Posting in Science
An experiment with a pay-what-you-want offering, including the option to not pay at all, increased revenues.
In reverse-auction transactions, such as those offered through Priceline.com, customers set the prices they're willing to pay, and wait to see which sellers bite. That's a one-to-many proposition. But what about a one-to-one interaction between a seller and a buyer in which the seller exclusively dictates the price?
Three University of California-San Diego researchers conducted a experiment in which an amusement park let customers set the prices they would be willing to pay for thrill pictures on one of the rides. They could even pay nothing. Sure, there's risk, but pay-want-you-want pricing also resulted in an eight-fold increase in sales, according to The Economist. (The findings were originally published in Science, paid registration required.)
As described, the experiment had an interesting result -- revenues from the thrill photos increased:
"The authors set up their pricing experiment at the exit of a roller-coaster ride at a large amusement park. Riders were offered a photograph of themselves, snapped mid-coast. The usual price was $12.95, but on one day riders were told they could pay what they wished, including taking the photo for free.... Allowing customers to set the price dramatically increased the percentage of buyers—from less than 1% to 8%. Even accounting for those who took a free photo, the amusement park collected more revenue on the pay-what-you-want day than when selling for the usual fixed price."
Another twist: when customers were informed that half the money they paid would go to a charity, revenues tripled.
Interesting strategy proposed by the professors -- but actually, it's been done before. Consider a place where this same model actually has been in force for years -- at museums. For example, the New York Metropolitan Museum of Art asks for voluntary donations of any amount up to the recommended adult admission of $20 per visit. About $30 million, or 15% of the museum's funding, came through admissions in fiscal 2010.
Charities operate on a pay-what-you-want model, and many have impressive revenues.
The big question is: is this a model that could work for businesses? Or are standard market mechanisms -- supply and demand -- enough? With enough competition, after all, customers can simply walk away from a transaction to get the price they want. Should pay-what-you-want be more overt?
Jan 13, 2011
Pay What You Want (PWYW) pricing has gotten some promising attention in the past few years, but most people still dismiss it as naively utopian, only suited to very special situations. I have posted a survey of a growing body of research and real use (including the article mentioned here) that suggests that it has much more value than most businesses realize, in a wide range of situations. This research paper is an eye-opener, but there is a lot more to think about. A blog post with a link to this survey is at http://www.fairpayzone.com/2010/10/pay-what-you-want-still-crazy-after-all.html. What is more, I suggest that an enhanced form of PWYW can be applied to ongoing Internet-mediated relationships, using feedback on how well people pay, to gate access to further PWYW offers as a special privilege. This FairPay process enables behavior like a freemium model that can be far more simple, fair, adaptive, dynamic and profitable. More on this is at http://teleshuttle.com/FairPay.
This will only work for high-profit add-on items. And it possibly isn't even the BEST strategy for them. But, even if the idea needs some refinement, the results are fascinating - the implications for add-on pricing strategies and possibly for charities are very promising.
Huh... the Law of Supply and Demand and the Free Market actually works... who would have thought it? Duh. "Hates Idiots" has it right.
I've heard that Panera Bread has a couple of restaurants running this way and showing increased profits.
It works for museums and vanity photos because most of the costs are fixed. For most goods and services there are significant variable costs. If the customer gives you less than the variable cost, it doesn't matter that you get more revenue, your costs are going up even more.
They had their picture prices set too high. Lower their prices to the average it sold for on that day and you would likly see a volumn increase. Which could pay off in the long run as long as there is a profit margin left at the lower cost.
The Natural History Museum across the park works the same way. Offer them $1.00 less than the admission price and watch what happens.
It works in part because of novelty. The fact that it is a "charity" event and that the park ride is not a regular occurrence increases demand. The question, in part, is not will revenues rise, but will the profits? If it costs $1 and you sell it for $10, 100 times (revenue $1000) you get $900 profit. If it costs $1 and you sell it for $1.01 10,000 times (revenue $10,100) you get $100 profit. Also, once people get used to it, will the amount they are willing to pay drop? A new DVD used to sell for $50+, now you are much more likely to see it under $20. Once a quality product is released for less money people lose the willingness to pay more for something that is not. This is why you see the bonus items with the DVD s even though they are mostly junk in the long run.
Freedom works in mysterious ways. Tangential, but Elin Nostrom won a Nobel prize recently for showing how societies and groups can be succesfully self-organizing, without government laws and enforcement.