December 17, 2013

Pay What You Want Pricing: The New Standard

Dennis O'Donnell

I recently spent some time at a local car dealership looking to replace a very old, ailing, and nearly dead vehicle. Car shopping isn’t so bad – test driving cars is fun, and the smell of a new car is somehow always amazing, but there’s always the dreaded price negotiations! After thinking about my car shopping experience, I think there’s an interesting phenomenon developing – we’re all entering the age of “Pay What You Want” on nearly every item, without even knowing it.

If you haven’t heard anything about it yet, Pay What You Want is a unique pricing strategy – often written just as PWYW. It’s really pretty simple on the surface: a company offers their product for sale at any price, even $0, and leaves it up to the consumer to decide what to pay. While it sounds like it might immediately flop as a business model, it surprisingly does not. Panera Bread company has entire stores that run on PWYW, and for a short while, sold their Turkey Chili in select stores on a PWYW model. Radiohead famously sold their “In Rainbows” album online on a PWYW model.

The reason I’m writing about PWYW is because the ubiquity of information we’re seeing today as a result of widespread internet usage, smartphones, and social media has created it’s own spontaneous, involuntary version of Pay What You Want. We’re all participating in a Pay What You Want pricing economy, but this is something very new, and it’s changing the dynamic between businesses and consumers.

If we take a cup of coffee as an example (because it’s simple), the traditional thought pattern has been that the consumer will push to get the price as close to $0 as possible, and the business will push to charge as much as it can. If this held true, then when a PWYW model went into place, nobody would pay anything – but in study after study, this doesn’t happen. Instead, a new economy of information, perceived value, and fairness kicks in. The consumer now gets to pick their price – so they calculate the value based on a bunch of factors: what does a cup of coffee cost? What should this person serving me get paid today? How much is rent for this store? How good does the coffee taste? Another major factor is social pressure – you don’t want to be the person who stiffs the hard-working barista behind the counter.

In other words, whereas traditional pricing models favor opacity on behalf of the business: don’t dare tell them those coffee beans only cost ten cents, or where you bought them, because it only supports the consumer’s case for a lower price….PWYW favors transparency, so the consumer can give you the most favorable price possible given all the costs and work you’ve put in.

The final jump I’m going to make is this: we’re already in a Pay What You Want pricing model in a lot of businesses – we just don’t know it yet. When your iPhone has a myriad of apps that can tell you the price of nearly every item you want within a 15 mile radius, and the Yelp reviews of every reseller that carries them, you’re paying what you want. Sure, you can’t pay $0, but you weren’t going to anyways. But you can pay what you want within a pretty wide range, and choose your seller of choice. I’ve personally seen tools at Home Depot that are on – the exact same tool – for 70% less. In that case, I paid what I wanted. I’ve also made purchases in stores that have an active and helpful staff that acknowledge their true costs, are pretty transparent with their business model, but offer value beyond the sale, and are selling at prices above Amazon. In a Pay What You Want economy, it seems transparency, perceived value, and fairness are the real drivers of price.

If you’ve ever shopped at a Pay What You Want business, please share in the comments! If you’d like to read more about PWYW, there are a lot of great blog posts out there by other writers who have done a great job covering the topic:

Tim Harford’s Article about Pay What You Want

Tech and Innovation Daily talk about PWYW in different industries

A great study in plain english about PWYW and amusement park photo sales

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