Pay What You Want as a Marketing Strategy in Monopolistic and Competitive Markets


If you wouldn’t pay a fixed tuition fee, but were allowed to pay what you want (PWYW), how much would you be willing to pay for the course Customer Centric Digital Commerce? It would probably depend on your expected valuation of the course. However, would you be willing to pay voluntarily?

This is what Schmidt et al. (2015) studied

The authors studied the reasons why buyers are willing to pay voluntarily under PWYW and how competition affects the viability of PWYW. Below, the main advantages for sellers of PWYW are shown, with their corresponding results.

  • Advantage 1: Price discrimination: different customers pay different prices for the same product.

Buyers are willing to make substantial voluntary payments because of their own valuation of the product, the cost for the seller, and because of a strategic motive to keep the seller in business.

  • Advantage 2: Market penetration: maximize unit sales.

When the PWYW seller has a monopoly, almost all buyers buy his product. However, when there is also a posted price (PP) seller in the market, there is no full market penetration.

  • Advantage 3: Competition: drive competitors out the market with PWYWY.

When there is also a PP seller in the market, buyers have a reference price and therefore pay less to the PWYW seller.

When the market is not monopolistic, both sellers using a PP strategy is best. However, when one of them uses PWYW, the other seller is better off also using PWYW.

How did they study this?

They studied this by conducting a laboratory experiment, which is the main strength of the paper. Many field studies confirm that PWYW can be advantageous (e.g. Kim et al., 2009), but cannot explain why.

With a laboratory experiment, all variables can be controlled. Furthermore, the authors choose conservative design features. For example, no personal interactions, no complementary products, a fictitious product and no one observes how much the buyer pays. All these features make it easier for a buyer not to pay anything and therefore if buyers are willing to pay positive prices in the experiment, they are likely to also have a significant effect in real markets.

Managerial implications

There are several managerial implications.

  • PWYW is likely to be more successful for small shops and non-profit organizations.
  • PWYW is best suited for products with low marginal costs, that create high value for customers (e.g. museums, digital products).
  • Neighborhood shops are likely to receive higher payments than sellers dealing with customers only once.

Conclusion

From this, we can determine that a university has a possibility to succeed when applying a PWYW strategy. A university is non-profit, with low marginal costs and high value for students. Students are also recurring customers, since they take many courses. A university might even have a monopoly for certain courses, which benefits the university. However, students often do not have much money and prefer to spend their money on other activities.

Do you believe Erasmus University would survive with a PWYW strategy?

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.

Schmidt, K.M., Spann, M. & Zeithammer, R. (2015). Pay what you want as a marketing strategy in monopolistic and competitive markets. Management Science. 61(6), 1217-1236.

 

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