How to Maximize Pay-What-You-Wish Pricing

Pay-what-you-wish pricing schemes have now been employed by everyone from musicians and restaurateurs to entrepreneurs. But new research suggests that the true path to maximizing profits is to combine pay-what-you-wish pricing with an appeal to charity. Ayelet Gneezy, a marketing professor at the University of California-San Diego, conducted a field experiment at a theme park (sample size: over 113,000). Gneezy presented four different pricing schemes for souvenir photos: a flat fee of $12.95; a flat fee of $12.95 with half going to charity; pay-what-you-wish; and pay-what-you-wish with half going to charity. At a flat fee of $12.95 per picture, only 0.5% of people purchased a photograph; when customers were told that half the $12.95 purchase price would go to charity, a meager 0.59% purchased a photo. Under the simple pay-what-you-wish variation, 8.39% of people purchased a photo, but customers paid only $.92 on average. The final option — pay what you wish, with half the purchase price going to charity — generated big results: purchase rates of 4.49% and an average purchase price of $5.33, resulting in significant profits for the theme park. “When the charity factor is introduced, these casual freeloaders balk at the idea of paying nothing, because it’s more likely to reflect badly on them,” writes Ed Yong. “Rather than naming a higher price, their preference is to avoid buying altogether — for them, it isn’t worth it. Sales fall, but the actual profits go up because the remaining customers are motivated by their desire for the product and for the cause, will pay for both.” (HT: Josh Shpayher)[%comments]

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  1. Drill-Baby-Drill Drill Team says:

    I wonder what Ron Popeil would think about selling this idea? But wait there is more…..For a Limited Time Only….Act Fast Supplies are Limited…….If You act now get a free set of1x1 Wallet Prints,,,,,, Would you like Fries with That……Joe the Crippled Orphan was Abused Daily, Won’t You Help Joe?

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  2. Trotto says:

    @D-B-DDT

    What?

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  3. Chris says:

    You can not maximize pay as you wish pricing because the portion that goes to charity “actually has to go to charity”, or else it’s a scam. So it is not the way for business to maximize their profits.

    This really is the least of concerns for economists right now, as it doesn’t really work, and we have real issues to address in the meantime. Please come up with something better!!!

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  4. E. Nowak says:

    Wow, if this doesn’t prove that the term “ethical business” is an oxymoron. Using a person or cause as a way to sell something isn’t charity, it is exploitation. Of the customer and of the charity. I think you need to ask the NYTimes Ethicist what he thinks about this.

    I know the business/charity model has been used forever, but it doesn’t make it RIGHT.

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    • Steve Cebalt says:

      Hi E. Nowak: I see things differently. Most businesses are ethical (because it’s more profitable), and ALL private charity dollars come from one place: profits from private enterprise. Linking sales to a worthy cause as described in this example creates profits for the business, revenue for the charity, and a service to the customer. Where is the exploitation if the charity supports the effort and makes good use of the funds to advance its charitable mission? Additionally, this model sets the market price by allowing people to pay what they want. If they are more motivated by the photo or the charity matters not at all. Remember: no business profits, no charity. All non-government charit dollars are the product of commercial business profit.

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  5. Ian Kemmish says:

    Or perhaps they were more motivated by the desire not to appear mean in front of their children? A control experiment conducted somewhere other than a theme park would have been nice.

    Other interesting locations would be a) near a charity shop; b) near a charity poster; c) near a bank…..

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  6. Brian says:

    Maybe $12.95 is too expensive for the photos. What if they charged $5.00 for the photos without half going to charity. The percentages could drop to 2.5% and still make the same profit as giving half to charity at 4.49%

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  7. Chelsea says:

    @Chris: Obviously they take into account the money given to charity! They’re saying that even *after* giving half of the proceeds to charity, they would be left with an average of $2.665 from 4.49% of park-goers, and that that amount of money is more than they got from the other three pricing schemes. They maximized pay-as-you-wish pricing, because more people purchased their product than they did with a flat rate, and the people who purchased their product gave nearly six times more money than they did when none of the proceeds were promised to charity.

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  8. Dave says:

    @3

    If you do the calculations, you’ll see that they are almost doubling their profits even after giving half to charity. Everyone wins.

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