I’m Not Going to Pay a Lot for This Cereal

We’ve written repeatedly about pay-as-you-wish commerce or honor-system payment schemes, ranging from music to bagels to coffee.

A reader named Seth sent in an interesting new example, all the more so because it shows how one firm is using the pay-as-you-wish mechanism as an experiment to find a good price for a new product:

I am writing to tell you about a relatively high-end supermarket in the Redbird neighborhood of Miami. I went in yesterday and noticed they had a new homemade cereal (a lot of their products are made “in house”) that looked appealing.

There was no price listed, but I didn’t notice this at the time; I just picked it up and put it in my basket. When I got to the checkout, I was asked “How much do you want to pay for this?”

I was confused and the cashier explained that they are trying to find out how much they should charge for the new cereal and as a test they wanted to see how much their customers are willing to pay. I asked what the average was in his experience and he said around \$2.00, so I gave \$3.00.

Aside from the pricing experiment itself, I found Seth’s response to be particularly interesting. It reads like a sequence from a behavioral economics case study.

First, he asked “what the average was” — an attempt to create a mental anchor from which to adjust his own offer. (I once wrote about my own failed attempt to do so.) And then, once he’s told the average amount, he increases his offer by 50 percent!

Would he have done the same if the clerk said the average was \$6.00? Would he have done the same if, instead of a live clerk, there was just a sign with the stated average contribution?

I am guessing the answer to this last question is no — unless, of course, the sign had a picture of some eyes taped to it.

Magnus Falk

I'm surprised noone has asked the obvious question: Was the clerk a girl, and if so, was she cute?

Of course Seth is more likely to want to appear magnanimous and pay 50% more if the clerk is cute!

Johan

If the 3\$ payed by Seth truely were 50% above the average, it would most likely not be included in the average to steralize the sample. If the clerk was wrong with his caluclation of the average, which I find very likely, than his 3\$ was as much of a guess as anything could be.

Greg

"In terms of digital income, we've made more money out of this record than out of all the other Radiohead albums put together, forever - in terms of anything on the Net."
http://www.wired.com/entertainment/music/magazine/16-01/ff_yorke

AliKhattak

I had a similar experience with a Tourist Guide in Berlin. The company basically offered 'free' tours on foot of the city (mostly along the historic lines) and the tourists were free to choose whether to pay or not at the end of the tour.

The anglophonic group got an Australian ex-journalist pursuing a PhD in Political science at the local university who gave one of the most comprehensive and well structured commentaries I've heard. At the end of the 3 hour tour, almost everyone handed over five to twenty euros. I must admit that the collection was done by the guide himself and he had mentioned average amounts the tour guide company had received on previous tours in a 'by the way' manner during the tour.

frankenduf

Seth clearly doesn't know how to bargain

Ben

Rick - The answer clearly is not "nothing". If I were to pay nothing, then it would not be produced or sold, and I would not have food to eat. Self interest must extend a little farther into the future than right now.

Ken

@#14 That's not necessarily true! I would feel awful to "take advantage" of the seller's generosity by paying below cost. An extra \$3 would buy me peace of mind.

@#2, Shame on you for not understanding the advantages of a free market. As a hint, let me ask you why would anyone travel out to a desert island just to sell at a dollar or two above cost? When supply is suppressed by price restrictions, quantity of supply fails to match demand. See also: rent control.

Ben K

On the behavior side of things what did Seth gain (since Stephen obviously does not perchase cereal)with his dollar bump up is that a whole number effect why not 2.05 was she cute a dollar might get me noticed, reminded him of his mother and she may give him approval. If he was trying to avoid guilt or a sense of loss he would have just not bought or paid the normal price assuming the paying the average is not a loss. Why don't marketers just have a standard 10% markup over cost kind of like architects(if it fails increase every thing by 10% and try again)so if it is selling out too fast increase by 10% again until it sells at the rate you want? Say 5% of volume not sold at the end of the day.

Julien Couvreur

The author of "Predictably Irrational" ran some studies which showed that people are very vulnerable to arbitrary anchors, especially for things for which we don't have a good comparison.

In other words, Seth would have probably paid more than \$3 if the cashier had set an anchor at \$6.
But a higher anchor would have been possible if those cereals where unique enough that Seth's memory of other cereal prices could not have easily been used as a comparison ;-)

Boldizar

Has anyone studied pay-as-you-wish systems across cultures? Americans are generally labeled selfish, but I'd say 95% of people who go to the Met pay their "recommended price." I'm Slovak, and few self-respecting Slovaks would willingly pay the full price to any institution, but nearly all would pay full price at one of those Norwegians street-side strawberry stalls with just an honour box for money. Because that's owned by an individual.

As anyone who's tried to "queue" for a train in China will tell you, this sort of behaviour is completely learned. I'd be fascinated to know how different cultures "measure up."

www.boldizar.com

Alice

Who's to say that the supermarket isn't carrying out it's own experiment?

Most people would ask about the average price before making their own offer. Some cashiers might be saying the average is \$2, some may say \$4, some may say \$8.

It'd be a great way to see when people stop going above the average and by what amount....

steve

Forget reasonable, reasonable doesn't matter, in fact mark up doesn't matter; as long as the ammount charged is more than the cost with a reasonable margin. But to maximise profits, they should charge the max ammount consumers are willing to pay for something, therefore it seems fair to ask what consumers are willing to pay.

What I struggle with in this case though is that they are really asking "what is the minimum ammount you will pay for this?". Consumers often have a range of prices and may be embarrased to say they got something free, therefore they offer the minimum ammount, rather than the maximum ammount they would pay as would be the data points in teh demand curve.

di

For a museum, a free or "pay what you wish" day may allow those with limited resources to bring their kids to a cultural experience they otherwise might not be able to afford--a community educational service of sorts.

It also encourages people to bring small children who may only have a short attention span to try it out.

A group of museums in my city have one free Tuesday a month. Lots of parents and preschoolers, many of whom get memberships as the kids get older.

Kevin in McLean

Who gets to decide what's "reasonable?" That's one of the most loaded words in the English language, especially when it's used with a hot button issue like profit.

I would guess that he came up with a price first and then asked to see if his price was reasonable. If the average was significantly higher, he probably would have raised his but not as much. . . and vice versa had the average been lower.

dude

1) would Seth increased his offer by 50% if told the average price was \$6.00

who knows? sounds like Seth was acting irrationally by paying 50% above the \$2.00 price.

I bet he is the envy of a auto salesperson's dream..."Hey Seth, the average price I sell this car for is \$20,000. So, tell me how much do you want to pay?"

Seth responds, "I'll give ya \$30,000. Is that ok???"

Jane

I wouldn't have put the cereal in my cart if I didn't know the price. I just don't like these "pay what you think it's worth" experiments.

What's cereal really worth... a couple cups of flour, oats, sugar, salt etc, labor and packaging. Most of the price is marketing.

Garrett

An interesting example of 'honor system' payments that I've experienced lately... campground firewood. On two different occasions I bought firewood from vendors using the 'honor system' payment plan, they post a price and leave a box (anchored firmly in place) to drop the cash. I think in both cases \$5 for a bundle of 5-6 split log pieces. I paid the \$5 and was happy to have the convenience of all hours access to firewood.

Most recently, I was in a campsite which had a chain-link fence around the firewood and a sign "Sorry, the honor system hasn't worked. Go into town for firewood after hours."

What I wonder is whether these vendors really had drastically different experiences/returns with the honor system or just different expectations.

kurisutein

I don't think he would have done the same if the clerk said \$6 since cereal usually doesn't cost that much. \$2 is actually on the low end, and I would say \$3 is the average and "fair" amount, that I usually pay for cereal.

I think he would have done the same if there was a sign.

check this out:
A few months ago I auctioned off my paintings. Paintings that I had painted myself. I'm not a well known artist and this was the first time I had done something like this and I only sent out the announcement to friends.

No one could see what others bid and the highest bid won. I set the starting bid at 1 cent.

What I noticed was that all of my really close friends did not bid but everyone else did. (highest bid for a painting was \$75)

Whats up with that?

Rick

I find it surprising that the question asked was "How much do you want to pay for this?" Clearly the answer to this question is "Nothing", right? Now, if the question was "How much would you expect to pay for this?" or "What you think is a reasonable price?, then I would have an answer of a few bucks.

Forget economics, this is fascinating psychologically that Seth is not answering the question he's been asked, but rather converted it in to one which actually made sense from the perspective of the questioner.