Everyone loves a bargain, and nothing’s a better bargain than something that’s completely free. That’s why any deal that has the word “free” attached – whether it’s a free kids’ meal at a restaurant, a free trial issue of a magazine, or a free email account – brings customers running.
The simple truth is, companies are in business to make money. So when they offer you something for free, they’re not doing it just out of the goodness of their hearts – they expect to make money, one way or another. And sometimes, the money doesn’t actually come out of your pocket. For instance, when Google sells the data it collects from its millions of email subscribers and billions of daily web searches, that doesn’t cost you anything directly – it just helps companies figure out better ways to market their products to you.
But in many other cases, something that’s billed as free actually has a hidden cost. It might lead you to spend more money right away, or it might lock you into a deal that will cost you money in the long run. Either way, as a smart consumer, you need to be on guard whenever you see the word “free,” because free stuff can sometimes end up costing you a lot of money.
How the Word “Free” Affects Us
There’s something about the word “free” that seems to short out our brain’s logic circuits and leads us to make decisions that really aren’t in our best interests. In his book “Predictably Irrational,” behavioral economist Dan Ariely gives several examples of ways that the word “free” leads consumers to behave irrationally.
In one experiment that Ariely designed, a temporary candy stand was set up on a college campus. Students had the choice of buying a Lindt truffle, a gourmet treat that normally sells for about $0.50, for just $0.15, or getting a Hershey Kiss worth about $0.05 for $0.01. Not surprisingly, 73% of the passersby decided the truffle was a better deal.
But when the experimenters dropped the price of both items by one cent – $0.14 for the truffle, and free for the Kiss – suddenly the percentages reversed. Now 69% of the students found the free Hershey Kiss more appealing than the truffle – even though the truffle was $0.36 off its retail price and the Kiss was only $0.05 off. The testers repeated the experiment several times, experimenting with different prices, and every time the word “free” led people to make a different decision from the choice they made when money – even a tiny amount of money – was involved.
On his blog, Dan Ariely gives several other examples of how the word “free” drives consumers to make hasty – and perhaps even dangerous – decisions. For example, he explains how from 1968 to 2010, the Danish government offered voluntary sterilization surgery as a free service to all its citizens. Then it decided that starting in 2011, it would begin charging for the procedure – about $1,300 for men and $2,500 for women.
When the government announced the upcoming change in 2010, the rate of people seeking sterilization suddenly increased five-fold as citizens rushed to have the procedure while they could still do it for free. Perhaps some had already planned to have the procedure – but there’s a good chance that some had never really thought about sterilization before. However, when they realized it was only going to be free for a limited time, it suddenly looked like an opportunity not to be missed.
Likewise, Ariely describes what transpired at a nightclub in New York City that, for one night only, offered free tattoos to patrons. Of the 76 patrons who opted for the tattoo, 68% said they wouldn’t have gotten a tattoo if it hadn’t been free.
When Free Isn’t Really Free
While you might not let a free offer lure you into unplanned surgery or a spur-of-the-moment tattoo, there are many subtle ways in which the word “free” can tempt you into decisions that hurt your wallet. Here are several examples of supposedly free things that can have hidden costs.
1. Free Shipping
Internet superstore Amazon offers free shipping to customers on certain orders. To get this deal, you have to buy $25 or more worth of “eligible books,” or $49 or more worth of all “eligible items.”
At first glance, this seems like a sure money-loser for Amazon. After all, shipping isn’t free for them, and the bigger the order, the more it costs to ship – so shipping big orders for free must cost the company a lot of money. And it does – but in the long run, Amazon ends up making more money on additional purchases than it loses on shipping.
Offering free shipping brings in business partly by making Amazon more attractive than its competitors, so you’re more likely to choose Amazon when you shop online. But also, offering free shipping on orders above a certain price limit makes you more likely to order extra items so you can avoid shipping costs. For example, if you want to buy one book that costs $14.95, but the shipping would add an extra $5, you could decide to buy a second book costing $12.95 to put you over the $25 limit so you can get it shipped for free. This is good for Amazon, but not so good for you, since you end up spending $7.95 more than you would have just by paying for shipping – and you end up with an extra book you didn’t really need.
If you think no one would ever buy a book they didn’t really want just to get free shipping, think again. In “Predictably Irrational,” Ariely notes that Amazon’s sales shot way up when it started offering its free shipping on large orders – but not everywhere. In France, where Amazon reduced its shipping charge to 1 franc (about $0.20) instead of cutting it to zero, orders didn’t increase significantly. Even though 1 franc was still a trivial cost, it wasn’t “free,” and so it didn’t lure people to purchase more.
One way to avoid Amazon’s free-shipping trap is to shell out the $99 a year for an Amazon Prime membership, which includes free shipping on all orders. Unfortunately, this deal can also lead to overspending. First of all, since you no longer need to pay shipping costs, it’s easier to give in to an impulse purchase. Second, since you’ve already spent the $99, you’re tempted to buy and ship as many items as possible to make sure you get your money’s worth from your membership.
This doesn’t mean that you’re always better off buying just one item at a time on Amazon and paying the full shipping cost. For example, if shipping costs $5, but adding a $2 item to your cart makes it free, then you obviously come out ahead by doing it. The point is that you should do the math on each individual purchase and look at the total cost – goods plus shipping – for each option, rather than being distracted by that shiny word “free.”
Alternatively, if you don’t mind waiting a while to place your order, you can just put the item you want in your cart and log out. Then, the next time you want to make a purchase on Amazon.com, you can add the new item to your cart and see whether the total is now high enough to get you the free shipping. If it is, you’ve just saved a few bucks. If not, you still have the choice of paying for shipping or adding a third item.
2. Free Accounts
Banks often lure new customers with the promise of free checking accounts. A chance to avoid paying a monthly maintenance fee sounds like a no-brainer – until you look at the fine print. In many cases, these accounts are only free if you meet certain requirements, such as maintaining a minimum balance, using direct deposit, or making a certain number of purchases with your debit card. And on top of that, these “free” accounts are often loaded down with other banking fees, such as overdraft fees and ATM fees.
The word “free” can also end up costing you more when it’s attached to a credit card. Suppose you’re offered a choice between two cards: a card with a $50 annual fee and a 10% interest rate, and a “free” card with no annual fee and a 25% interest rate. If you never carry a balance on your account, the card with no annual fee is definitely a better deal. But if you only make the minimum payment each month, the “free” card will probably end up costing you a lot more in extra interest than the $50 a year you’d pay for the other one.
To avoid paying through the nose for a free account, you need to read the fine print and make sure you know what you actually have to do to get the free rate. If you don’t mind keeping, for example, a $5,000 minimum balance, great – but it’s important to know about it, so you can avoid letting your balance drop too low and getting hit with a fee. And if a “free” credit card comes with a higher interest rate, crunch some numbers and figure out whether that’s actually a good deal for you.
3. Free Trials
One type of offer that can really cost you money is the free trial. This is when, for example, a company offers you a free sample of a product, such as an acne cream, a magazine, or a cheese-of-the-month. If you like the sample and decide to sign up for the long term, that’s good for you and for the company.
The problem comes when you don’t like the sample – or, at least, you don’t like it enough to pay for it on an ongoing basis. If you don’t remember to call or write the company and cancel your subscription, you’re going to start getting the same product, and being billed for it, month after month. Sometimes, instead of billing you, the company just charges your credit card automatically – so if you don’t check your credit card statement every month, you might not even notice that you’re paying for something you never wanted. And even if you do remember to cancel your subscription, companies don’t always make it easy to do.
To avoid getting roped in by a free trial offer, be very cautious before you sign up. Make sure you know exactly what you’re agreeing to and exactly how to cancel. To be on the safe side, do an Internet search to see whether other people have had problems canceling a contract. Then, if you still decide to take the free trial, make a note in your calendar of when it expires so you won’t forget to cancel if you choose to.
4. Free Gifts By Mail
Not all freebies offered by mail order are free trials – some are gifts. Unfortunately, many “free gifts” offered through the mail actually aren’t free, as they come with shipping costs.
For example, one website offers supposedly free jewelry, with the caveat that all customers must pay a “shipping and processing fee” of $6.99 for each piece. The pieces available are pretty cheap-looking, and if the website offered them for $6.99 each – even with free shipping – many people might not look twice at them. But saying they’re free makes it look like a bargain – even though it is not.
So when you see an offer for something that you can get by mail for free, read a little further to see if there’s a charge for shipping and handling. If there is, ask yourself: Would I be willing to pay that amount for the same item in a store? If the answer is no, then this is one “freebie” you can skip.
5. Free Gifts With Purchase
A friend of mine spent a few summers working as a vendor at a Renaissance fair, selling pickles on a stick. One year, to spice things up, he offered his customers a great deal: “Free pickle – when you buy the stick!”
This promotion was making fun of another common type of freebie: the gift with purchase. For instance, if you buy $50 worth of skincare products at a department store cosmetics counter, the store might throw in a tube of lipstick as a bonus. However, just like my friend’s pickles, this gift isn’t really free – it comes with the condition that you spend a set amount on a specified type of product.
This doesn’t necessarily mean it’s a bad deal. If you really want the skincare items and are willing to pay $50 for them, then getting a tube of lipstick is just a nice bonus. But if the main reason you’re buying $50 worth of skincare products is to get the “free” lipstick, you’d be better off just buying the lipstick itself. It almost certainly would cost less, and it doesn’t saddle you with several pots of face cream you don’t really want.
Another type of gift offered with purchase is a store credit to be used on a future purchase. For instance, suppose a clothing store runs a special sale: If you buy $50 worth of clothing, you’ll get a gift card worth $10 off the next time you shop there. You actually do need a pair of jeans that costs $50, so you figure you might as well buy it now to receive the $10 credit.
The snag is that the gift card has an expiration date – and if you don’t use it within two months, your credit will disappear. You hate to let that $10 credit go to waste, so you go back to the store and buy a $25 shirt that you don’t really need. Even with your $10 credit, you’ve spent $15 more than you intended.
To avoid falling for a gift-with-purchase deal, look at the whole thing as a package. If you think the skincare products and the lipstick, taken together, are a good deal at $50, go ahead and make the purchase. Similarly, if the new shirt isn’t something you’d pay $25 for, but you think it’s worth $15, then that’s a perfectly good way to use your $10 credit. Just don’t overspend solely to get a free gift or store credit.
Avoiding the Free Trap
The main thing to remember about “free” offers is that there’s almost always a catch. The freebie is the bait, but there’s bound to be a hook.
In some cases, it could turn out that the seller is making money in ways that don’t actually hurt you at all. For instance, a warehouse store offering free in-store samples of its wares is hoping you’ll be inspired to buy them – but it can’t actually force you to do it. Likewise, a free streaming media subscription that’s supported by ads is no problem if you don’t mind a few ads with your TV shows. But you can’t be sure a freebie is really free unless you take the time to check it out from all angles first.
Here are several specific precautions worth taking anytime someone offers you something for free:
- Read the Fine Print. Before you sign up for any deal, make sure you know exactly what you’re agreeing to. Specifically, check to see whether you are agreeing to any kind of service or regular delivery of a product. If so, make sure you know how to cancel the subscription before you are charged. If you aren’t sure you’ll be able to cancel later, don’t sign up.
- Do the Math. Calculate the true cost of the “free” item. If it’s a gift with purchase, look at the cost of the item you have to buy to get the freebie – and if it’s a mail-order offer, look at the shipping costs. Add up the total amount, and then ask yourself whether you’d be willing to buy the item for this price. By substituting the actual price for the word “free,” you can consider the offer rationally.
- Watch Out for Extras. If you sign up for a freebie online, keep your eyes peeled during the checkout process. Some websites make you scroll through pages of additional offers before confirming your order for the free item. In some cases, the “yes” box on these offers is checked by default – so if you just clicked through without looking, you’d be signed up for dozens of extra products or services. Read through all the pages carefully and uncheck the boxes so you don’t get stuck with extras you don’t want.
- Protect Your Personal Information. Sometimes, when you sign up for a free trial or other freebie, you have to provide your personal information, such as your mailing address, email, or phone number. Before you hand over information, make sure you know how the company intends to use it. In some cases, taking the offer automatically signs you up to receive catalogs, promotional emails, or telemarketing calls – maybe just from one company, or maybe from all its partners as well. So if you don’t want to deal with a flood of messages, don’t hand over your personal information unless you have a guarantee that it will not be used for spam.
- Use Cards With Care. Other free trials and mail-order offers require you to provide a credit or debit card number that the company can use for billing. Once the company has your card number, it can keep charging you month after month, and canceling isn’t always easy. One way to protect yourself is to use a prepaid card with limited funds, so even if the company keeps billing you, there’s only so much it can collect. Or, if you have a credit card that lets you generate a “virtual account number” for one-time use, you can enter that number instead, and the company won’t be able to bill you at all.
As Dan Ariely’s research shows, just seeing the word “free” can lure people into making irrational decisions that aren’t in their best interests. The key to avoiding a supposedly free offer is to focus on the true cost – whether that’s a shipping charge for a sample, spam in your inbox, or ads on your web browser. If you consider these actual costs, you can make a more level-headed decision.
What are other examples of free things that have a hidden cost?