Anyone who reads this blog regularly will know that I’m a huge fan of NPR’s Planet Money programme. The show guides you through the arcana of finance and economics in a witty and accessible way. Recently, they rebroadcast a programme on the cost of free. In this case they were talking about free doughnuts and rumours of a longstanding grudge that US veterans have against the Red Cross. Planet Money’s Chana Joffe-Walt investigated, and sure enough, American vets do grumble about the Red Cross charging for their doughnuts. The story is a bit more complicated, and I don’t want to spoil the reveal, but the story illustrates in Planet Money’s own wonderful fashion the cost of free, or more precisely, the cost to businesses of charging for something that used to be free. In the case of the Red Cross, they still have trouble shifting the opinion of vets who once got doughnuts for free and then found themselves paying for them.
If consumers are used to one price and it changes, the change will seem more dramatic, according to economist Uri Simonsohn, who is interviewed in the piece. When that reference price is zero, consumers will have one of two reactions. They will either adjust their reference price, the price that they are accustomed to paying, or Simonsohn says a price change can be seen as a categorical change, a change in the relationship between the consumer and the organisation. Simonsohn compared this categorical change to akin if your parents charged you for a holiday meal. The Red Cross charging servicemen for doughnuts was send as a categorical change, and Joffe-Walt said that the servicemen felt betrayed by the change in price and the change in the relationship brought about by that price change.
Simonsohn says businesses make these massively damaging categorical mistakes when they start charging for things that “people don’t think are part of business”. For example, Delta Airlines made the mistake of charging to speak to agents over the telephone in the 1990s, and Planet Money host Alex Blumberg says that customers “freaked out” and were so furious that Delta were forced to reverse the decision. As Blumberg said at the top of the programme, “Free can backfire. When you take something that was free and give it a price, that is a highly a risky move.” When people view a change in their relationship with a business as categorical, their imagination starts to run wild. If a business is going to charge me for this previously free product or service, they ask, where will it end?
Some price changes, however, are accepted. People won’t stand for being charged to speak to an agent, but now many Americans and most Europeans flying on low-cost carriers have accepted paying for bags. The idea that they have to pay to move not only themselves but their baggage from one place to another makes sense, but paying someone to have a conversation, that doesn’t make sense at all.
So how can businesses, including news organisations, avoid making the mistake of a categorical change in what they charge? As Joffe-Walt says, news organisations like the New York Times are wrestling with this. Blumberg said that people can either view the New York Times as a newspaper, which they know they pay for, or they can view it in the online ‘information wants to be free’ category. “Avoid for charging for things that people would not describe as ‘hey, I got this for free’ because that mistake could be very hard to fix,” Blumberg said.
We are seeing a lot of experiments by news organisations who are trying to generate revenue from readers to help pay for journalism, but it’s important that publishers not try to charge for things that their readers don’t see as part of the journalism business. Making a category change error could have serious ramifications, and many news organisations do not have the resilience left to survive such mistakes. The big challenge of paid content has been, and continues to be, in understanding what things (or, more often, what bundle of things), readers will pay for. Fortunately, we’re starting to figure out what works and, just as importantly, what doesn’t.