Likewise, we have the example of wines, where blind taste tests often show cheap wines to score better than expensive ones. The expensive wines have high perceived quality only after people know how much they cost.
Should we be surprised if a large set of consumers realize that the emperor has no clothes?
The issue is that your webpage occupies three times the width of my screen.
Agnostic,
You still jumped to conclusions. The quality of any product depends on how much effort is put into it. How much effort is put into it depends on what the making thinks it’s worth putting into it. That, in turn, depends on how much the manufacturer expects to get out of it. He does not expect much out of it, he won’t put much into it.
So it comes down to a question of motivation. Low motivation, low quality. But recompense is not the sole determinant of motivation. Pride plays a big role, as does upbringing. Reputation can encourage high quality work. This covers peer pressure, family and friends, even the reaction of enemies can impact how you approach a project.
Free means cheap is a simplification, and like most simplifications it is invalid.
bgc has it correct. Anything that is “free” (meaning that someone besides you is paying for it) is going to be overused. The NHS is an excellent example. Its costs were far greater than originally projected because people didn’t realise agnostic’s point. Even a small $20 copay will stop some people from going to a doctor for a runny nose.
tanstaasfl
There is a small industry devoted to pricing models. All of the airlines use professional pricing consultants. The local private school had trouble enrolling enough students until they raised their prices. So their is some irrationality in the price people want to pay. There are even some who will not take something if it is free.
the chocolate example, as described, seems odd. certainly one possibility is that humans compare the prices of two things in relative terms–that is, 15 cents is 15X the price of 1c, but 14c is infinitely more expensive than free. this is testable (increasing the price of both chocolates by 10c should further skew people towards the truffles), and would explain behavior much more parsimoniously than invoking some sort of weird psychological phenomenon associated with the word “free”.
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.
Ummm… I realize this is tangential to your main point, since movies and music are generally not intended to be “free”, and are subsidized by the people who actually buy the stuff, but what you write here is totally wrong. I can find any song I want on BitTorrent. You can get the whole discography for almost any band all in one go. I’ve even found obscure shit from the 60′s for my parents before. I’m no classical music connoisseur, so I’m not totally certain about that (like if you want specific recordings etc.) but my guess is you can find it. I bet an enormous fraction of recorded CDs are available on BT.
Movies are even easier. Any major movie is online. Foreign films are easy if you speak the language the movie was recorded in and can use the sites in that language, and probably even if you can’t.
I’d like to see stats, or failing that, examples of stuff that is hard to get online for free, if you want to make this argument.
I’m not too impressed by the chocolates example either. You’re talking about trivial items (a piece of candy) and trivial sums of money – the psychology involved is interesting, but I’m not sure the results generalize to more important decisions. Also, IMO, Hershey’s Kisses are not exactly “crap”, and in fact I prefer Hershey’s chocolate to a lot of the more expensive stuff. If the experiment in question had used candy that actually tasted like crap for the “free” choice, I suspect the results might have been different.
I can also think of counter-examples. Tap water is basically free and generally safe to drink, but lots of people buy the bottled stuff. You could probably dress yourself entirely with free T-shirts with ugly logos, and while some geeks do this, most people do not. Etc.
But in general, you can imagine the quality level you’d enjoy from a free car or an all-volunteer police force.
It seems like you’re getting two different arguments mixed up here. Saying that free stuff tends to be crap (or simply not exist) because people usually don’t want to expend lots of effort to get nothing in return is… well, not exactly news, and in fact I agree that “using free to grow your business” is in general a stupid idea and has failed in most cases where I’ve seen people try to implement it. But that’s different from saying that giving things away would lead to an abundance of crap because psychological mechanisms would cause people to irrationally reject superior alternatives, a claim which in general does not seem valid.
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.
Is there a single real world example of this? I can’t think of one. Certainly the opposite trend dominates – people flock to overpriced junk because they use price as a heuristic for value. I’d imagine they’d do the same even if the alternatives were free instead of merely cheaper. If you gave away rustbucket cars to anyone who wanted them, would it put a dent in BMW sales? I doubt it.
“Is there a single real world example of this?”
How about encyclopedias? It used to be that libraries and educated people would spend a lot of money for a good encyclopedia. Now people go online and look at sites for free. I absolutely love Wikipedia, but I’ll admit it is not quite as reliable as Encyclopedia Britannica used to be.
chemdude:
Of course bgc is correct–he’s an Austrian–and will always have the correct explanation of such phenomena.
How about encyclopedias? It used to be that libraries and educated people would spend a lot of money for a good encyclopedia. Now people go online and look at sites for free.
If you started charging, say, $5 for a lifetime subscription to Wikipedia, and also increased the price of Britannica by five bucks, would people start flocking toward Britannica?
How do we know that the following equation is incorrect?
FREE + lower quality = Better value
Dan’s experiments show a discontinuity of preferences at the price of zero. They do not tell us which side of the discontinuity is “correct.” Ironically, I think this is one that the markets will sort out.
Free services are advertising for premium services.
‘”free” has the power to create a consumer stampede.’
Free=Eyeballs. Ad firms are paid huge sums for eyeballs. Convenient services like email are much stickier than your typical ad and therefore a much higher value.
“Thus, in a world where there is more FREE stuff, the quality of stuff will decline.”
Wrong. There is competition for eyeballs in the free space. Competition=Higher quality. Examples: Email, Linux, Google Docs. (BTW, Google docs is constantly adding new features)
“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,”
The free service IS the trinket. The premium service, or a secondary service for another market is the product.
Google
Free search = trinket
Ad platform = product
Many successful web businesses use the “freemimum” model.
Because digital products scale so efficiently, there’s not much difference in overhead between 60 or 60000 users.
If you need 3000 paying customers to turn a profit, and your conversion rate is 5%, the 60,000 repeat eyeballs on the free service is a much more efficient way to get 3k paying users than advertising traditional advertizing.
Free services are leverage to generate novel revenue streams is other creative ways.
Competition=Higher quality. Examples: Email, Linux, Google Docs. (BTW, Google docs is constantly adding new features)
Not true — at least not in information-based fields. All the neat stuff by Google that you’re talking about was delivered only after it started to really dominate and edge out the competition, allowing it to focus on side projects, and/or to act as a royal patron to start-ups.
I don’t know what you’re talking about with Linux — 1% or less uses it. Except for servers, it doesn’t compete with anything.
I don’t know what you’re talking about with Linux — 1% or less uses it.
What he’s talking about is the fact that the very existence of a competitor keeps the dominant player on its toes, and forces it to keep working in the consumer’s interest rather than sitting on its glutei maximi and enjoying its monopoly rent. The future threat is more important than the actual effect at a given time.
You may not see the potential effect of Linux, but rest assured that Microsoft definitely saw it.
A more accessible example is Firefox. Compare the quality of Internet Explorer after Firefox burst onto the scene. Notice that both products are essentially “free” from the consumer’s viewpoint.
What he’s talking about is the fact that the very existence of a competitor keeps the dominant player on its toes, and forces it to keep working in the consumer’s interest rather than sitting on its glutei maximi and enjoying its monopoly rent.
Right, like how the rest of us keep the NBA players in top shape — they wouldn’t want us to take over professional basketball and do it right.
Compare the quality of Internet Explorer after Firefox burst onto the scene.
What are you talking about? You make it sound like IE has been around for ages in monopolistic decadence, and only recently became good. IE only overtook Netscape in 1999 — before then, it had anything but a monopoly.
Furthermore, it’s market share has not been steady, as you imply with your sitting-on-their-asses monopoly argument. They peaked in 2002 and have been slightly declining since. So much for IE being a long-entrenched, decadent monopoly.
Here’s a picture showing that IE’s popularity looks like a flaring up and dying down, just like Netscape before it:
http://en.wikipedia.org/wiki/File:Browser_Wars.svg
Well, I wouldn’t be surprised if Linux actually runs on more CPU cores than Windows (given the vast number of servers, and their higher-core structure).
Also, since an increasing fraction of all software activity is via the Web/Server model rather than locally on the PC, I’d bet that Linux totally dominates the active-CPU-clock-cycle measure of computer activity.
And given how dreadfully bad the new Windows Vista version seems, and the rise of netbooks, I think the local platform may be heading in the same direction.
And don’t forget the other incredibly successful software components of the Free/Open Source movement, such as Apache, PHP, MySQL, etc., most of which have pretty much wiped out their non-free competitors.
I really, really would avoid making “Anti-Free” arguments when you’re talking about software (for which the cost of production and distribution is zero!)
@agnostic
May be you should stick to the stuff you really know about?
Software isn’t much the epitome of the “standard trade good”!
Microsoft is not dead, contra that article. Microsoft haters have been predicting its demise forever — and have always been wrong. It’s Apple that’s stalling out — their OS market share had been gaining steam during the 2000s, but it peaked and slightly declined during 2008, now at about 7 – 7.5%.
I know software isn’t a standard trade good — hence the emphasis I placed on information in the article and comments, numbnuts.
May be you didn’t read all the article, Microsoft is “dead” the way IBM is dead, a lingering dinosaur still breathing but which cannot harm anymore.
The bias toward Apple is from Paul Graham not me, there is no such thing as “Apple computer” it’s “Steve Jobs computer”, so yeah it’s likely to be dead soon or may be it will go open source the way Mozilla hatched from Netscape.
Anyway the “game” isn’t anymore about the OS but about higher level development platforms mostly web centric and (big) database centric.
Gross generalities usually leave plenty of room for exceptions which certainly makes the arguing fun. There are plenty of ways businesses can make money by providing ‘free’ stuff. Unfortunately in the current cycle this means ‘creators’ are having to find ways to generate cash that are non-traditional and in some cases counter-intuitive. ‘What I made is free, but if you want it conveniently/safe it will be $.99. Anderson’s book is really about shifting revenue streams, and while it describes todays environment I’m not sure it proves sustainability.