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Reactive Devaluation and The Economics of “Free”

Imagine you’re in negotiations for a new job, and the hiring manager says “Well, we’ll throw in the ‘gold’ relocation package instead of the ‘silver'” at the very end, and doesn’t ask for anything from your side.  How much different do you think the ‘gold’ package is from the ‘silver’ version?

If you answered “not much,” you’re using what behavioral psychologists call “reactive devaluation.” Simply put, it means you’re reacting to the ease in which you attained the ‘gold’ package, and lowered your estimate of its value.  It’s perfectly logical behavior, and discussed in a NY Times article titled “Sometimes your customers want you to charge more.

In the article, an innovate online tool was given away for free, and valued poorly.  After hearing from customers (and a parent) that she “would not be taken seriously because her prices were too low” the entrepreneur is pulling the free version and finding ways to charge.