The New Pricing Model: “Name Your Price. Really!”
By Shlomo Maital
Harvard Business School’s Working Knowledge has an interesting piece by Michael Blanding, about research by marketing assistant professor Shelle M. Santana. Santana studied “pay what you wish” (PWYP) pricing.
PWYP? According to economists, it makes no sense. If you can pay, say, one cent, or nothing, why of course that’s what everybody will do.
Yet another case where economic theory misleads.
“Research shows,” notes Blanding, “that when people are able to set their own prices, almost everyone pays something – and sometimes well over the suggested price.” Santana says she was interested in the broad variance of prices people pay, under PWYP, and who pays a little, and who pays a lot, and when.
She found that by controlling the environment and context, she can influence what buyers are willing to pay.
Some examples of PWYP? Radiohead’s In Rainbows album has ‘name your price’ downloads. Dallas Theater Center has Pay What You Can nights to attract new patrons. Boston Pedicab has an ‘open fare’ system. Panera Bread has four nonprofit Panera locations with PWYP (I wrote a blog about one, some time ago).
In one experiment Santana and a colleague designed a PWYP promotion for a pack of gum at a student café at NYU. At one scenario, their sign showed a pair of hands shaking, and read “It’s Your Turn to Set the Price Today”. At a second, the sign showed a group of hands in a circle, that read: “Because We’re Partners, It’s Your Turn to Set the Price Today.”
Guess which sign got the highest price? Of course – the second sign got an average price of 69 cents, compared with 57 cents for the first. That’s a 21 per cent difference.
Why? Creating a communal norm… pro-group, rather than just pro-self. Moreover, customers are willing to pay more, often much more, when a portion of the proceeds is donated to charity – something many companies discovered long ago.
Harvard Business School Working Knowledge, 22 July 2015. “Research and Ideas”