A different look at pay-what-you-want pricing
The concept of pay-what-you-want pricing is quite simple. Rather than setting a fixed price, sellers instead ask each buyer to pay whatever price they feel is appropriate for the object or service. In some cases, a minimum price (“floor”) or suggested price may be set, but in most cases buyers are allowed to pay what they want—even nothing.
Some restaurants have been experimenting with this strategy for years, with mixed results. Software developers have also used freeware and shareware as another form of this type of pricing model. In doing this, they rely on donations from buyers to continue further development and support of these products.
But the most well-known use of this pricing model was when British alternative-rock band Radiohead released its In Rainbows album in 2007 as a digital download using a pay-what-you-want model on the group’s website. Fans of the band were freely allowed to download the album and pay whatever price they wanted, including paying nothing if desired. While 60 percent of the million-odd downloads that first month were, in fact, for free, the other 40 percent paid an average of $6 per copy—netting the band nearly $3 million.
And while Radiohead’s relative success with In Rainbows (which proved to be a critical success) has led others to try this unique pricing model—both in the digital and brick-and-mortar world—the results have been mixed (at best).
Non-profits—especially museums and other brick-and-mortar attractions—that rely on suggested donations (as opposed to setting a fixed ticket price) for entry have also begun to experiment with pay-what-you-want pricing—again, with mixed results. Relying on patrons to determine the value of their experience (and thus the amount that they willing to pay for entrance) may sound good in theory, but it also can leave patrons confused regarding the appropriate amount to pay. Nobody wants to pay too much, but then again nobody wants to be perceived as cheap. Unfortunately, the way that most humans deal with this conflict is to just avoid it altogether. The easiest way to do so is to go somewhere else (besides the museum) where the pricing decision has already been made.
So where does the pay-want-you-want pricing model go from here? Is there a way to tweak the model so that it shows real, meaningful results? One such way is to combine the model with an added layer of corporate charity.
In the research paper, “Shared Social Responsibility: A Field Experiment in Pay-What-You-Want Pricing and Charitable Giving,” 1 researchers from both the University of California, Berkeley and University of California, San Diego, along with Disney Research, conducted an extensive field experiment where photographs taken of riders on a roller coaster and then offered for sale were priced using the typical fixed-price model, and then priced using a couple of variations of the pay-what-you-want model. The results were surprising.2
The researchers observed customer behavior under four conditions: 1) when photos were offered at the regular price of $12.95; 2) when photos were offered at $12.95 with the added information that half would go to charity; 3) when photos were offered for whatever price the customer wanted to pay (including nothing); and 4) when photos were offered at pay-what-you-want pricing with the added information that half their money would go to a popular patient-support organization.
Of 28,224 riders who saw the photo priced at the regular $12.95, only a tiny half a percent of them purchased the item, yielding a small profit of about 6 cents per visitor. Slightly more people paid that price when they learned that half of it would go to the charity, yielding a profit of about 7 cents per visitor. So the charitable component increased demand, but only slightly.
Under pay-what-you-want pricing, many more people bought the photo—8.4 percent, but they paid only about 92 cents each, slightly less than the cost of production. This resulted in a slight loss.
The results get interesting when pay-what-you-want pricing was combined with information that half the customers’ money would go to the charitable partner. About 4.5 percent of riders chose to purchase a photo, a figure that was lower than without the charitable partner, but substantially higher than for either of the fixed price conditions. The crucial change was in the price they chose to pay: Whereas riders under strict pay-what-you-want pricing had paid only 92 cents, when it was combined with charity, they paid an average of $5.33. Overall, this produced a profit of nearly 20 cents per visitor compared to the 6 cents observed at the standard price. For a ride that attracts more than 15,000 people a day, that difference is enormous.
Once again, letting customers pay what they want when they know a significant portion of their money is going to a good cause not only generates the most profit for the company—it also generates the most donations for a charity.
Setting aside obvious concerns that companies could misuse the pay-what-you-want plus corporate donation model to trick buyers, this research is quite interesting. The most obvious example would be for museums and other like-minded organizations that currently use a pay-what-you-want/suggested donation model to add a charitable component to the mix. It’s also too bad this research was conducted after the Radiohead pricing experiment in 2007; it would have been interesting to see the Radiohead results had they added a charity component to their pay-what-you-want pricing model for their digital release of In Rainbows. Incorporating a charitable aspect into the model certainly seems to be one avenue of potential success.
As the pay-what-you-want pricing model continues to gain popularity, its ultimate success (and potential acceptance as a mainstream pricing model) will hinge on how the model is framed and presented. Still, given human nature and the state of the economy, this process may be slow—no matter how expertly and optimistically the appeal to consumers’ higher angels is sold.
1. Ayelet Gneezy, Uri Gneezy, Leif D. Nelson and Amber Brown. "Shared Social Responsibility: A Field Experiment in Pay-What-You-Want Pricing and Charitable Giving" Science Magazine. July 6, 2010.
2. Frank Flynn. "Pay-What-You-Want Pricing and Charitable Giving". Stanford Graduate School of Business: Center for Social Innovation. Winter 2011 http://csi.gsb.stanford.edu/pay-what-you-want-pricing-and-charitable-giving