The Free Scam: If It Doesn’t Cost Anything, You’re The One Being Sold

Have you ever seen the queue at an ice cream stall that has a free ice cream promotion? People will queue up 30 minutes for free ice cream, ignoring the cost of time it entails. The moment ‘free’ is involved, everyone is happy to work or suffer for a rate that doesn’t even amount to minimum wage. The word ‘free’ has such a magic pull, it seems to eradicate rational thought.

It’s the same reason why financial advisors who work for an hourly fee don’t get hired. Who wants to pay someone USD 100 an hour for ‘advice’? And those that will get a kick-back from whatever they sell – often hundreds, if not thousands of dollars in case of many financial products – but offer to ‘consult’ you for ‘free’? These guys are not short of customers.

There is a paradox in consumer behavior: Consumers say they want transparent, unbiased and competitively priced advice and services. But if you take a look at how much time people spend reading ‘free’ newspapers, Googling ‘free’ reviews and watching ‘free’ television, it’s clear that ‘unbiased’ isn’t the top priority.

What’s strange is that the more money is involved, the more people fall for the ‘free’ scam. Taking a ‘free’ taxi in a tourist hot spot to go see a souvenir shop? Everyone’s alarm bells go off and it seems obvious that the 100 Thai Baht they save on the ride will come out of the 500 Thai Baht in commission that their driver will be paid from their purchase. A USD 100,000 financial product? Why yes, let’s go with the guy doing a ‘free’ consultation. Even if that means he’ll recommend a product that’ll end up costing me an additional USD 10,000 over the years (out of which his real income, his commission, will be paid).

It’s not that people aren’t aware of this, but they underestimate it. Everyone understands that Facebook is ad-financed. What they don’t know is that Facebook makes an average of around USD 2.31 per person who uses the site every month, or USD 27.72 per per person per year. If you just extrapolate that, you’ll get USD 277.27 over the course of 10 years. Would you have paid USD 277.27 for the ‘Facebook software’ if it was sold in a store? Probably not. But someone did: Advertisers. And they then made it back from the people who saw the ads. So indirectly, yes, on average you paid USD 277.72 for Facebook. An that’s not counting your wasted time.

Unfortunately the reverse – that if you pay for something, you’re not getting sold – isn’t true either. However, at least it has the potential to be true. There is a theoretic possibility that the company prioritizes your interest over that of other external stakeholders. You’ll never be more important to a company than it is to itself. But at least you can be more important than other outsiders.

I would argue that the issue can be divided into transparency, the alignment of interest and pricing:

• Transparency: People don’t know that they’re going to a ‘sales pitch’ when they make an appointment with a ‘consultant’. They think they receive advice, whereas someone is actually selling them a product. The same holds true for a lot of other free services and products they receive. They end up paying for it one way or another, often with more than just money: See the next item for that.
• Alignment of Interest: Facebook will happily get you to waste free time or work hours every week and every day. That time that is being lost may be worth a whole lot more than the USD 2.72 they get out of you by showing you ads. Making you a social media addict for month doesn’t even buy Mark Zuckerberg a cup of coffee. But since you provide your attention for free and Facebook gets that from more than a billion people, that adds up to more than 3 billion dollars a month.
• Pricing: Every time I tell people that insurance brokers get 15% of their commission, people nod and say ‘yeah, that’s about what I expect and am happy to pay’. What they don’t expect (or necessarily feel okay accepting) is that this commission is being paid every year for as long as they pay their premium. When you pay yourself for a service, you can decide what it’s worth. If it’s charged to you indirectly, you have no say in the matter and may end up getting severely overcharged.

What should we do with this information?

I believe we should improve our economy and our society by creating regulations that aim to shift the power balance towards the consumer. Specifically, the following are measures that can help:

• Create truth in sales: We have truth in advertising, we should also have truth in sales: If someone receives a commission from any product or service they promote, they should be legally barred from calling themselves an ‘advisor’ or ‘consultant’. They are sales people and the presumption is that they act in their own best interest first. This would help to create transparency.
• Include external costs: Some CEOs destroy hundreds of dollars of value that belongs to you to create a fraction of that for themselves. They turn your hours of addiction into cents of advertising. We should enforce providers to pay for the resources – consumer attention – and do so in direct correlation to how much they sell it for. We do it with taxes for pollution and alcohol, so why not social networks? Introduce a banner tax to make advertising less profitable and recover some of the cost for society.
• Standardize conditions, not commissions: Many industries (e.g. insurance) will have standardized commission rates for sales staff, but refuse to standardize conditions for consumers. Every contract is different, making it difficult to compare and creating a form of monopoly pricing for providers. Standardizing conditions the same way we standardized electrical outlets enables people to compare easier, change easier and decide on what rate to pay on consultations.

Of course the individual circumstances and measures would depend on the jurisdiction. Some might already have realized some of the steps above, others don’t have regulations on any of them. Nevertheless, it’s important to lay out the framework for a society in which non-institutional purchasers are enabled to make informed decisions that serve their own best interest.