Number five was a voucher offer in a magazine. When filling it in I noticed the opt-out box but decided that since they were offering me a free teapot, the least I could do was let them send me some advertising. The principle of reciprocity is strong – you scratch my back, I’ll scratch your free scratchcard – or something like that. I got my free teapot in the post two days later and that was me on the CTC mailing list.
Number six was when I discovered – from that mailing list – that CTC was now offering home delivery. Free delivery with any order of four or more teapots was tempting, but what was really interesting was the reverse offer. They had partnered with a same-day delivery service. And if you paid for the delivery service, the teapot was free. I decided to indulge – partly to rack up another free teapot towards my month’s target, and partly just for the hell of it. Sure, it cost me £6.50 – but have you ever had nothing in the fridge and just wanted to have someone bring a freshly poured drink to your door? Well, I did. And it was worth it.
By this time I was wondering why this flurry of offers seemed to be surrounding me all at once. I managed eventually to get Maggie on the phone.
“It’s all strategy,” she insisted. “You’ll see in the end.”
“Give me a clue, at least. You can’t be having to offer discount deals to shift your stock, surely?”
“No, no!” She seemed keen to reassure me. “Demand is higher than ever. This isn’t a desperation move in any way. It’s just about getting to a bigger market. People are wary of drinking something they don’t recognise, and a free offer is one of the best ways to get more people to try something new. In four weeks we’ve got over half a million new people to try us out. If we manage to hang onto a tenth of those as semi-regular drinkers, it pays for itself six times over.”
Teapot number seven was a limited-time promotion from a newly opened local sandwich shop: come in on opening day and get a free teapot. Again a useful tool for the shop – letting local office workers know they are there – and for CTC, who won some new tea drinkers and a loyal retail outlet. The goodwill that CTC won by offering a couple of hundred free teapots, which cost them perhaps £40 in manufacturing expense, was far more than they could have achieved by paying the shop. Free gifts are a good way to create a positive mutual obligation between you and another business, and they have much more symbolic value than plain cash.
Number eight was an extra that the CTC retail staff threw in when I visited the factory on a research trip. I went to the factory shop to buy a gift for my mother, and at the checkout the cashier added in an extra teapot – cinnamon and dark chocolate – as a gift. Once again the goodwill this created will be worth much more than the cost of the teapot, and it introduced me to a new flavour I probably wouldn’t have tried on my own. I might buy it again.
Numbers nine to 22 came as part of an impressive promotional offer. Once I was on the mailing list, they emailed me a special offer: an automated Teasmade-style alarm clock and kettle. Imagine! Being woken up each morning with a freshly made teapot. And, best of all, it came with two weeks of free teapot refills, which meant that the purchase paid for itself in teapots alone. So I ordered one, set it up and now I am woken each morning by the delicious smell of tea, chocolate and – importantly – caffeine. That in turn helped create an even stronger tea-drinking habit, and no doubt will lead me to buy more teapots in the next year than I would otherwise have done. I even signed up to a subscription plan to receive five teapot refills each week in the post.
I won’t count the free biscuit I got with my ginger teapot in Manybucks last week, though it did lead me to buy the teapot without looking at the price. Nice biscuit.
And number 23 was part of a bundle of free stuff that I got in a hamper sold by the local deli. I did have to buy the physical hamper, for about £19, but in it there was a chocolate teapot, some cake, biscuits, honey and a bunch of other stuff – I have no idea what the cost would have been to buy it all, but it was very tasty.
So I won my bet. And while I did get a whole month’s worth of free teapots, I don’t think any of the companies who gave them to me have lost out.
Why do free offers work so well?
Many purchase decisions involve more than one component. Order a book online and pay a delivery fee; buy a main course and then pay for a side dish and drink; sign up for an accounting service and decide whether also to buy their annual company secretary service or separate tax advice.
When this happens, the consumer could think about the purchase in one of two ways. They could add the components together and consider: is the total purchase worth the money I’m being asked to pay?
Or they could think separately about every item and make a separate evaluation of each. On the face of it, this is illogical – because they can’t buy the delivery charge separately from the book it comes with – but it turns out that is what a lot of people do.
The danger in this is that if the consumer thinks the delivery charge is too much – even if the overall deal is a good one, because the book itself is cheap – they may decide not to buy. By asking them to make two decisions, you create twice the opportunity for them to say no to your offer.
Including add-on items for free – or, more accurately, including them in the price of the basic product – makes it easier for your consumer to say yes, by taking away a decision. The word ‘free’ signals to a consumer that they don’t need to think about this item at all. It’s free – no downside – therefore you can focus just on whether to buy the main item at the price charged for it.
Two well-known case studies – there are many more – show the power of free offers.
One, carried out in the laboratory by Dan Ariely and colleagues, offered people the choice between a cheap chocolate candy for 1c and a luxury truffle for 26c. Most people chose the 26c truffle. When another set of subjects were offered the choice between the cheap candy for free, and the truffle for 25c, they overwhelmingly switched their preference to the free one.
Another was an experiment accidentally conducted by Amazon. In most countries Amazon offers free delivery for orders over a certain value, or, during some temporary promotions, on all orders. In France, the delivery charge was not free but was set to one franc (this was in the late 1990s, before the euro). This is a tiny amount of money compared to the price of most books, so one might expect it to have almost no effect. Nobody would consciously dispute that a franc is a fair price for delivery. And yet, this small change resulted in far fewer sales. When free delivery was offered in France too, sales increased significantly.
How to apply it
This is one area where you can, and often should, move away from the value comparison chart that you developed in Chapter 1. The key values of your customers are those which they will pay for. Free offers are most effective in the dimensions which customers do not value so highly.
For example, if you sell a car and your key values are comfort and reliability, your existing customers may not place a high value on excitement. Therefore offering a free holiday might attract new customers without diminishing the value placed on your main product features.
‘Free’ subconsciously communicates to your customer, ‘get the upside without having to think about the downside’, so it increases the appeal of a product with no penalty and without making the buying decision any more complex.
The drawback of free offers is that, for many customers, the free addition will not increase the perceived value of your product. Thus it may not increase the price point you can achieve with these customers, but you may end up giving away the free item anyway if it is offered alongside your main product or service.
You should therefore find free items to offer which have a low cost per sale to you. This might mean giving away something that has little direct cost, such as an ebook or an entry to a competition. It might mean partnering with a company that wants to promote its product to your customers. Or it might mean requiring customers to register or send in a voucher t
o get the free offer, in which case it will be taken up by only the subset of customers who most care about it.
Thus, seek out complementary products which are low cost and do not directly satisfy the key value dimensions of your main offering. If you do happen to find a product which does strengthen one of those dimensions, you may well be able to offer it as a chargeable upsell item (see the next chapter for details) instead of a free offer.
Alternatively, you could make your product or service the free offer in someone else’s sale. If you find a company which is selling a non-competitive product into a similar marketplace to yours, and you want to get hold of some of their customers, try offering them a deal. They will be increasing the appeal of their own product, so they may be willing to pay you a contribution towards the cost of your product. You will gain exposure to a new market and a friendly new partner for future joint promotions.
Chapter summary
• ‘Free’ is almost a magic word. It transforms the customer’s decision context from the default position of having to balance tradeoffs – is this feature worth giving up that one? – to one where there is no decision to make, because they get something for nothing.
• If a free product is bundled or linked with a priced product, it makes people better disposed towards the priced product.
• Free products can increase the urgency of a purchase, as consumers don’t want to miss out on the chance to get something for free.
1. An experiment by Joseph C. Nunes and Xavier Dréze showed that giving consumers a two-stamp head start on a loyalty card at a car wash – even though the advantage was illusory – increased the number of people completing the card by over 80%.
Chapter 14
Upselling
I went to see Maggie in August – the supermarket deal and café distribution were settled, sales continued to rise steadily – and asked her what was next.
“You tell me,” she replied. “What do you like to eat with your chocolate tea?”
I thought about it. “Quite often a croissant; sometimes a biscuit. Usually I don’t eat anything, I suppose.”
“There’s your answer, then. We want to capture some of that market – or create more of it.”
“Are you manufacturing your own biscuits now?” I asked.
“I wouldn’t get into that business,” she replied. “Too risky to invest in setting up all the kitchens and so on. Fortunately there are people who already took those risks. Have a look.”
She showed me several products, branded with “Chocolate Teapot Company”, which were distinctly not chocolate teapots. One was a chocolate-covered ginger biscuit, one a Danish pastry, and the others different variations on the theme.
“Isn’t this just line extension?” I asked. “The marketing gurus say line extension is a dangerous thing – it dilutes the brand.”
“Agreed – but we don’t expect anyone to buy these on the strength of the brand. These are our new premium revenue source – to let us capture a higher share of wallet when a teapot is being drunk.”
I looked up at the wall of the factory café and there were some new items on the menu.
• Chocolate teapot: small £2.59
• Chocolate teapot: large £3.09
• Add a G-Tea ginger biscuit: + 79p
• Add a D-Tea Danish pastry: + £1.89
Now that I saw it, the pastry did sound like a tempting way to soak up some of the tea.
“How many of these are you projecting to sell?” I asked.
“We’ve done some testing already. The original goal was to do more price differentiation – giving price-insensitive people an extra route to spend more money. But we’ve realised this also helps us capture part of the audience who would have bought food anyway, but from someone else. Looks like we’ll increase sales by about 15% in the outlets that are willing to stock the extras.”
“So if you wanted to create more price differentials, why not just increase the price of the top product?”
“It can be tricky to do that. Although we always run a high-priced option alongside our core items, if we move the top price up too high it can affect the overall perception of value for money. If people see a £6 teapot on the menu, it hurts us in two ways. First, it shifts up the average price point for teapots, so if people are choosing between teapots and coffee, or even deciding whether to enter the café at all, they are less likely to do it. Second, it changes people’s assumptions about the lowend products. They may assume that if the top price is £6, the £2.59 option can’t be any good. So you can only use differentiation and anchoring up to a point.”
I was surprised by this. “Didn’t someone do some research about jury trials where they found the anchor always had a positive effect, no matter how high it is?”2
“Yes, but that’s a slightly different situation,” said Maggie. “In that case, the jury had to make an award – they had no alternatives open to them. We are in a competitive market and people can buy a different product altogether if they don’t like us. If they think of us as being an expensive product, they may unconsciously avoid us before even noticing that we have some affordable options as well. But if we use optional products to differentiate, the customer doesn’t perceive those prices as part of our product – even though they may end up spending nearly £5 instead of £3.”
I was starting to understand the complexity of pricing perception. Low prices attract customers to even consider your product, or your shop, as a buying option. Once they have made that decision, you want to influence them to pay as much as possible, without going so high that you completely put them off buying. And then you want them to remember your product as being good value, so that they come back again to buy more. All this while managing the margins of other companies in the chain – retailers if you’re a manufacturer, or manufacturers if you’re a retailer, or complementary service providers if you offer a service.
There’s more on how to profitably handle this complexity in Chapter 17, “Managing the pricing environment”. For now, though, Maggie had a specific problem.
“We want to get our café channel to sell our biscuits and cakes with our teas, rather than the other products they stock. So James is trying a few experiments. We’d like to know what you think.”
Maggie introduced me to James, an earnest young man with curly hair, wire-rimmed glasses and a somehow incongruous white lab coat.
“OK, look at this now,” he started. “Maggie’s explained to you about the biscuits, right? Well here are our different biscuit plans; let’s see what you like best.”
I was back in the product test room where I’d first encountered the chocolate teapots several months before. On several tables were a range of teapots with different products lined up beside them.
First, a regular milk chocolate teapot, price label £1.99. Beside it, a chocolate biscuit priced at £1.20 – reduced to just 75p if bought with the teapot.
Next, a bitter chocolate teapot, price label £2.29. With this one, a caramel biscuit at 65p.
Third, a large white chocolate teapot, priced at £3.35. Beside it, a scone and butter for £1.60.
James explained to me the reasoning for each.
“There are two different ways to do an upsell. One is to extract more money from people who want more of the same thing from the product. The other is to offer something complementary to broaden the appeal of the product.
“The chocolate biscuit is the first kind. It’s designed for customers who want even more sweetness and will pay more for it. They can get a certain amount of sugar in their tea for £1.99, and an extra hit for 75p more. And they save money too! The other two options are about activating different attributes. People who prefer the bitter teapot might still want a little sweet flavouring to complement it. The scones are for people who are drinking tea to satisfy their thirst, but are feeling hungry too.”
“And the pricing?” I asked. “Why is the caramel biscuit cheaper than the chocolate one?”
“I can’t give you a scientific answer to that, I’m afraid. We are just trying out some different price points for different attributes. Different customers have different preferences, and people who like the taste of bitter tea seem to care less about sugar than people who buy sweet tea. The scone combination seems to work well when the total price comes in under £5 – so we’ve kept it just under that level.”
James added in a low voice, “Don’t tell everyone, but the guy who owns Cosanostra was round here last week and he loved the scone. Sir Charles something or other.”
I assumed this was Sir Charles Leverkraft, chief executive of Leverkraft & Gamble. How interesting.
When I visited a café the following week I noticed the first offer, the chocolate biscuit, was available at the counter. I didn’t pick one up, but halfway through my teapot I felt like it might be nice to have a bit more sweetness. Why hadn’t I bought it with the teapot and got the discount? Sighing, I went up to buy it anyway – and was pleasantly surprised when the café discounted it to 75p regardless. It felt like a gift. Another nice touch to increase my loyalty to the brand.
Upselling achieves two goals at once. It allows you to exercise additional price discrimination without making it too obvious to customers that that is what you are doing. And it lets customers choose their own balance of product attributes to tailor your offering just how they want.
This technique applies perhaps even more to services than to physical products. The experience of a service is more complex, and typically there are more attributes for variation. You also have much more customer contact while providing a service, and many more chances to complete the upsell. Customers who do not realise they want the extra service right away might change their minds later.
The Psychology of Price Page 13