Pay what you want

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Pay what you want (or PWYW, also referred to as value-for-value model [1] [2] ) is a pricing strategy where buyers pay their desired amount for a given commodity. This amount can sometimes include zero. A minimum (floor) price may be set, and/or a suggested price may be indicated as guidance for the buyer. The buyer can select an amount higher or lower than the standard price for the commodity. [3] [4] Many common PWYW models set the price prior to a purchase (ex ante), but some defer price-setting until after the experience of consumption (ex post) (similar to tipping). PWYW is a buyer-centered form of participative pricing, [5] also referred to as co-pricing (as an aspect of the co-creation of value).

Contents

Motivation

PWYW models can be sometimes successful as they eliminate many disadvantages of conventional pricing. These models can eliminate fear of whether a product is worth a given set price and the related risk of disappointment ("buyer's remorse"). For sellers it removes the challenging and sometimes costly task of setting the "right" price (which may vary for different market segments). For both buyers and sellers, it changes an adversarial zero-sum conflict centered on price into a friendly win-win exchange centered on value and trust. It also accounts for varying value perceptions and price sensitivities among buyers. [4] 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 to implement PWYW pricing include price discrimination and market penetration. Price discrimination occurs automatically in a PWYW model since buyers with higher valuations of the product will choose 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. [6]

The success of PWYW models depends on several factors. For one source, [7] a successful PWYW model has a:

  1. A product with a low marginal cost
  2. A fair-minded customer
  3. A product that can be sold credibly at a wide range of prices
  4. A strong relationship between buyer and seller
  5. A very competitive marketplace

This strategy tends to be more effective when relating to digital products or services.

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 this is more oriented to charity or social uses and based on ability to pay. PWYW is 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, street performers, and charities. It has been gaining interest in wider industries.

Research

After the Radiohead experiment, economics and business researchers began a flurry of studies, with particular attention to the behavioral economics aspects of PWYW—what motivates buyers to pay more than zero, and how can sellers structure the process to obtain desirable pricing levels? The first studies appeared in 2009: Kim et al. [23] and Regner and Barria. [24]

In 2010, a large-scale experiment was conducted in an 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 although many more people bought the photo under a PWYW model, the average price paid is very low ($0.92), resulting in no income increase for 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 paid amount would be donated to a patient support organization) the average amount paid increased substantially (to $6.50). This significantly increased the firm's income, as well as generating a substantial charitable contribution. In a 2012 follow-up research paper, Gneezy and colleagues found PWYW may deter some customers from purchasing. Their results show: "individuals feel bad when they pay less than the 'appropriate' price, causing them to pass on the opportunity to purchase the product altogether". [25]

In a series of controlled laboratory experiments, Klaus M. Schmidt, Martin Spann and Robert Zeithammer (2014) show that outcome-based social preferences and strategic considerations to keep the seller in the market can explain why and how much buyers voluntarily pay to a PWYW seller. They find that PWYW can be viable in 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. [26]

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. [27]

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 price paid decreases significantly; yet the decrease in price paid reduces with every transaction. They further show customers' preference for fairness and price conscientiousness influence the steepness of the individual price curves. [28]

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. These factors include product characteristics, consumer-related characteristics, situational variables, relational techniques, and reference prices. The review also addresses economic and communicative success, and underlying market motives. [29]

Enhanced forms

There are several changes to the PWYW model which can improve its profitability while maintaining its buyer appeal.

Ex post pricing

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 offers this payment choice is Ebook seller OpenBooks.com. [30]

Post-pricing separates the buying decision and the pricing decision. [31] Consuming a product, call it a good, reduces information asymmetries about the good's quality, so the buyer is informed of the product's quality when they decide what to pay. Risk-averse buyers who would not purchase the good at a fixed price for fear of its quality (or would price at a discount in an ex ante PWYW system) can be enticed to purchase the product using an ex post PWYW system. The ex post PWYW system works as a signal of quality to attract risk-averse buyers. This might be a profitable strategy if it attracts risk-averse buyers, increasing the consumer base and allowing economies of scale in production.

Charity elements

Another enhancement is to add a charity element when selling digital content. This is used in the Humble Indie Bundle, which has a buyer-directed charity component to further increase buyer willingness to pay. This charity effect is similar to the research study noted in the Research section above. [32] Humble Bundle also encourages buyers to "beat the average" by adding additional content for customers who pay above the current average purchase price.

Repeated transactions

A further enhancement is to use a series of repeated transactions. This is called FairPay ("Fair PWYW"). This shifts the scope from a single digital content transaction to an ongoing relationship over a series of transactions. [33] It builds on the benefits of ex post PWYW pricing (setting the price after consumption, when product's value is known) and adds a feedback process for tracking individual buyers' reputations for paying fairly, as assessed by the seller. It then uses the fairness reputation data to let the seller determine what further offers to extend to that particular buyer. 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. [34] The Fair PWYW architecture and how it builds on modern digital content pricing strategy has been outlined on the Harvard Business Review Blog. [33] Fair PWYW integrates PWYW into a feedback/control cycle which tries to create value for both the buyer and seller. It attempts to 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 the buyer and seller's relationship. [35]

See also

Related Research Articles

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