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When Free Is Bad, and Expensive is Good

Marc Tracy bizbox.slate.com

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June 2, 2009

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It is an old saw--and a true one!--that, in down times, an effective marketing and pricing strategy is to discount, as well as to offer creative, eye-catching promotions that also save the customer money. Call it recession marketing (we do!).

While we certainly stand by that, it appears there may be limits to it. The main limit being that while discount is good, free is bad. So, anyway, says the New York Times, reporting on an academic study soon to be printed in the Journal of Consumer Research. The study found that offering a "freebie" hurts not only the free product's perceived the value, but the perceived value of the product you're actually trying to sell. (We here define "freebie" as a product that is automatically included, free, with the purchase of a related product, or a second unit of purchased product--the ploy known as BOGO, or Buy One Get One.) So think twice before offering two-for-the-price-of one.

Meanwhile, and we think along similar lines, the Washington Post's Economy Watch blog brought news of a new development at McDonald's: the introduction of a $4 burger (remember, that's expensive for Mickey D's!), a 1/3-pounder. At first glance, this gambit seems strange: McDonald's, which has the biggest and maybe the best reputation of any fast-food chain--and which, in recent recession-filled months, has accordingly seen enviable revenue growth--is introducing a more expensive premium menu item? It would seem to cut against the times, as well as against its own grain.

But guess again. In fairness, part of the reason for the upgrade is that the chain has steadily juiced up other types of offerings in recent years, but hadn't done so with its burger yet, even as competitors have (Burger King already offers a 1/3-pounder). More intriguingly, though, during the recession there may actually be a market, if not for premiums, than for premiums-among-discounts: as the National Restaurant Association's VP for Research explained, in the blog's words, "In recessions, higher-income families that never would have gone to a quick-service restaurant such as McDonalds's are attracted to premium-priced products." As McDonald's welcomes new, and wealthier, clientele, the Angus may seem like the perfect fit for them.

Ingenius? Or too clever by half? Frankly, we're leaning towards the former. It really does make a lot of sense. We think that these two marketing developments show that, while discounting during a recession is a good thing, it is the type of good thing there can be too much of.

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