Pay what you want (PWYW) pricing has been in existence for some time. The mechanism allows consumers to pay whatever they value the good at, often including zero as a price. Hotel, flight and car rental comparison site priceline.com has made use of the mechanism since its conception in 1997. From there on many industries have empowered their clients to decide the amount they are willing to fork over. The pricing mechanism has spread to amongst other the game industry (humblebundle.com), software industry (stacksocial.com) but also more analogue industries like restaurants (TRUST, Amsterdam) and movie theatres (Popcorn as Anything, Newtown Australia). The PWYW mechanism came under great attention in 2007 when Radiohead invited consumers to buy a digital copy of their album In Rainbows. In an interview with Music Ally, Radiohead’s Head of Business Affairs Jane Dyball “confirms that Radiohead had made more money before ‘In Rainbows’ was physically released than they made in total on the previous album Hail To the Thief.” (Music Ally, 2008). Obviously, consumers are willing to pay for something that they could obtain for free. But why would they?

Over the years, behavioral economics has uncovered many factors contributing to why consumers opt not to choose the zero option and often even pay significantly above the minimum price. The most well-known paper on factors that drive the price consumers pay in PWYW mechanisms comes from Kim et al. (2009). Their research finds that “fairness, altruism, customer satisfaction (CS), customer loyalty, price consciousness, and income affect PWYW prices” (Kim et al., 2009). In a more recent inquiry into the factors affecting the PWYW price paid by consumers Kunter surveys the results of 5 studies on PWYW prices and investigates their “relevance, the relative importance of motivation-related factors (e.g., fairness, getting a bargain), and their impact on customers’ PWYW payments” (Kunter, 2015).

As expected, the research by Kunter corroborated many of the factors found by Kim et al. (2009) (Kunter, 2015). Kunter notes that “fairness, customer satisfaction, income, and the avoidance of feelings of guilt are pivotal” to the PWYW mechanism (Kunter, 2015). Nevertheless the research also showed some surprising findings. First of all and contrary to intuition, social factors like “satisfying the provider” and “avoiding feelings of shame” seem to exhibit mixed effects on the PWYW price in the 5 studies examined. Furthermore, feelings of customer loyalty and altruism can even be considered irrelevant with respect to PWYW pricing.

So what are the limitations and practical implications of knowing what factors influence consumers PWYW pricing behavior? For starters, the PWYW model is mostly researched in face-to-face settings where the connection between the provider and the consumer is more and direct. Online interactions on the other hand are often less personal and providers should take care in designing their PWYW campaign in such a way that it addresses customers personally. A prime example of such a personalization was performed by satirical card game Cards Against Humanity (CAH). In 2012, they decided to adopt the PWYW pricing model and included zero as payment option. However, as illustrated below, they used a slightly less subtle approach to persuade people to come back on their decision to obtain the product for free.

Although almost 20% of the consumers decided to pay zero dollars, the profit for the CAH organization after accounting for manufacturing, envelopes, postage and credit card fees was just over $70,000 based on roughly $296,000 sales (Temkin, 2012). Pretty impressive numbers given that almost 1 in 5 customers decided join the free riders!

Pay what you want pricing is starting to earn its stripes in terms of viability. The mechanism has resulted in some significant profits as well as grueling losses. It is even able to outperform more traditional fixed pricing in certain situations. This success has not gone unnoticed and PWYW is spreading to new industries every day. Right now there are even platforms that enable local consumers to name their price for a service (e.g. restaurant or massage) and subsequently lets local businesses compete against each other to either match or beat the consumer proposed price (https://www.chiching.com/). Expect to pay what you want in a local establishment near you soon!

P.S. If you are wondering how Cards Agains Humanity spent their earnings and what you could potentially do with $70,000 I suggest you click here!

Sources

Kim, J. -Y., Natter,M., & Spann,M. (2009). Paywhat you want: a new participative pricing mechanism. Journal of Marketing, 73(1), 44–58.

Kunter, M. (2015). Exploring the pay-what-you-want payment motivation. Journal of Business Research, 68(11), 2347-2357.

Musically.com,. (2008). Exclusive: Warner Chappell reveals Radiohead’s ‘In Rainbows’ pot of gold | Music Ally. Retrieved 11 February 2016, from http://musically.com/2008/10/15/exclusive-warner-chappell-reveals-radioheads-in-rainbows-pot-of-gold/

Temkin, M. (2012). Cards Against Humanity. Cardsagainsthumanity.com. Retrieved 11 February 2016, from http://www.cardsagainsthumanity.com/holidaystats/