Pay What You Want – a Successful Business Strategy?

In the pay what you want pricing model, the buyer decides how much they want to pay for a product or service. The merchant does not charge a fixed price for their products or services. Each customer determines how much they feel the product or service is worth to them. They then pay the price they choose – or may even pay little or nothing at all.

Many businesses question whether this pricing model is even viable for retailers. When viewed from the perspective of classical economic theory, the pay what you want model can never be viable. These theories suggest that given a choice, the homo economicus will always prioritize their own monetary interests and pay as little as possible.

But the portrait of human behavior painted by classical economic theory has long been displaced within academic circles. Today, economists have finally accepted what has been common knowledge to the general public: human behavior cannot be reduced solely to economic self-interest. Rather, there are numerous social and cultural influences which influence the choices we make.

Pay what you want pricing models are already deeply established within certain sectors, such as street artists and charities. Increasingly, pay what you want pricing is also being used in the music industry and by restaurants.

Pay what you want experiments

To find out whether the pay what you want model could be applied in a broader context, a research team led by Professor Martin Spann, Klaus Schmidt and Robert Zeithammer of the Ludwig-Maximilians-Universität München conducted an experiment. The experiment compared pay what you want pricing to a conventional fixed pricing model. Buyers could determine the value of products themselves. Merchants, for their part, were free to decide whether they wanted to offer products, and the quality of the products they offered.

The researchers determined that social preferences played a major role in determining buyers’ willingness to pay for goods and services when a pay what you want model was used.

When making pay what you want purchases from small businesses or non-profit organizations in particular, buyers were largely motivated by altruism or strategic concerns and were more ready to pay fair prices. For example, consumers were exceptionally ready to voluntarily pay relatively high prices when they made purchases from local businesses in their own neighborhoods.

The experiment also showed that some buyers prefer conventional fixed pricing to pay what you want pricing. The researchers are of the opinion that the pay what you want model can work for small businesses and non-profits. Big businesses and businesses operating in highly-competitive markets, on the other hand, are not likely to successfully implement pay what you want pricing.

Another factor which is difficult to replicate in a research environment is that friendly salespeople are unlikely to fully exploit pay what you want pricing to their advantage. This is the case when, for example, a salesperson is particularly agreeable or does not want to appear greedy. Naturally this social factor only affects sales made in person and has little impact on online-only purchases.

Pay what you want in Switzerland

Pay what you want models have not yet established themselves in Switzerland. Some hotels and restaurants have experimented with this model, but results have been disappointing. Swiss consumers have consistently shown a preference for fixed list pricing. When allowed to choose the price they wanted to pay themselves, many consumers had difficulty determining how much they should pay for goods and services. Swiss consumers tend to avoid situations which leave a lot of room to personal interpretation, largely for fear of paying too little and coming across as stingy. This may result in consumers paying more for goods and services than they can actually afford to.

Can a pay what you want strategy actually work?

The results of research and experiments with PWYW models can be summarized like this:

• Due to social factors, consumers are ready to pay something for goods and services when PWYW models are used, but only if they feel they are getting a quality product.
• PWYW models can be implemented profitably, but primarily by small businesses and non-profit organizations.
• PWYW strategies are less likely to work for larger businesses.
• Personal contact between the merchant and consumer is decisive in determining the success of PWYW models. Due to social factors, personal contact with the seller increases the likeliness of the buyer paying a good price for a product or service.
• The absence of personal contact and social controls in online shopping reduces the likeliness of PWYW models being implemented successfully by online merchants.
• Many consumers show a preference for fixed list prices – even when given the option of paying what they want to.
• PWYW models can, in some cases, increase consumer confidence in the product or service being offered. If merchants are willing to let their customers determine the value of their services, the buyer is likely to assume that the quality of the products on offer is high.
• PWYW models can have a positive marketing effect in that short-term PWYW promotions are likely to generate press interest. Some musicians and restaurants have successfully implemented PWYW for marketing purposes. However, in markets where PWYW strategies are more widely used, their marketing impact is likely to be lower.
• The society, country and culture heavily influence the success of PWYW strategies. In Switzerland, for example, PWYW models have not yet achieved widespread adoption because consumers tend to be skeptical of new payment models.

More on this topic:
Small business money-saving tips
Guide to choosing the right business credit card
Swiss business account comparison
Swiss business loan comparison