Pay what you want (PWYW) pricing mechanism can be a successful promoting tool to boost your business. PWYW is in general perceived as more fun, innovative and benefits from higher word-off-mouth behavior than more traditional promoting tools such as sampling and discounts (Kim J.Y. et all, 2014). Nevertheless, the accompanying losses and especially the uncertainty of it, discourage companies from using this pricing mechanism as promoting tool.
This blog will teach you how to improve profitability of the PWYW pricing mechanism and how to decrease variance in prices paid.

Provide a reference price
External reference prices improve profitability and decrease variance in final prices paid. A reference price serves as an anchor for determining the value (Kumar et al. 1998; Mayhew and Winer 1992; Kopalle and Lindsey-Mullikin 2003). This trick will increase profitability especially in situations where customers are not familiar with the value of the product. The reference price gives customers an indication about the value of the product and positively influence the final prices paid.

Make it personal
Personal interaction will boost profitability at a PWYW pricing mechanism. Paying nothing can result in distress and social disapproval (Heyman and Ariely 2004). In situations where there is no personal interaction, for example in an online shop, there is no room for social disapproval and consumers will act rather by market exchange norms than by social norms. Consequently, paying nothing is a logical option. When you make the interaction more personal, for example by letting a sales person ask for a reasonable price, customers will feel social pressure and consequently will act by social norms. In this latter situations customers are less likely to pay nothing and more willing to pay a reasonable price. Thus, personal interaction will increase the price paid at a PWYW pricing mechanism.

In conclusion, PWYW pricing mechanism can be used as a promoting tool without extreme losses when implemented correctly. By making the interaction personal, the final price given will increase. Moreover, by providing a reference price, the variation in final prices will decrease. As a result, a PWYW pricing mechanism can boost your business in a more profitable way than sampling or discount promotions.

Sources:

J.Y., Kim , K.Kaufmann, M. l Stegemann  (2013). The impact of buyer–seller relationships and reference prices on the effectiveness of the pay what you want pricing mechanism. Marketing Letters (4)4, 409-423

Kim, J.Y., Natter, M., & Spann, M. (2014). Sampling, discounts or pay-what-you-want: Two field experiments. International Journal of Research in Marketing, 31(3), 327-334.

 Kumar, V., Hurley, M., Karande, K., & Reinartz, W. J. (1998). The impact of internal and external reference prices on brand choice: the moderating role of contextual variables. Journal of Retailing, 74(3), 401– 426.

Kopalle, P. K., & Lindsey-Mullikin, J. (2003). The impact of external reference price on consumer price expectations. Journal of Retailing, 79(4), 225–236.

Mayhew, G. E., & Winer, R. S. (1992). An empirical analysis of internal and external reference prices using scanner data. Journal of Consumer Research, 19(1), 62–70.

Heyman, J., & Ariely, D. (2004). Effort for payment: A tale of two markets. Psychological Science, 15(11), 787–793.

Image: http://www.randibuckley.com/the-mutual-respect-in-pay-what-you-think-its-worth/