What it means
The phrase is said to come from the practice of some bars offering a free lunch to customers who bought drinks. The lunch was not truly free, because the price of the drinks covered it.
The saying later spread through economics and was popularised in fiction by the author Robert Heinlein, and economists such as Milton Friedman used it often. The underlying idea is that resources are limited, so using them for one purpose means giving up another.
Time, money, staff and attention all have alternative uses. Whenever someone says something costs nothing, the sensible question is who pays and what is being given up.
In business, TANSTAAFL is a useful check on offers and projects. A free software trial may cost staff training time and the effort of moving data.
A government subsidy may come with conditions that restrict how a firm operates, and a discount on bulk orders may tie up cash in stock. Finance professionals turn the idea into numbers using opportunity cost and total cost of ownership.
The question is not only what was paid, but also what the same resources would have earned elsewhere. This helps to compare options that look different on the surface.
The saying has limits. Sometimes a genuine improvement in efficiency means more output from the same inputs, which is a gain without a matching loss.
Even then, someone usually bears the cost of the change, such as the effort of redesigning the process. For managers, the practical habit is to ask three questions of any offer that looks free.
Who is paying for it, what are we giving up by accepting it, and what happens in a year's time when the free period ends? Those questions turn a slogan into a simple checklist that can be used in any meeting.
In practice
Real-world examples.
Example
A marketing manager is offered a free trial of an analytics tool for 90 days. The tool needs two analysts to spend 40 hours each setting it up and moving data. The finance team counts the hours as a real cost when deciding whether to buy, and finds that the trial was costing about as much as a month of the paid plan.
Example
A restaurant owner is tempted by a supplier's free delivery for orders above $2,000. To qualify, she orders more than she needs and some of the produce spoils. The waste is the price of the supposedly free delivery.
Example
A city council accepts a free piece of land from a developer. The land requires $3,000,000 of cleaning and a promise to build affordable housing. The council compares the full cost with what it could do with the same money elsewhere.
Formula
Calculation
Opportunity cost = value of the best alternative that is given up
Total cost of a free offer = direct price + value of time and resources used + other costs
A company is offered a free three-day training course for its 20 staff. The direct price is $0. Each employee's time is valued at $400 a day, so the time cost is 20 x 3 x 400 = $24,000. The course also requires a $1,500 travel budget, so the total cost = 0 + 24,000 + 1,500 = $25,500, meaning the free course is not free at all.Case study
Seen in the real world.
Ashgrove Logistics is an illustrative, fictional haulage company that was offered a free fleet-tracking system by a supplier. The only condition was a three-year contract to buy fuel cards from the same supplier.
The finance manager compared the fuel card prices with the market and found them 2% higher. On annual fuel spending of $1,500,000, that was an extra $30,000 a year, or $90,000 over the contract.
The tracking system would have cost $60,000 to buy, so the illustrative conclusion was that the free system cost $30,000 more than buying it outright. Ashgrove bought the system separately and kept its existing fuel supplier.
Watch out
Common mistakes.
- Counting only the cash price and ignoring the time, risk and flexibility given up in accepting an offer.
- Assuming a free offer is always a trap, when some deals do provide real value and should be accepted after the costs are weighed.
- Confusing the saying with a statement that all trade is unfair, when it simply says that resources have alternative uses.
Questions
People also ask.
What does TANSTAAFL stand for?
It stands for "There ain't no such thing as a free lunch".
How is it linked to opportunity cost?
It is a popular way to express the idea that every choice gives up the next best alternative.
Who made the phrase famous?
It was widely popularised by Robert Heinlein in a novel and later quoted often by economists such as Milton Friedman.
From the founder's library
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