Yesterday, Google flipped a switched on its Google Apps policy — starting with December 7th, 2012, Google Apps will no longer be free! The change is for Google Apps for Business and it effectively ends the ability to create free accounts for groups of 10 or fewer users (here’s Google’s announcement). Individuals could still have a personal account, but businesses will have to pay $50 per user, per year… That is NEW business customers will have to pay — if you had a business account prior to the announcement, you get to keep it on the same terms you’ve signed up for — free! But all new Google Apps business customers from this point forward will pay to play.

There’s a lot of chatter about whether Google’s customers will pay or walk away, but I’m interested in the behavioral economics analysis of this change. Allow me describe a few experiments on anchoring — the psychological phenomena where individuals get attached to the first result they witness and base their subsequent decisions on that original priming. The experiments I’m going to describe come from two books: Dan Ariely’s “Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions” and Daniel Kahneman’s “Thinking, Fast and Slow.” Both are excellent books and deserve the time and effort to read them. In particular, Nobel Prize in Economics laureate Dr. Kahneman’s book is one of the best books I’ve read in a long time.

Experiments in Priming

Both Dr. Ariely and Dr. Kahneman described the following experiment in priming conducted on graduate students in economics. At the start of the class, every student was handed a piece of paper with samples of merchandise on which they were to bid in a class auction (to be held at the end of the class). Next to each item on the auction list, students were instructed to write down the last two digits of their social security number — this was their anchor number against which the rest of their decisions were made, without their awareness of this fact.

After each student was thus anchored, they were asked to indicate whether they would pay the amount equal to the last two digits of their social security numbers in cash for each item on the page. The items included bottles of wine, chocolates, books, and other student-friendly items. After all the students marked “yes” or “no” next each item, they were asked to write in what they would actually pay of those items.

The idea of the experiment was to see if students with high digit numbers would be willing to pay more for the same merchandize as students with low digits in their social security numbers; to see if the arbitrary anchors changed the decisions of the students. … And it did!

Here’s a bit of the data shared by Dr. Ariely in his “Predictably Irrational” book:

Students who had the last two digits of the social security number in the range of 00 to 19, were willing to pay (on the average) $8.64 for a cordless computer trackball, while students with social security numbers ending in the range of 80 to 99 were willing to pay an average of $26.18! That’s more than triple for the same item! What’s more, when asked, all the students said that the social security anchor had nothing to do with their pricing decisions — the decision influence was subconscious.

If you think that it was only the “naive” grad students that acted so irrationally, Dr. Ariely proved that it was not so, conducting a similar experiment with members of the faculty. And both Dr. Ariely and Dr. Kahneman go on to present example after example where completely unrelated priming resulted in anchors on human decision making. These were beautifully designed experiments with great implications.

Google and Behavioral Economics

So what are the implication in the concrete example of Google’s policy change in regards to Google Apps for Business? Let me point out what Google did right: it is NOT changing the service for existing customers — those users have been anchored on paying nothing and they will have a very hard time agreeing to pay anything above $0. This is one of the reasons why it is very difficult to change existing users from free to paying customers. Just ask New York Times how well their subscriptions rates are going…

And Amazon is using a similar priming mechanism for free deliveries — once customers get anchored on free delivery, they will find paying for so unappealing, that they would rather do business with Amazon only… This is a winning business strategy.

So what of the new Google Apps customers? Well, Google has to find a way to anchor them to something else. At the moment, Google is trying to point out how expensive Mycrosoft Office is and how relatively inexpensive is their service. That might work eventually…after enough time passes that there will be only few free Google Apps Business customers. How much time? Well, that will depend on how quickly domain names turn (Google Apps are tied to a particular domain name). And it will depend on how aggressive Google will get with its marketing.

Interestingly, there will be a new business opportunity for people who own several domain names with free Google Apps already set up. Unless Google will make that legacy nontransferable.