The Societal Cost of Giving Something Away

Wednesday, May 13, 2015

It’s long been held that the best way to get someone to try something is to give it to them for free.

However, do consumers actually use those free goods and continue to use them after initial acceptance? Not as much as those who paid for the product, according to Supply Chain and Operations Associate Professor Enno Siemsen. And even if the free product they received could save their lives.

Siemsen and colleagues discovered this phenomenon conducting research in rural Malawi, Africa on the trial and adoption of a water purification product. In their study, one group of households was provided the purification packets for free, while two groups were offered the chance to buy at deeply discounted prices, either three Zambian Kwacha (Kw) or five Kw, respectively.

“When we gave the product away for free, there were a lot of dysfunctionalities that appeared,” says Siemsen. “You had a lot of people taking the product, but as for actually trying it out, that was a different story.”

In fact, 28 percent of those who received the product for free never used it.

“Once we move to a positive price we didn’t have this dysfunctionality,” Siemsen adds. Only two percent of the households that actually paid for the product (three Kw) didn’t use it, suggesting that a positive price may prevent people from impulsively taking something they have no intention to use. Siemsen’s findings did show that usage dropped as the price point increased.

More astonishing than the discrepancy in usage was the adoption rate of the product based on its cost. More than half of the households that were charged three Kw were repeat customers, compared to only 24 percent who had to pay five Kw and 22 percent for those who received the product at no cost.

Siemsen says these findings show little support for a giveaway strategy and suggest NGOs and companies look differently at the base of pyramid markets.

“For a long time we’ve thought of this as a development problem, we have to give aid for them to develop,” says Siemsen. “That implied a zero price point, which has often created a dependency.

“Instead, if we think of people in these markets not as victims of poverty but as consumers with needs, we can develop business models with products that are particularly suited for them. Not only will we help more people this way, but companies can turn a profit in doing so.”