NCPA - National Center for Policy Analysis


March 27, 2009

Despite the old saying that the customer is always right, businesses generally assume that they must dictate prices to customers.  But a team of marketing researchers wanted to see if the opposite extreme -- "pay what you want" (PWYW) -- could also be profitable.

PWYW is an innovative pricing model in which buyer's control over the price setting is at a maximum level; that is, the buyer can set any price above or equal to zero, and the seller cannot reject it.  Previous research suggests that participative pricing increases consumers' intent to purchase.  However, sellers using PWYW face the risk that consumers will exploit their control and pay nothing at all or a price below the seller's costs.

To test this, researchers conducted experiments in Germany at a restaurant, a movie theater and a delicatessen where customers could pay whatever they wanted for a buffet lunch, tickets or hot drinks, respectively.  Every customer paid something, and only a few customers paid very low prices:

  • In fact, the average price paid for drinks at the delicatessen was slightly higher than normal.
  • Although the average price at the restaurant was somewhat lower than normal, it sold so many more buffet lunches than usual that the owner retained the new approach and said he planned to replicate it.
  • However, PWYW pricing doesn't just apply to face-to-face situations: the British band Radiohead released an album online, in exchange for whatever price people wanted to pay, and it was reported that 2 million copies were downloaded and that the album was profitable.
  • Researchers suggest that such a pricing strategy is most applicable to products with high fixed, but low variable, costs.

Yet, further research should analyze the importance of such personal interactions on consumers' decision process.  PWYW might be a profitable alternative to free samples for new product introductions or money-back guarantees, say researchers.

Source: Ju-Young Kim, Martin Natter and Martin Spann, "Pay What You Want: A New Participative Pricing Mechanism," Journal of Marketing, Vol. 73, No. 1, January 2009.

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