There is nothing permanent except change—analyzing individual price dynamics in “pay-what-you-want” situations.


The innovative pricing mechanism Pay-What-You-Want (PWYW) has received increased attention in both research and practice during the last years. Museums and restaurants such as Brooklyn Museum and Little bay in London already implemented it. With PWYW pricing, buyers determine prices, and sellers need to accept every price, even if it is below zero. This can create a positive consumer experience, since it eliminates fair and related risks. (Kim et al., 2009)

PWYW can either be used as a promotion tool (e.g., when introducing a new product) or as a sustainably pricing mechanism. However, when buyers determine the price paid, it is important to consider individual price dynamics. This is what Schons et al., (2013) looked at. They examined the dynamics in prices paid in PWYW situations over multiple- customer-seller transactions on an individual customer level.

How did they measure this?

In order to test this, they conducted a field experiment in combination with a survey. They collected data by selling iced coffee at PWYW prices in an outdoor coffee bar frequently patronized by young people for over eight weeks. The iced coffee was added to the bar’s product portfolio for the purpose of this study, which enabled the researchers to track customers’ pricing decisions without existing supplier-specific internal reference prices (IRP). To monitor repeat purchases, they added a loyalty card that contained an ID that customers used to code their questionnaires at every purchase. The resulting sample comprised 966 first-time customers and includes 333 customer with two, 183 customers with three, and 128 customers with four purchases.

What did they find?

This paper elaborates on the importance of individual dynamics within PWYW pricing. First, first-time transaction prices are based on IRP. However, the influence of IRP on prices paid decreased over time. This is mainly because individual dynamics change over time. Buying frequently results in a decreasing downward slope in prices paid and IRPs because price paid in the first transaction calibrate IRPs to a level that already reflects customers’ fairness discounts. Second, customers with higher preferences for fairness pay on average higher prices. Third, repetition negatively affects customers’ price behavior, especially along the very first purchases. Lastly, it is important to note that within this study, the prices paid reached a steady state after the third transaction, only nine customers paid zero prices supporting the findings of Kim et al., (2009) and Kim et al., (2010), and customers underestimated the product’s cost by 16%. Can you imagine: buying the same product for the second time and pay a lower price or no price at all, while if you buy it for the fourth time, the price will not differ from your last price paid?

So what does this mean?

Sellers need to be aware that implementing PWYW for frequently purchased products does not ensure profits over repeated transactions. The profitability of a PWYW application depends on whether the long-term price paid after three transactions is still above the suppliers’ cost. In addition, this study confirms that customers have difficulty determining actual seller cost and hence consistently make lower estimations. PWYW pricing practitioners should therefore provide cost information to adjust customers’ initial estimates. Since this study investigated in PWYW prices at a local coffee bar, it would be interesting to see whether other larger settings such as clothing or electronic equipment result in the same conclusions. What is your opinion? Would you rather go to a coffee bar with PWYW pricing or to one with fixed prices? And if so, would you pay more than zero euro?

 

References

Kim, J.-Y., Natter, M., & Spann, M. (2009). Pay-What-You-Want—a new participative pricing mechanism. Journal of Marketing, 73(1), 44–58.

Kim, Ju-Young, Natter, M., & Spann, M. (2010). Where customers pay as THEY wish. Review of Marketing Science, 8(2)

Schons, L.M. & Rese, M., Wieseke, J., Rasmussen, W., Weber, D. & Strotman, W. (2012) There is nothing permanent except change—analyzing individual price dynamics in “pay-what-you-want” situations. Marketing Letters, 25, 25-36

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