Wouldn't It Be Nice to Really Pay What You Wish?

It is worth noting that several pricing schemes that often get lumped together are in fact quite different.

“If set up properly, PWYW can make it hard for all but the most callous customer to rip you off.”

There’s the honor-box system with a posted price list, like the one the Bagel Man used. In this scenario, there’s no one to collect the money but the price is essentially fixed, and the seller (the Bagel Man, or whomever) engages in a tradeoff: lower labor costs but higher risk of underpayment.

There’s the “freemium” model, with several iterations, in which someone offers a product or service or some portion thereof for free while finding an alternate means to monetize the enterprise. This is what Chris Anderson has written about.

And then there’s the sexiest, riskiest, funnest model: pay-what-you-wish. Think Radiohead. If you use a PWYW scheme too liberally, you are courting financial disaster. Just imagine if Tiffany & Co. held a PWYW day on all diamond jewelry. Personally, I love it when a salesman or contractor asks me “What do you want to pay?” for a certain good or service. My answer is always the same: “What I want to pay is zero. Does that work for you?”

So plainly there are limits to the viability of PWYW. But one factor that PWYW pricing calls into play is human conscience: if set up properly, PWYW can make it hard for all but the most callous customer to rip you off. Consider this story sent along by a reader named Jessica Donovan, about a nice-sounding guy in Essex, Vermont, who started a PWYW taxi service:

As an antidote to rigid financial conditions, Hagen got his cab driver’s license and insurance and officially opened for business last month with the Recession Ride Taxi. In his SUV, Hagen will take passengers anywhere they want to go in and around Essex — for whatever they want to pay.

There are no set prices for transportation, and Hagen also offers a cooler full of pay-what-you-want beverages to thirsty guests. He even offers special perks to frequent riders: he provides his passengers with hole punch cards, giving them a free ride after every six trips.

Of course, Hagen’s customers could easily get a free ride anyway; after all, he’s not forcing them to open their wallets. Since his payment policy is so flexible, he’s taken some strange trades: one customer gave him a $10 grocery card, and a local musician gave him his group’s CD. But in the weeks since the business has launched, Hagen hasn’t been short-changed once.

“I believed from the start that this would work,” he said. “I believed that people are going to be generous enough to make it worth my while, and I’m going to be generous enough to let them decide.”

I think most of us would have a hard time stiffing the taxi driver in a case like this. I wouldn’t even be surprised if his PWYW scheme generates so much goodwill that he makes more money than if he had a fixed price. When you match PWYW with a face-to-face, conscience-inducing contact, it’s not very risky. What I would like to know is what is the riskiest, easiest-to-rip-off PWYW scheme you’ve heard of, and how did it work out?


Ken Arromdee

I don't get it. My reaction would be that although paying nothing leaves my pocket full, it's not really in my interest to pay nothing, since I want the service to be able to make a profit and continue operating. In other words, I would want to pay what is basically a market price. (Ignoring a few extraneous factors.)

I know nothing about running a taxi service and certainly haven't looked at his books, so the only way I can figure out what the market price is is to have him charge one, which he's refusing to do.

(And even if he gives a "standard" price but leaves me free to refuse it, that doesn't help. The market forces that affect a normal price don't affect this "standard" price.)

Jesse

Even if the taxi ended up losing a bit of possible money, it might still be worth it for the improved interactions with customers. I imagine a lot of people are pleasantly surprised by his pricing, or at least have less cause for complaint.

Give me a choice of a variable up-or-down 10% in exchange for consistently happier interactions, and I'd gladly take it as long as it meets my needs.

The risk of posting a default price is possibly losing some of that goodwill. Perhaps having a default ready if asked would help.

Sammy

Blogs are another example of PWYW. Almost all blogs are completely free and open to whoever navigates to the site. Still, most of them have some way of donating to the author. A blog I frequently read has a box labeled "beveled guilt" which links to his paypal donation account. Unlike the taxi example, a blog is usually something someone loves doing, and would do anyway whether he was making money off of it or not. I don't think many people make a full living off of their blog, but it can supplement other income from a real job, or writing related to the subject of the blog.

Tony

If this really worked then socialism would work. Human behavior is such that as others found out what each other paid, the price would keep dropping. The system depends on people not knowing what others are paying.

The only reason people pay reasonable amounts in these limited examples is because most other equivalent service providers have a known price.

Jeremy

Pay as you wish is ideal only in scenarios with ultra low marginal cost. Music and software downloads are a prime example.The cost of recording Radiohead's albumn is sunk. anything recieved for a copy is profit.

Toby

The taxi guy in Essex is brilliant. He's using the job he created for networking as well as $$.

G

I think many people fail to consider the long term consequences of under paying in a PWYW transaction. In the short term I can maximize my benefit by paying $0 for a movie or song thereby saving my available money to buy other things.

However in the long term, the artist or movie studio will go out of business if too many people under pay. By underpaying I am depriving that provider of a profit that he needs to realize if he is going to continue to produce what I want. I will be depriving myself of the benefit of future products.

I could assume that someone else will over pay to make up for my under payment and in some cases that may be true but I suspect that people in general don't look at the "whole cost" of their choice when they decide to under pay in a PWYW transaction.

Pat

The key element appears to be social tension. If you are facing a 1:1 payment conversation with the taxi driver, it's hard not to pay an amount you think it's fair. It's just too ackward to feel like you are directly ripping somebody off, right in front of them. But if it's a coffee shop with a "money box" in the corner, the direct social tension is lessened, making it easier to underpay.

Jeff

Bad idea.

As a consumer, I want to know the price so that I can make an informed decision between multiple vendors. We can even do away with tipping as well. If you want to make my life easier, set the price, post it and I will decide to buy or not. Published prices are what markets are built on. If you want to participate in markets then publish your price, or I will go to the other guy who did publish his.

M.B.

Could have saved the taxpayer billions of dollors if PWYW had been used instead of "cash for clunkers".

moz

I've been running a tray of stickers (ONE LESS CAR, WE ARE TRAFFIC, MORE BIKE LANES etc) and a donation tin at monthly bikes rides for going on ten years now. It's face to face which helps, and surplus goes to help run the bike ride so it's not a pure donate-for-sticker environment, but it's also obvious that the cost of running the ride is occasional photocopying, web hosting and some of my time.

I think people still over-estimate the cost of actual stickers. As with so many small, low-value items the store cost is about 95% overhead and the cost of the physical "product" is close to zero. So people know what a bumper sticker is worth and pay accordingly in most cases.

My usual problem is excessively generous people who give me silly amounts ($10 or $20 notes) and won't take change. Often the whole tray cost less than what one person tries to donate. They generally argue that it's easier to just take some stickers from me and run than find one retail or wait for change. And yes, I do argue, so in that sense I have a suggested donation.

The extreme is when I'm at unrelated events and have the stickers handy, and someone who knows me asks for one. Often surrounding people will want them too so I also profit from people for whom the ride itself is not of interest.

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GianCMS

Personally, I hate when someone asks me what i want to pay. Obviously I would like to pay nothing, as most people would; logically. I feel that this policy is some sort of guilt trip to make you pay more than the service/good is actually worth. Thats what I have ended up doing on some occasions. Despite my previously stated opinion i think this taxi PWYW idea is a refreshing idea and it is nice because it shows that even in the world we live in today, there are people that have a good will and that will not try to "steal" for lack of a better word, despite its legality in this case. I wonder though, would this work in any city or any country or does the general mind set and customs and economic situation of a certain place or person come into play?

OlliM

to #27:

Unless the amount you pay somehow affects the amount other people pay (blog post?), you are correct to "assume that someone else will over pay to make up for my under payment". The other people either will or won't pay for it, and your 10$ will be worth exactly that, ie. have virtually no consequence on the movie studio making more movies.

This is kind of a prisoners dilemma: to each of us individually it makes sense to pay nothing, but by cooperating and paying we can all have higher utility.

Charmaine

PWYW scheme works because it plays on people's conscience by making sure they are REMINDED of it. Afterall, the payment scheme is really atypical. It forces the consumer to think about morality, even though it may be the last of his concerns in a fixed-priced business transaction. I am sure that after a while when the novelty wears off (either the scheme becomes too commonplace, or the same guy is asked to offer his own price too regularly), the buyer will start behaving normally and retain as much surplus for himself as possible, probably paying such that the marginal cost of embarrassment just equals the price, or just enough so that the provision of the good continues (the seller doesn't selling to him).

Another possibility I can think of is that there is some kind of a self-selection bias, i.e., only people who especially has "excessive goodwill" to display (altruistic ones) end up as customers. However, I can't complete this line of argument by coming up with a reason why greedy and malevolent ones would stay away. Similarly, as opposed to a one-price system where both generous and stingy customers pay the same price, this PWYW system may for some reason allow the generosity displayed by the good types to outweigh the shortchanging by the bad types. The pool of customers might remain the same, or expand in both directions since it is possible that both generous and stingy types are attracted with the change in payment scheme.

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DJ

Free water cups at fast food restaurants where you can fill it with soda with basically no consequnces.

Nathan

I'm a caddie at a ritzy country club. We work for tips only, and our wages are entirely at the mercy of our clientele. Thing is, there is a huge social stigma about under-tipping, and we are tell club officials if we get stiffed or under-tipped. Suffice to say, everyone gives fair tips. There's an example of a pwyw that works.
Street musicians and smelly dudes who hold the door open at Dunkin Donuts... not so much.

Richard

There are two restaurants in Melbourne, Victoria called "Lentil as Anything". This is their philosophy:

"Lentil as Anything is a unique vegetarian restaurant that is run as a not-for-profit community organisation. It is largely staffed by volunteers. Our Philosophy is that the customer decides what they want to pay for the food and drinks they've had, they decide what it's worth and give as they feel"

Really nice food, funky atmosphere, and a box on the counter that you can put whatever you like in, or even pretend to put something in to avoid embarrassment.

Ronbo

"Pay What You Want" is a misnomer, which is why you get the rejoinder "I'd like to pay nothing." More accurate to say "Pay What Is Fair". Since you obviously found some utility in the product or service, the fair price isn't zero. It brings in issues of (perceived) cost, reasonable profit, and comparable prices you've paid in the past.
The overwhelming majority of customers are not buying their first cup of coffee or taking their first taxi ride: they are experienced consumers. They have some idea of what the price should be. And most people like being treated with respect, I've been loyal to businesses that perhaps weren't the very best at what they did, but they treated me well. "PWIF" creates customer goodwill and I think likely increases customer retention.

Brett

I started using PWYW at my chinese martial arts studio. I wanted to remove money from factoring into the tuition I provided, either way. Students pay what it's worth to them.
Kung fu instruction is very personal, face-to-face and quite demanding - on the instructor and the student. It would be impossible to anonymously freeload and I doubt anyone would be able to stand in class knowing they were paying nothing while rent and sundries were being paid by the school.
So far: some students pay a great deal more than they were previously required to pay, and others pay whatever they can afford. But more importantly, I'm no longer chasing students for money - they willingly bring it to me.

Chris

PWYW also works in face-to-face settings, where the 'we're all in this together' mindset still has a shot. Going back to the PWYW taxi driver, people recognize the value they're getting and thus pay something close to the expected price. But #24 is correct as well - making more than a set / given / expected price requires imperfect information.