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]


Richard Reisman

There is another radically new variation of PWYW that can have real power for repeat purchases and subscriptions (especially for digital content products, such as music, video, games, news, etc.). I call it FairPay, and it uses feedback on PWYW price setting by each buyer to develop a reputation for fairness, and making future FairPay PWYW offers to that buyer contingent on having a good reputation, thus incentivizing buyers to pay fairly. Details are at teleshuttle.com/FairPay. Charity is certainly a promising enhancement as well, and both can be used together.

Shawn Hesketh

Fueled by a recent family crisis, I took the advice in this article to heart and changed the entire business model of my online learning website to PWYW. Thanks for the inspiration! Details at: WP101.com

Dimbodoyle

Whats interesting is whether this would sustain? after a while people might just pay less after the inital shock! I walk past chuggers (charity muggers) all the time

bowlweevils

What is far more obvious than the increase in purchases due to charity is that this was a product that almost no one wanted, with a ridiculous price.

People know that the cost of a photo with a digital camera taken by a bored teenager getting minimal pay is negligible. Charging $12.95 is price-gouging, an attempt to prey on a captive audience. This is why a tiny half a percent of potential customers bought it (and those who did were probably doing it to satisfy the demands of a child or a date, not because they wanted it).

Charging $12.95 with half going to charity is still obvious price-gouging, and dragging a charity into your scummy racket is not going to bump up sales very much. I suspect if you asked people who didn't buy what they thought of a charity that was willing to be associated with this scheme, they would not be very positive.

Now with the pay what you want, we get something closer to the actual value of the service - 7% of the original price. But even here, only 8.4% bought the photo. This is a product that no one really wants. Do you think that a supermarket would keep a product on its shelves that had that kind of purchase rate?

So add a charity. Now sales rates are down by almost 50% - people are still feeling that the park is using the charity to scam them. Nevertheless, some people still decide to donate to the charity.

It is absurd to call people "free-loaders" in this situation. This was a situation where people were rightfully rejecting predatory pricing. In another article, the $0.92 was stated to be almost as low as the operating cost. This means that the asking price was at least 1100% more than operating costs.

Let's propose a different situation: the park provides transparent pricing. It states what it costs to provide the photo, it states what it thinks is a reasonable profit, and it says that any amount over the cost + profit will go to the charity. Now how many people will buy it? How much will they pay? Probably more than in any of the other scenarios.

No one is a "free-loader" for refusing to pay an exorbitant rate for an item they don't want. The park could ask people whether they wanted a photo before it was taken. But they didn't because they know taking the photo without permission is a mechanism for increasing pressure to buy. Asking first would eliminate the supposed "free-loader" issue, since no photos would be taken of people who didn't want them.

Everyone knows that amusement parks take every opportunity that they can to profit from their captive audience, just like movie theaters, airlines, restaurants on toll highways, etc. People accept these prices because they have to, not because they think they are being treated fairly.

These are not purely rational consumers. They are semi-captives with emotional children and romantic partners expecting them to buy them souvenirs of their excursion. When the children grow up and the romance has matured, there will be no more buying of photos by these people. Just new customers in the same unpleasant situation.

Perhaps in some situations there is a genuine free-loader problem. But a price-gouging amusement park attempting to nudge you to buy something you never asked them to provide is not such a situation. The rational consumer would do everything they could to avoid buying anything at all unneeded at the park because they know that the prices are intentionally unfair. And that is why you can't bring food into the park or leave it to go get food.

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