Freebies and entitlement

Take away a freebie and people will hate you.

The latest EconTalk podcast relates a story of people who harbored a grudge against the Red Cross for decades. What did the Red Cross do that was so bad? They sold doughnuts at cost.

The Red Cross had given soldiers doughnuts for a while. Then at some point they started charging a nickle. They were not making a profit, only selling the doughnuts at cost. And they only started charging because the U. S. Army asked them to. Even so, some veterans and their families remained angry about this for many years. To this day, some Red Cross workers bring free doughnuts to meetings trying make up for hard feelings.

If you give away something but make it clear from the beginning that it’s only free temporarily — a free sample, a trial version, etc. — then you may charge money later without causing resentment. But if people ever get the idea that your product will remain free, they feel entitled to it.

If Facebook, for example, decided to charge even $1 a year for an account, they would lose millions of members. People would burn Mark Zuckerberg in effigy. Presumably they could have charged $1 a year without criticism when they started. But since the service has been free, they can never charge for it without creating enormous ill will.

13 thoughts on “Freebies and entitlement

  1. The red cross story was interesting and a good lesson. Thanks

    I use facebook mainly for stalking though, so if they start charging I may actually pay!

  2. People are by nature hypocrites, cowards, selfish. And a slough of other negative qualities too numerous to mention. If you ever read my blog posts, you will see how cynical and borderline misanthropic I am. People are fake. They like believing they are good and virtuous. I myself admit that Im a jerk to people. But at least I am real enough, have the humility enough, too see truth without bias, bigotry or resentment. Even if self-deprecating. Its unfortunate how perceptive one becomes when they adopt a cynical perspective. There is little that offends me more than seeing my disgusting insights into humanity pan out just as predicted.

  3. I think this is exactly what’s happening over at Ning. Following announcements that Ning will no longer be free, comments seem to indicate that there is resentment from the users who feel they were partially responsible for building/creating Ning.

  4. I guess at the time when we most needed to understand the humility of the Red Cross work, and start to act it out in our own lives, that we failed to rise above being spoon fed. It’s not all that bad, a small number of the human tribe have learned to work together, we have even travelled to the most alien and hostile place imagineable; the moon. A bit of re-education and a few more denizens might turn their hearts around. Latly – Facebook, I maybe would pay $1 per year; hotmail, $5 per year; gmail, $10 per year. But it would not be lightly, I already pay over £10/m to be on this network.

  5. True but there would be less users on facebook if they started with a monthly cost.
    Maybe I misunderstood your point, but the question is, if they start charging now, would there be less or more users compared to facebook that charged the users since day 1?

  6. Thomas, I was just looking at goodwill toward Facebook, but you raise an interesting question. I imagine FB would have far fewer users today if they had charged since day 1, though they might have been more profitable.

    But consider these two scenarios. (A) Charge some small membership fee for 8 years. (B) Give away membership for 4 years, then charge a small membership fee for the next 4 years. At the end of 8 years, which will have more users? Which will make more money?

    At the end of the first 4 years, (B) will have far more users. But then what happens? The ill will from taking away an entitlement could mean that growth reverses so much that scenario (A) would have produced more users and more profit by the end of the 8 year period.

  7. I completely agree with your post but I’d like to point out something about the true hurdle of payment that is often overlooked. A dollar a year sounds negligible but that’s misleading. Suppose we’re standing next to each other in the grocery line, complete strangers. If I asked you for penny, I’m sure you’d oblige if you had one in your pocket. But things would be quite different if, in order to give me one cent, you had to provide a username, think up and remember a password, agree to some (likely unread) legal contract, tell me your full name and street address and e-mail address, and give me your credit card number, its expiration date, and that three-digit security thingy. It’s really worse than that if you count intangibles, for example the nuisance factor of simply having an open account out there with your credit card attached to it.

  8. IJK: You have a good point. The transaction costs of membership are often more of a barrier than the dollar costs. Convenient micropayments never materialized. The web might look very different if there were an easy way to pay a dime here or there. Along those lines, one of the things Stack Overflow did well was making it very easy to get started. They went to great lengths to let users do as much as possible before asking them to create an account.

    Gene: One of Stack Overflow’s goals was to kill Expert’s Exchange and I imagine it’s working.

  9. Facebook is far from free now. One pays through giving Facebook a share of one’s attention for minutes to hours a day. Companies would kill for that kind of mind share. And that’s not speaking of the information about myself that I give up control of.

    There exists an implicit contract – actually, an explicit contract spelled out in the terms of use – between Facebook and the users. It simply involves no cash at this point, but valuable considerations change hands.

    Behavioral economics shows that people have a huge discontinuity in their utility function for money around zero. Now why this is so is a different question, but it would explain why $1 (+transaction costs) a year is fairly big deal.

  10. One way around this might be voluntary payment for services like Facebook. I’d estimate they would raise at least a few million if they said something like, “We know you love Facebook. It costs something to run this. If you’d like to contribute $1 as a way of saying thanks, click here.”

  11. Paul, along those lines, they speculate in the EconTalk podcast that the New York Times might make more money if it were a non-profit!

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