Mental Transaction Cost

From the audio book chapter on Free: Explain and give an example of a mental transaction cost.

Mental transaction cost is the thought process one has to take when making a decision in purchasing something. You take things into account, like is it worth it? Should I get my wallet out? That's why having something for free or the "zero" concept eliminates the mental transaction cost. People like things when they don't have to think that much to make a decision.

An example of a mental transaction cost is Zappos shoes. Zappos eliminated shipping costs both ways. Therefore you don't have to pay for shipping to get them and if you want to return your shoes, you don't have to pay for the shipping back either. This way, you will want to order a lot of shoes to try on and then send back the shoes you don't want. However, in Zappos mind set, they hope that trying on all the shoes after you already purchased them, you will easily keep the shoes, which gives them more sales. Therefore, is it worth purchasing the shoes? Will you really want to end up keeping all the shoes you try on and be spending more money in the end? However, with free shipping, it almost eliminates some of the questions. If you had to pay for shipping, you would be more wise about the decision since you'd feel like you were paying more.

Another example would be Amazon books. If you purchase more than 25 dollars of books, then you have free shipping. So Amazon is hopeful in that you will buy two books instead of one to get the free shipping. Even though clearly, the second book was worth more than the shipping you'd have to pay. But the mental transaction cost thought was that you are getting free shipping over 25 dollars, so it's almost better to buy two books than buying one and paying for shipping. The mental transaction cost benefit is the free shipping. It makes your decision easier when something free is involved. Questions are eliminated from mental transaction cost thought process when "free" is added into the equation.

Mental transaction cost is all the questions you ask yourself when purchasing something and if the product is worth it. Do the shoes fit? Do I like them? Should I get more if it's free shipping? And how about the books? Should I go for two or stick with one? All of this thought process is mental transaction cost.