Pay what you want

Pay what you want (or PWYW) is a pricing strategy where buyers pay their desired amount for a given commodity, sometimes including zero. In some cases, a minimum (floor) price may be set, and/or a suggested price may be indicated as guidance for the buyer. The buyer can also select an amount higher than the standard price for the commodity.[1][2] Many common uses of PWYW set the price prior to a purchase, but some defer price-setting until after the experience of consumption (much like tipping). PWYW is a buyer-centered form of participatory pricing, also referred to as co-pricing (as an aspect of the co-creation of value).

Motivation

Giving buyers the freedom to pay what they want can be very successful in some situations, because it eliminates many disadvantages of conventional pricing. Buyers are attracted by permission to pay whatever they want, for reasons that include eliminating fear of whether a product is worth a given set price and the related risk of disappointment (“buyer's remorse”). For sellers it obviates the challenging and sometimes costly task of setting the “right” price (which may vary for different market segments). For both, it changes an adversarial zero-sum conflict centered on price into a friendly win-win exchange centered on value and trust, and addresses the fact that value perceptions and price sensitivities can vary widely among buyers.[2] While most uses of PWYW have been at the margins of the economy, or for special promotions, there are emerging efforts to expand its utility to broader and more regular use. (see "Enhanced forms", below.)

Further reasons for sellers implementing PWYW pricing includes price discrimination and market penetration. Price discrimination occurs as a result of buyers with higher valuations of the product choosing to pay a higher price. Thus, price discrimination could result in higher revenues for the seller if costs are sufficiently low. PWYW is also an effective tool for penetrating a new market, perhaps to introduce a new brand, as even consumers with a very low valuation can pay small amounts for the same product.[3]

Other names include "pay what you wish", "pay what you like", "pay as you want", "pay what you feel", "pay as you wish", "pay as you like", "pay what you will", and "pay as you will". "Pay what you can" is sometimes used synonymously, but is often more oriented to charity or social uses, based more on ability to pay, while PWYW is often more broadly oriented to perceived value in combination with willingness and ability to pay.

History and commercial uses

PWYW has long existed on the margins of the economy, such as for tips and street performers, as well as charities, and has been gaining breadth of interest.

Research

With the prominence of the Radiohead experiment, economics and business researchers began a flurry of studies, with particular attention to the behavioral economic aspects of PWYW—what motivates buyers to pay more than zero, and how can sellers structure the process to obtain desirable pricing levels? One early such study (possibly the first) was the one done by Kim et al. in January 2009.[12]

In a large scale experiment conducted in a large amusement park, Ayelet Gneezy, Uri Gneezy, Leif D. Nelson, and Amber Brown tested the effectiveness of PWYW by selling roller coaster photos to park visitors. Their results show that, although many more people buy the photo when it is offered under PWYW, the average price paid is very low ($.92), resulting in no income increase to the firm. However, when PWYW was coupled with a charitable cause (buyers were informed they could pay what they wanted AND that half of the amount they pay would be donated to a patient support organization) the average amount paid increased substantially (to $6.50), resulting in a significant income increase to the firm in addition to generating substantial charitable contribution. In a follow-up research paper, Gneezy and colleagues (2012) found that PWYW may deter some customers from purchasing. Their results show that this is because, "individuals feel bad when they pay less than the 'appropriate' price, causing them to pass on the opportunity to purchase the product altogether".[13]

In a series of controlled laboratory experiments, Klaus M. Schmidt, Martin Spann and Robert Zeithammer show that outcome-based social preferences and strategic considerations to keep the seller in the market can explain why and how much buyers pay voluntarily to a PWYW seller. They find that PWYW can be viable on a monopolistic market, but is less successful as a competitive strategy because it does not drive traditional posted-price sellers out of the market. Instead, the existence of a posted-price competitor reduces buyers' payments and prevents the PWYW seller from fully penetrating the market. When given the choice, most sellers opt for setting a posted price rather than a PWYW pricing strategy.[14]

Another PWYW experiment looked at determinants for the price chosen by consumers of the application iProduct, which provided tutorials and lessons for potential application developers on the App Store (iOS). The application was offered as free with in-app purchases, including a gratuity mechanism that allowed users to pay/donate what they wanted for the projects included in the app. The study tested the significance of four determinants in deciding the PWYW price paid by consumers: fairness (proper compensation to the seller), loyalty to the seller, price consciousness (focus on paying a low price), and usage (how much the consumer will use the product). The study found that price consciousness negatively influenced the price paid, while usage and loyalty positively influenced the price paid for the product. Fairness was found to have no significant effect.[15]

Further research focused on the long-term perspective of pay what you want. A study conducted by researchers of the Ruhr-University of Bochum examines repeated transactions in a pay what you want environment. By using latent growth modeling they find that the average prices paid decrease significantly; yet the decrease of prices paid declines with every transactions. They further show, that customers' preference for fairness and price conscientiousness influence the steepness of the individual price curves .[16]

A broad review of the literature on PWYW and related forms of voluntary payment (tipping, donations, and gifts) by Natter and Kaufmann published in 2015, examines many relevant factors as they relate to voluntary pricing strategies, including product characteristics, consumer-related characteristics, situational variables, relational techniques, and reference prices. It also addresses economic and communicative success, and underlying market motives.[17]

Enhanced forms

Efforts have been made to expand on the benefits of PWYW, to make it more useful and profitable to sellers, while maintaining its inherent appeal to buyers.

One simple enhancement is to shift the time of pricing from the usual practice of ex ante pricing, which is done at the initiation of a transaction and prior to the consumption experience, to ex post pricing, which defers pricing to a follow-up step after the consumption experience. A commercial use that emphasizes this feature is book-seller OpenBooks.com.[18] An academic paper explains that post-pricing “separates the decision to buy from the decision how much to pay. Information asymmetries about the quality of the good are reduced during the act of consumption so that buyers are informed about the product’s quality when they decide how much to pay. As a consequence, risk-averse buyers who would otherwise refrain from purchasing under a fixed price mechanism” (or who price at a discount to allow for this risk) “can be attracted to purchase under a PWYW pricing ex post consumption (PWYW-EPC) mechanism. In this case, the pricing mechanism itself constitutes a signal. … [This] can be a profitable strategy … to attract risk-averse buyers for realizing economies of scale in production.”[19]

Another such enhancement is reflected in the Humble Indie Bundle, which has added a buyer-directed charity component to further increase buyer willingness to pay. This is similar to the research study noted above.[20] Humble bundle also encourages buyers to "beat the average" by adding additional content for customers paying more than the current average purchase price.

A further enhancement is an expanded process, called FairPay (short for Fair PWYW), which shifts the scope from a single transaction view, to an ongoing relationship over a series of transactions. It builds on the benefits of ex post PWYW pricing (setting the price after consumption, when value is known, as described above) and adds a feedback process for tracking of individual buyers' reputations for paying fairly (as assessed by the seller). It then uses that fairness reputation data to let the seller determine what further offers to extend to that particular buyer. In that way it seeks to incentivize fair pricing by buyers (to maintain a good reputation, and thus be eligible for future offers), and to enable sellers to limit their risk on each transaction in accord with the buyer's reputation.[21] The FairPay architecture and how it builds on modern pricing strategy has been outlined on the Harvard Business Review Blog.[22] FairPay integrates PWYW into a feedback/control cycle that continuously seeks win-win dynamic value propositions that reflect the customer’s dynamic perceptions of value and real willingness to pay—this enables it to optimize co-creation of customer value over the course of a relationship.[23]

See also

References

  1. 1 2 Strom, Stephanie; Gay, Malcolm (May 20, 2010). "Pay-What-You-Want Has Patrons Perplexed". New York Times. Retrieved 2010-05-21.
  2. 1 2 3 Smart Pricing, Chapter 1. "Pay As You Wish" Pricing, Raju and Zhang, Wharton School Publishing, 2010. ISBN 0-13-149418-X.
  3. ↑ "Pay What You Want as a Marketing Strategy in Monopolistic and Competitive Markets".
  4. 1 2 "Annalakshmi Foods: Manifesting Attributes of Love, Serve and Give".
  5. ↑ "Restaurant depends on kindness of strangers". Associated Press at MSNBC. July 6, 2004. Retrieved 2007-03-27.
  6. ↑ Tyrangiel, Josh (October 1, 2007). "Radiohead Says: Pay What You Want". Time magazine. Retrieved 2010-05-21.
  7. ↑ About Moshpit Tragedy Records Retrieved 2012-02-03
  8. ↑ EVANS, LISA. "INSIDE FIVE BUSINESSES THAT LET CUSTOMERS NAME THEIR OWN PRICE". Fast Company.
  9. ↑ "TiE UK North – Manchester – Liverpool – Preston » TiE Featured Startup MyHelpster".
  10. ↑ "Security Check Required".
  11. ↑ "One retailer is letting customers decide how much to pay — but there's an invisible price if you choose the lowest option". Business Insider. Retrieved 2016-01-04.
  12. ↑ JY Kim, M Natter, M Spann (January 2009). "Pay what you want: a new participative pricing mechanism". Journal of Marketing 73 (1): 44–58. doi:10.1509/jmkg.73.1.44.
  13. ↑ Ayelet Gneezy. "Pay-what-you-want, identity, and self-signaling in markets".
  14. ↑ KM Schmidt, M Spann, R Zeithammer (September 2014). "Pay What You Want as a Marketing Strategy in Monopolistic and Competitive Markets". Management Science. published online. doi:10.1287/mnsc.2014.1946.
  15. ↑ ""Pay What You Want: An Exploratory Study of Social Exchange and Buyer-Determined Prices of iProducts" by Kent Marett, Rodney Pearson et al.".
  16. ↑ LM Schons, M Rese, J Wieseke, W Rasmussen, D Weber, W Strotmann (2014). "There is nothing permanent except change—analyzing individual price dynamics in "pay-what-you-want" situations". Marketing Letters 25 (1): 25–36. doi:10.1007/s11002-013-9237-2.
  17. ↑ Natter, Martin; Kaufmann, Katharina (2015-08-01). "Voluntary market payments: Underlying motives, success drivers and success potentials". Journal of Behavioral and Experimental Economics 57: 149–157. doi:10.1016/j.socec.2015.05.008.
  18. ↑ "OpenBooks.com".
  19. ↑ "Munich Personal RePEc Archive".
  20. ↑ A Gneezy, U Gneezy, LD Nelson, A. Brown (July 2010). "Shared Social Responsibility: A Field Experiment in Pay-What-You-Want Pricing and Charitable Giving". Science 329 (5989): 325–327. doi:10.1126/science.1186744.
  21. ↑ Better Revenue Models: Pay What You Want – Not Crazy After All These Years? Retrieved 2011-08-13.
  22. ↑ When Selling Digital Content, Let the Customer Set the Price Retrieved 2013-11-22.
  23. ↑ Frow, Pennie; Reisman, Richard; Payne, Adrian (2015-06-11). "Co-Pricing: Co-Creating Customer Value Through Dynamic Value Propositions". Rochester, NY.

External links

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