"Pay What You Want" (PWYW) is a pricing strategy where customers are granted the freedom to set their own price for a product or service, often with a suggested amount. Originally seen as a short-term promotional tool or as a staple of non-profits aiming to widen their reach, PWYW has now found a spot in the playbook of profit-driven enterprises across various sectors, including restaurants, software, organization of events and digital music. The band Radiohead's release of "In Rainbows" (2007) showcased PWYW pricing, allowing fans to download the album at any price, even for free. With this uncommon move, the band sparked widespread attention, media coverage and significant revenues.
While its potential has been established, PWYW remains a risky strategy, as it relies on customers' honesty and willingness to pay a fair price. Hence, it is essential to explore the various design variations that can be implemented in PWYW models and assess how consumers react to these alterations. CUBE Professor Fernando Machado and his co-author Ranjit Christopher (Henry W. Bloch School of Management) dive into this dynamic realm, in the scientific paper “Consumer response to design variations in pay-what-you-want pricing” published by Journal of the Academy of Marketing Science (2019), uncovering four distinct consumer responses:
- Opting Out: Some consumers prefer the familiarity of fixed prices or feel uncertain about the PWYW model.
- Free-Riding: Bargain hunters capitalize on the opportunity to pay the minimum, often driving it down to zero in traditional PWYW scenarios.
- Following Recommendations: Trust in the seller's judgment or perception of a reasonable price prompts adherence to the suggested price.
- Choosing a different amount: A segment of consumers exercises autonomy by selecting alternative payment sums, influenced by personal preferences or perceived value.
To unravel the mysteries of PWYW, Machado and Christopher employed two main strategies. First, they crafted a theoretical model delving into the motivations of consumers, balancing altruistic (prosocial) with self-interest motivations. Then, they put their theories to the test through a flexible statistical model, analyzing real-world data alongside two controlled experiments. Their findings shed light on crucial factors shaping consumer behavior:
- Payment Visibility: Transparency fosters fairness and deters free-riding, though it may decrease unit sales.
- Timing of the payment: Offering post-consumption payment options boosts revenues by aligning payment with perceived quality.
- Price Recommendations: Providing price recommendations can guide consumer decisions, but the magnitude of these recommendations matters. Too low, and you risk lower revenues; too high, and you may deter customers.
- Information on Payment Recipients: Disclosing where payments go cultivates consumer trust and willingness to pay.
In essence, Machado and Christopher’s research unveils the intricate dance between PWYW design choices and consumer responses. The results suggest that optimal PWYW designs vary drastically with the seller’s managerial objective.
Profit-seeking organizations, tend to be better off by designing for highly visible payments, using communication that primes consumers’ fairness concerns and either altogether abstaining from making price recommendations or recommending a price that is close to what consumers would expect to pay for a similar product.
Conversely, firms seeking to maximize market penetration (a likely objective for non-profit organizations or for those that use PWYW as a temporary promotional tool) may thrive with anonymous payments, no appeal to fairness concerns, and low-price recommendations.
Understanding the nuanced interplay of PWYW dynamics empowers businesses to navigate this terrain with confidence, bridging the gap between consumer satisfaction and sustainable profitability.
To access the full research article please visit the Journal of the Academy of Marketing Science website here or you can request a copy directly from the authors here.