Caution: Free Does Not Always Pay Off

I honestly admit that Dutchies are often the first ones in line when there is something to get for free. Even on an international scale this characteristic is associated with the Dutch. Because I sometimes experience this typical Dutch behavior as embarrassing,  I am glad to have found out that our behavior can be explained towards the world by the notion of the ‘penny gap’ which explains the huge psychological difference between cheap and free.

The difference between cheap and free is theorized by Josh Kopelman as the ‘penny gap’. This concept explains the difference between the demand for a good for free which turns out to be higher than the demand for a good at the price of one cent (Anderson, 2008). Obviously the penny gap is a concept which is strengthened by the (free) possibilities allowed by the worldwide web. The ability to access content for free like music, news and information is a dream come true for the Dutch, but of course also for the rest of the world.

One explanation for the penny gap is the fact that something that is free is automatically more appealing. Even if something is only charged at a symbolic one cent, this makes people feel that they might not want it. Another explanation is the fact that symbolic charges require a payment, which leads to some extra effort while free content or products are only one mouse-click away (Moore-Jones, 2011). A clear example illustrating the penny gap regards the promotion of free shipping costs at triggered customers to order a second book by charging no shipping costs when ordering more than $25. This approach proofed to be successful since the company immediately saw an increase in its revenue. Due to this success France used the same approach, but with a little adjustment. It charged a symbolic amount for its shipping costs. You can guess what happened (de Vries, 2009).

As can be concluded from this example, free has become a physiological game enabling increasing revenues for businesses. However, there is a downside to this game indicating that ‘free’ may not always be the way to go.  reported this year a decrease in revenue due to an increase in shipping costs. The free-shipping program, is next to promoting sales, also promoting wastefulness due to the fact that purchases need to be moved over shorter distances or need to come from various distribution centers Mouton, 2014). Obviously consumers take advantage of the possibility to shop whenever they prefer and having the purchase delivered at home or at the office for free.

As the Dutch have known for centuries, the difference between free and cheap is the difference between a great market and no market (Anderson, 2008). Although the Dutch’ love for anything that is for free seems like a smart argument to increase revenue by the use of cross-subsidizations, carefulness must be taken into account in developing business models. Consumers are getting used to free quickly and this may not always result in efficient outcomes.





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