Why free trials work: the behavioral economics of conversion

Three well-documented effects explain why free trials convert at rates no other consumer marketing channel matches.

Effect one: the endowment effect. Even brief "ownership" of a good — a coffee mug, a lottery ticket, a free-trial account — increases the price the holder demands to give it up. Kahneman, Knetsch & Thaler's Journal of Political Economy paper demonstrated this in controlled experiments with university students.

"Median selling prices were about twice the median buying prices… The reluctance to sell that we observed is a manifestation of loss aversion." — Kahneman, D., Knetsch, J. L., & Thaler, R. H. (1990). "Experimental Tests of the Endowment Effect and the Coase Theorem." Journal of Political Economy, 98(6), 1325–1348.

Effect two: status quo bias. Samuelson & Zeckhauser's foundational paper in the Journal of Risk and Uncertainty established that people disproportionately favor the existing state of affairs, even when a switch would be objectively better. The default during a trial is "you will be charged"; status quo bias makes that default sticky.

"Individuals exhibit a significant status quo bias… A series of decision-making experiments shows that individuals disproportionately stick with the status quo." — Samuelson, W., & Zeckhauser, R. (1988). "Status Quo Bias in Decision Making." Journal of Risk and Uncertainty, 1(1), 7–59.

Effect three: present bias. O'Donoghue & Rabin's American Economic Review paper formalized the observation that people give disproportionate weight to immediate experience compared to future costs. The act of cancelling is immediate and effortful; the cost of forgetting is in the future. The asymmetry consistently favors not cancelling.

"People have self-control problems caused by a tendency to pursue immediate gratification in a way that their 'long-run selves' do not appreciate." — O'Donoghue, T., & Rabin, M. (1999). "Doing It Now or Later." American Economic Review, 89(1), 103–124.

The intervention that survives experimental testing: pre-commitment. Set the calendar reminder the moment you start the trial; default to cancelling unless you have a specific reason to keep. The pre-commitment defeats both status quo bias and present-focused preference at the moment of decision.

References

• Kahneman, D., Knetsch, J. L., & Thaler, R. H. (1990). J. Polit. Econ., 98(6), 1325–1348.
• Samuelson, W., & Zeckhauser, R. (1988). J. Risk Uncertain., 1(1), 7–59.
• O'Donoghue, T., & Rabin, M. (1999). Am. Econ. Rev., 89(1), 103–124.

Related: Endowment effect · Free trial scam · Loss aversion · Forgotten subscriptions