FT.com
By Tim Harford
As a business strategy, ‘pay what you want’ translates as
slim pickings. As a topic in psychology, it remains deliciously rich
It wasn’t so long ago that “pay what you want” was being
touted as the hot new way to make money in an economy transformed both by the
banking crisis and by digital commerce. In 2007, Radiohead released In
Rainbows, inviting fans to download the album and pay what they chose. In 2010,
Panera, a chain of bakery-cafés in the US launched Panera Cares, cafés with a
social mission and PWYW pricing.
Peak PWYW may have come with a widely shared talk by the
musician Amanda Palmer at this year’s TED conference. Palmer sprang to
prominence after raising more than a million dollars on the crowdfunding
website Kickstarter – and her TED talk hinted at how she’d achieved it. (In
some ways, easy: just ask for money and make it straightforward for people to
respond. In other ways, hard: Palmer’s intense and longstanding relationship
with her fans sometimes verges on performance art itself.)
Where do we stand now with PWYW? Since textbook economic
agents would choose to pay nothing, the idea defies economic assumptions. But
those assumptions may be reasserting themselves. Panera introduced a PWYW meal
in all its cafés in March, but axed the experiment in July. Some other
high-profile PWYW restaurants have closed after a year or two, or switched to
conventional pricing.
As for Radiohead’s In Rainbows, creative projects are
released with voluntary pricing every day. But it has been a long time since I
remember any such project hitting the headlines. And, since some of the PWYW
appeal was surely publicity, the model was always reliant to some extent on
novelty.
Tyler Cowen, a professor of economics at George Mason
University in Virginia (also a thoughtful food critic and author of An
Economist Gets Lunch) predicted in 2010 that the model would rarely work for
restaurants. The novelty would wear off, and repeat customers might find the
burden of choosing the right price discomfiting. The margin for error is small:
musicians such as Radiohead or Palmer can carry free riders because the cost of
distributing digital music is low. Restaurants will swiftly be wiped out if
many customers pay little or nothing.
Experiments by marketing professors Ju-Young Kim, Martin
Natter and Martin Spann found that PWYW schemes tended to reduce profits,
particularly if marginal costs were significant – as with restaurant meals.
To make PWYW stick, perhaps retailers need to be a little
more crafty. Ayelet Gneezy, Uri Gneezy, Leif D Nelson and Amber Brown, also
marketing academics, experimented with different pricing schemes for people
invited to buy photographs of themselves on a rollercoaster.
Some people were told that half the money they paid would go
to a charity for sick children. Some were invited to pay whatever they wished.
But it was those two options in combination that worked wonders: if patrons
were invited to pay what they pleased, and told that half their payment would
go to charity, revenues and profits surged.
But this scheme seems to rely on a cognitive illusion. It
could equally be described thus: “we’ll grab half of your charitable donation
and give you this photo in exchange; the more you give to the charity, the more
we’ll take.” Not so appealing.
And there is a twist. Gneezy et al found that, while profits
jumped, fewer people actually bought photos if they were told half the money
was going to charity. Were the people who would have paid a little and taken
the photograph afraid of looking cheap once the charity was mentioned? Perhaps
they found it easier to walk away.
As a business strategy, “pay what you want” usually
translates as slim pickings. As a topic in psychology, it remains deliciously
rich.
Tim Harford’s ‘The Undercover Economist Strikes Back: How to
Run – or Ruin – An Economy’, is published by Little, Brown this month. Its
price will be determined by the booksellers
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