April 28, 2012
In a new study published in the Proceedings of the National Academy of Sciences (PNAS) entitled "Pay-what -you-want (PWYW), identity, and self-signaling in markets" researchers found that "identity and self-image" concerns are potentially important factors in the market place when customers arrive at pricing decisions.
PWYW is used by many museums in New York, notably the Metropolitan Museum. The PNAS study finds that companies can actual be profitable under a PWYW model by relying almost entirely on social preferences as consumers choose to pay the appropriate price as it is "the right thing to do" and helps maintain their "self-image". It is those "fairness considerations" that guide tipping behavior with consumers looking to avoid violating social norms. With "inexperienced" customers, as in say Germans in the US who do not know tipping standards, knowing what others do helps in arriving at the right price.
From three field experiments in a theme park, a tour boat and a restaurant the researchers found that companies can have a sustainable and profitable model using PWYW by relying on social preferences. Among the findings, given the opportunity to name the price of a product, fewer consumers choose to buy it than when the price is fixed and low with a no-buy decision driven largely by customers' identity and self-image concerns since they feel bad when they pay less than the “appropriate” price.
The foregoing was found to be true in a real restaurant with PWYW located in Vienna, Austria where the payments over a two year period matched what would have been the outcome were there to have been a fixed price set by the owners. Curiously, they also found that customers who paid anonymously tended to disgorge more from their wallet than when they were "signalled" (by being able to see what others were paying) as that "crowds out the value of self-signalling". The authors attribute that to the fact that when customers "like a company they may pay a price that feels right rather than simply the lowest price possible".
PWYW is not new and has been tried in a variety of industries beyond restaurants and does seem to have some caveats beyond the obvious fear of an overload of free riders which studies such as the above disprove. That includes the need for a low marginal cost (when the additional unit's production or service cost is small) and an understanding that it applies principally to individual and not group or corporate sales. It is also sub-optimal when demand is close to or greater than supply.
As a pricing model it has had particular success in the online world as in the case of the band Radiohead (also cited in the study) which in 2007 offered a download of its album for free only to find that they had collected several hundred thousands from sales despite many free downloads. Hotels to this day offer variations of it with most with an explicit quid-pro-quo as with the Hotel Grand Pacific in Victoria, Canada which requires PWYW customers to fill out a survey so that the hotel can determine what customers are looking as they roll-out a special "Urban Room" floor. Others hostelries to have experimented with PWYW include the Popcorn hotel in Switzerland, the Ibis in Singapore and the Hotel Abruzzi in Rome. But so far, there haven't been too many for profit enterprises signing on despite the apparent revenue enhancement opportunities. Perhaps the acronym PowWOW (from Pay What yOu Want) instead of the awkward initials PWYW will get people talking.