Buying Decisions

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Part
01

Psychology of Buying Decisions

One of the major factors that affect consumer purchasing decisions when deciding between a paid and a free product is the perceived higher value of paid products. Consumers often rank paid products higher than free ones based on the perception of value and quality. Sometimes, consumers don't value free products at all. Other factors like anchoring the price to a certain first-informed price can also affect the purchase decision as seen in the case of PC software like MS Office and Adobe Photoshop, or paid smartphone apps. Associating increase of self-worth, social status, and sense of accomplishment with a paid product can also affect the purchase decision, tilting the balance in favor of paid products.


WHY DO CONSUMERS PAY FOR PRODUCTS WHEN THEY HAVE SO MANY FREE ALTERNATIVES AVAILABLE?

1. PEOPLE DON'T VALUE FREE THINGS, BUT THEY VALUE PAID THINGS
  • People have a cognitive bias of evaluating stuff or services based on its price at first judgment. Also, this first judgment sticks throughout the purchase-to-consumption journey and affects how the consumer actually consumes the product. Thus, we don't value free products but attach high value to paid products.
  • Ramit Sethi, CEO of Growthlab, a company that helps entrepreneurs of all levels start and grow online businesses, recounts his own experience while providing his course to a fraction of customers for free. According to Ramit, those who were given the course for free never opened the course emails sent to them even once, while those who paid for the course opened each and every email and completed the course.
  • A study conducted by Caltech and researchers at Stanford University determined that perception plays a significant role in the value we assign goods and services. For example, they found that "people not only rate the same wine more highly when they’re told it is more expensive," but these perceptions take physical form, determined through brain scans that showed increased enjoyment of the same wine they perceived to be of a higher quality.
  • In another study using placebo pain killers, participants took fake pain relievers. However, those who were told the prices of the drugs were higher reported higher pain reduction in comparison to those who were told their pain reliever was cheap.
  • These insights can be effectively concluded to point out that people don't find value in free products, but find paid products to be more valuable. Associating an elevated price with a product immediately associates value with that product.
2. THE PRINCE ANCHOR EFFECT
  • When we start our purchase journey, initial pricing information plays a key role in our purchase decision and is called an anchor. The final price of our purchase is always near to the anchor, or the initial informed price.
  • Research has also shown that people adhere to the anchors, even when other information is available that will make their decision more informed.
  • An example of anchors at work in purchase decision-making is the case of smartphone apps versus PC software. We are willing to pay for PC software like Microsoft Office or Adobe Photoshop, but will seldom pay the same amount for a smartphone app on an iPhone or an Android. This is because the price of PC software has been anchored to a fixed, price-based value, due to people thinking it is the norm for quality PC software.
  • Since the inception of PC software, quality PC software is rarely free. Given that, quality is automatically associated with paid software. This is one of the reasons people are willing to pay for software when many free alternatives are present.
  • However, in the case of smartphones, apps came into existence when most of the information necessary to create mobile apps was available online for free and quality apps were also available for free. Therefore, people have associated free apps with quality and are therefore not willing to pay higher.
3. SENSE OF ACCOMPLISHMENT AND ENHANCEMENT OF SELF-WORTH
  • Owning a paid product also increases the owner's sense of accomplishment and self-worth. This directly connects to the idea that paid products are more valuable.
  • According to Michael Norton, a psychologist and professor of business administration at Harvard Business School, people are motivated to gain peak experiences and find that extra boost that comes with the expenditure of money.
  • Anat Keinan and Ran Kivetz write in their research that people often buy things just to add an experience to their "experiential CV," thus checking off items on an experiential checklist."

RESEARCH STRATEGY:

We started our research with a focused surface-level search strategy, keeping in mind the fact that we are not to focus on case studies, but rather on the psychological aspects and related studies done on the subject of psychological influences on purchasing decisions. We had to scour through a lot of seemingly reliable data and results to choose ones favorable for our research request. We also searched both psychology-specific and business-oriented sites, in addition to academic directories and databases. In doing so, we hoped to find reliable information, studies, or conversations regarding the psychology of paying for products in a market where free alternatives are available.

Even after nitpicking the sources from the results that we found, we couldn't find any data which actively describes the psychology of why people buy paid products when they can get the same or similar products for free. We then turned our attention to sources alluding to why we spend a lot more than explicitly necessary. We found some sources which provide ideas about our cognitive biases which prevent us from choosing rationally between an expensive and cheap or free product. We found one such source to be backed by academic research, and, therefore, we extended that idea to the paid versus free model. We were able to garner insights that address the underlying reasons for choosing a paid product over a free one, and continued our search for software-specific purchasing insights. Through this method, we found one source that explained a major reason why PC software like MS Office is still purchased by people when there are other free alternatives available. We have extracted insights from the source and presented them in our key findings above.
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