Pay what you want

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, 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.[3][4] 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).

Not to be confused with Pay what you can.

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.[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 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.[5]

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. PWYW strategy may be used for a brief period of time only- like a introductory offer or surprise element. It is often misused in today's scenario until rolled out in a controlled environment. It is more aligned for digital products where add-on features can be bundled to escape the spiral of losses. Select invites, regulated or limited entries and other checks in place can make it worth it.

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.

  • Contemporary Christian music artist Keith Green implemented a similar structure for his album So You Wanna Go Back to Egypt. The album, available solely through Green's Last Days Ministries, was offered on mail-order coupon. A purchaser would send the coupon, along with the chosen purchase price (if any), to obtain the album.
  • One of the earliest known "Pay What Your Heart Feels" initiative was started in 1984 at Annalakshmi Restaurant at Bangsar, Kuala Lumpur, Malaysia, inspired by Swami Shantananda Saraswati.[6] This concept soon spread to some of the Annalakshmi restaurants located in other cities too.[6]
  • Theaters began using it for selected nights.[4]
  • Use by restaurants has been spreading since the opening in 2000 of Lentil as Anything in St Kilda, Melbourne, Australia. In subsequent years, further restaurants were opened around Melbourne including in Abbotsford Convent, Footscray (now closed) and Thornbury. In 2013 Lentil As Anything opened a restaurant in Newtown Sydney, Australia.
  • In 2003, One World Everybody Eats opened in Salt Lake City.[7] The restaurant was closed in 2013. [8]
  • Freeware applications are frequently distributed under donationware that prompts the user to donate to the author rather than paying for the software, as opposed to the Shareware model.
  • Jeff Rosenstock, frontman of New York punk bands The Arrogant Sons of Bitches and Bomb the Music Industry!, began releasing music through the website of his digital-only record label Quote Unquote Records in 2005. The first of these releases was the debut Bomb the Music Industry! album, Album Minus Band. Releases on Quote Unquote Records are offered as free downloads with the option of donating to the label. The header of their website reads "The First Ever Donation Based Record Label".[9]
  • A major boost in awareness occurred in October 2007, when Radiohead released their seventh album, In Rainbows, through the band's website as a digital download using a PWYW system.[10]
  • In December 2007, punk/metal record label Moshpit Tragedy Records became the first to operate fully under the PWYW download system.[11]
  • In 2008, Wheatus moved to the system for all their future albums and old albums they owned the rights to.
  • Koo Koo Kanga Roo, a comedy kids/hip hop duo, release all of their recorded music under this system. The group has referred to themselves strictly as a live band, and thus give away their music solely so as many people as possible can hear it and be able to sing and dance along with it at their performances.
  • In 2010, Panera Bread bakery used the system in a St. Louis, Missouri suburb, and has generated further attention by opening more since. The concept cafe is called Panera Cares Community Cafe.[3] In February 2019, the last cafe was shuttered.[12]
  • Introduced during May 2010, the Humble Indie Bundle was a set of six independently developed digitally downloadable video games which were distributed using a PWYW model (with inclusion of a buyer-controllable charitable contribution). At the end of the sale, $1.27 million had been raised. They have since done over twenty more bundle sales, generating a total of over $19 million in revenues, and securing in April 2011 an investment of $4.7 million by Sequoia Capital.
  • In late 2012, McPixel had a PWYW weekend, in partnership with The Pirate Bay, as the creator Mikolaj Kaminski wanted people to try his game as a reason to buy it.
  • Canonical implemented this system on the Ubuntu download page. Their message varies, but usually asks to "Show Ubuntu some love. Or, alternatively, help out in the bug tracker ;)". One can adjust the sum they wish to contribute for each development initiative from $0 to $125. Alternatively, there is an option to skip the payment and go straight to download of selected OS type.
  • In 2013, Headsets.com offered their customers the PWYW option. CEO Mike Faith noted almost all the company's customers paid full price, with only 10% opting to pay less, saying "Just as money-back guarantees were considered over-generous and dangerous when they were first introduced, they are almost a standard nowadays. There is no reason that trust-based pricing shouldn’t become a norm over the next decade."[13]
  • In 2013, Panel Syndicate released the webcomic The Private Eye that was launched as PWYW.
  • Fashion e-tailer Everlane gained significant attention in December 2015 with a PWYW after-Christmas sale that featured clear framing of PWYW pricing options quantized at three levels that provided 1) only cost recovery, 2) basic overhead recovery, or 3) full sustainable investment.[14]
  • In 2017, a BIG4 Holiday Park in Australia ran a PWYW pricing strategy for the month of August.
  • Servant Stage Company, a non-profit theatre company in Lancaster, Pennsylvania, operates completely on the PWYW model. In 2017, they reached over 31,000 audience members with 125 theatrical performances all offered PWYW. [15]
  • In 2019, Michael Stipe's debut solo single, "Your Capricious Soul", was offered for 77 cents, or however much more the buyer wished to pay, or free.[16][17]

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.[18]

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".[19]

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.[20]

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.[21]

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 .[22]

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.[23]

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.[24] 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.”[25]

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.[26] 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.[27] The FairPay architecture and how it builds on modern pricing strategy has been outlined on the Harvard Business Review Blog.[28] 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.[29]

gollark: 5 minutes then?
gollark: I mean, we can do today if you want.
gollark: Except it messed up the time...
gollark: A countdown on a generic countdown thingy which came up in search results.
gollark: https://www.timeanddate.com/countdown/to?iso=20180718T18&p0=235&msg=APDump&font=serif

See also

References
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  2. "No Agenda: How to have a successful podcast with no advertising". 2015-09-29.
  3. Strom, Stephanie; Gay, Malcolm (May 20, 2010). "Pay-What-You-Want Has Patrons Perplexed". New York Times. Retrieved 2010-05-21.
  4. Smart Pricing, Chapter 1. "Pay As You Wish" Pricing, Raju and Zhang, Wharton School Publishing, 2010. ISBN 0-13-149418-X.
  5. Schmidt, Klaus M.; Spann, Martin; Zeithammer, Robert (2012). "Pay What You Want as a Marketing Strategy in Monopolistic and Competitive Markets". doi:10.5282/ubm/epub.14312. Cite journal requires |journal= (help)
  6. r.n, Sankar (2008-10-11). "Annalakshmi Foods: Manifesting Attributes of Love, Serve and Give". SSRN 1568783. Cite journal requires |journal= (help)
  7. "Restaurant depends on kindness of strangers". NBC News. July 6, 2004. Retrieved 2007-03-27.
  8. "History - One World Everybody Eats". Archived from the original on 25 March 2018. Retrieved 25 March 2018.
  9. Crow, Sara (August 30, 2015). Never Get Tired: The Bomb the Music Industry! Story (Documentary film). Retrieved February 9, 2017.
  10. Tyrangiel, Josh (October 1, 2007). "Radiohead Says: Pay What You Want". Time magazine. Retrieved 2010-05-21.
  11. About Moshpit Tragedy Records Archived 2013-11-04 at the Wayback Machine Retrieved 2012-02-03
  12. "Panera Bread to close unique cafe concept this month". TODAY.com. Retrieved 2019-05-02.
  13. EVANS, LISA (2014-01-15). "INSIDE FIVE BUSINESSES THAT LET CUSTOMERS NAME THEIR OWN PRICE". Fast Company.
  14. "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.
  15. "Servant Stage".
  16. Sawyer, Miranda (20 October 2019). "It's the end of the world as we know it... and Michael Stipe feels fine". The Observer. ISSN 0029-7712. Retrieved 2019-10-20 – via www.theguardian.com.
  17. Natalie Dreier, Cox Media Group National Content Desk. "R.E.M.'s Michael Stipe's long-awaited solo material to be released this weekend". ajc. Retrieved 2019-10-20.
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  23. 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.
  24. "OpenBooks.com".
  25. "Munich Personal RePEc Archive". 2014-02-03.
  26. 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. PMID 20647467.
  27. Better Revenue Models: Pay What You Want – Not Crazy After All These Years? Retrieved 2011-08-13.
  28. When Selling Digital Content, Let the Customer Set the Price Retrieved 2013-11-22.
  29. Frow, Pennie; Reisman, Richard; Payne, Adrian (2015-06-11). "Co-Pricing: Co-Creating Customer Value Through Dynamic Value Propositions". Rochester, NY. SSRN 2634197. Cite journal requires |journal= (help)
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