The Risks of Offering 'Free' Goods and Services

Harvard Business Review

a day ago

Organizations often fall into a pricing trap. To increase adoption, encourage trial, or demonstrate goodwill, they offer their products or services for free. But research in consumer psychology and behavioral economics shows that 'free' comes with high, hidden costs. Once customers internalize 'free' as the reference price, it becomes difficult —sometimes impossible—to charge later. Worse, free offerings are frequently undervalued, overused, or abused. They create expectations that are hard to unwind and threaten long-term sustainability.
Fortunately, the same research also offers strategies for capturing the upsides of free without eroding perceived value.
Charging something is better than nothing.
Consumers equate price with worth. When you charge for something—even a token amount—you encourage people to treat it with more care, use it responsibly, and recognize its value.
Two parks in Egypt illustrate this point. When Al-Azhar Park opened in Cairo in 2005, critics balked at the idea of charging an entrance fee. After all, why should residents have to pay for access to public green space? But Al-Azhar Park's modest entrance fee helped create a sense of civic responsibility. Visitors were more likely to dispose of trash properly and respect the grounds. The fee also provided steady funding for upkeep and allowed the park to operate without relying solely on government or donor support. Fast-forward two decades, and the park is a thriving urban oasis. Just a few miles away, however, Al-Fustat Gardens—once a similarly ambitious park project—has slid into disrepair, marred by neglect and environmental decline. It has become so run down that the government is now spending another $120 million to rescue it.
As another example, consider free plastic grocery bags or giveaway items. People are less likely to reuse or appreciate them precisely because they cost nothing. Charging even a small amount can change behavior significantly.
Anchor value—even if you don't charge yet.
One of the most infamous examples of mismanaging 'free' comes from Netflix. In 2011, the company tried to split its DVD and streaming plans into separate services, each costing $7.99. But customers had long perceived streaming as a free add-on to their $9.99 DVD plan, and they rebelled when they were asked to pay for it separately. Netflix lost hundreds of thousands of subscribers and saw its stock drop 35% in one day.
The lesson is that even when you're not charging, you should communicate the monetary value of what you're providing. There are several ways to do this:
Strike-through pricing
Showing the original price—even if it's being waived—helps customers perceive a deal. For example, Adobe often promotes its Creative Cloud tools to students as 'normally $59.00/month, now $19.99/month,' signaling substantial value without asking for immediate payment.
Bundling
Amazon Prime includes a host of services—streaming, cloud storage, faster delivery—under one price. Even if customers don't use every feature, they know each has value, which helps justify the subscription price and builds loyalty.
Freemium tiers with visible upgrade paths
Spotify and LinkedIn both offer robust free versions of their services, but constantly remind users of the benefits they're not getting—such as ad-free listening or expanded networking analytics. These gentle nudges help establish what full access is worth.
The key is to make the value of the offering visible, even if the price is temporarily invisible. If customers think something has always been free, they'll resist paying later. But if they believe they're receiving something valuable for free, they'll eventually be more willing to pay when the time comes.
Time pricing information strategically.
The timing of a pricing change—or even the announcement of value—can make a significant difference. Behavioral research shows that people are more accepting of higher prices when they have psychological distance from the actual transaction.
Announce price changes well in advance, and people will focus more on benefits than costs. And before introducing any price, communicate three things: the level (how much it will cost); the value (why it's worth that amount); and the timeline (when it takes effect and for how long).
Consider a hypothetical SaaS company that has long offered its basic analytics dashboard free to enterprise clients as part of implementation. Over time, the dashboard evolves into a powerful data visualization tool with machine-learning features. Rather than start charging immediately, the company begins six months in advance by:
Sending usage reports to clients showing how much time the tool is saving their teams
Highlighting benchmarks that show its impact on decision-making speed and accuracy
Communicating that starting next fiscal year, the dashboard will be priced at $9,000 annually—while offering an early renewal discount
This long runway gives procurement teams time to budget, champions time to advocate internally, and executives time to associate the tool with business value—not just as a free add-on.
The same principle applies in other contexts: price increases introduced quietly at the end of a contract, or charges added to previously bundled services, tend to feel punitive. But when timed right, and paired with clear value communication, they can be accepted—even welcomed—as investments rather than losses.
Similarly, seasonal timing or communication channels can affect how price changes are received. Rolling out new fees during a quiet period (e.g., not during peak usage or major holidays) and explaining the rationale transparently can build trust and minimize backlash.
Use scarcity to reinforce value.
When offering something for free—if you must—limit it. Time-bound offers, 'only with purchase' deals, or restricted access signal that the product has genuine value. 'Free forever' may sound generous, but it erodes perceived worth.
Services like Headspace or The New York Times offer a 30-day free trial with clear messaging like 'a $12/month value, yours free for one month.' This sets a reference price that makes the eventual charge feel like a continuation of something worthwhile, rather than a new ask. These kinds of 'framing' tactics help customers associate value with the item, even if they didn't pay for it—yet.
. . .
Whether you're running a park, launching a product, or offering public services, free is rarely free. It sets expectations, shapes behavior, and, once entrenched, is difficult to reverse. Smart organizations understand that pricing is more than a financial decision—it's a strategic one. The best time to establish perceived value is before your offering becomes a habit. The second-best time is now.