How to "Earn what you want" when you ask customers to "Pay what you want"

Pay What You Want (PWYW) is a unique pricing strategy in which buyers are free to pay any price they want in exchange of a product/service, including zero. It is a participative pricing mechanism that delegates the whole price determination to the buyer. The seller simply offers one or more products under PWYW conditions, whereas the buyer decides on the price. After the buyer has set the price, the transaction automatically proceeds. Thus, the seller must accept the buyer’s price and cannot withdraw the product offer (Kim, 2009).

The reason behind giving buyers the freedom to choose their price is beneficial at times, because it eliminates the disadvantage of conventional pricing, one of the main fallout of which is buyer’s remorse. Buyer’s remorse is the sense of regret that the buyer experiences after making a purchase. As the payment in case of PWYW is totally voluntary, chances are very less that it would result in any buyer’s remorse. It might aid sellers in price identification when they enter into a new market. The information about the prices the buyers pay gives the potential buyers Willingness to Pay (WTP) which will provide sellers a potential price range.

Some modification in PWYW can also be seen as a form of imposing Libertarian paternalism. In this, we give the buyers freedom of selecting a price on their own. At the same time by giving them some anchors we could possibly influence their decision making which will direct them to optimal price.

What we did:

We conducted a survey which in which we asked participants how much they would be willing to pay in each of the following scenarios. We stated the scenario as follows, “You go to a local grocery store to buy a water bottle (800 ml). There you find an option of paying what you want, i.e. any price you feel justified, including price "0". In the above setting, kindly fill the responses of what would be your likely payment in each scenario.”

1. We first gathered their response in a plain vanilla case where they would be only shown a bottle and Pay what they wanted to.

2. In the next iteration, we mentioned the cost of production and recorded what price they would be willing to pay.

3. We then mentioned that 30% of their proceeds would be directed towards charity and recorded what price they would be willing to pay.

4. We then mentioned the MRP of the bottle and recorded what price they would be willing to pay.

5. We set a base price below which they aren’t allowed to pay and recorded what price they would be willing to pay.

6. We mentioned the average price paid by the previous customers and recorded what price they would be willing to pay.

We floated a Google form and circulated it among respondents mostly within the age group of 20-30, most of them students in graduate and undergraduate courses. Our objective was to initially see what price the buyer would pay without any conditions specified and also to see how the price would change for all the subsequent modifications.

Results

Plain Vanilla case:    Given that you like this bottle, with an option of Pay What You Want (PWYW), how much would you pay to buy this bottle?

Initially, without any anchor present, there were varying prices that buyers quoted. This was in expected lines as each consumer will act in his own accordance and in line with perceptions, which vary from person to person. It is however interesting to note that 3 persons have quoted the price 0, while the highest proportion of price quoted was Rs.100 by almost 20% of the respondents.

Display COP: It is displayed at the counter that the cost incurred for production is Rs.50 (Mention the payment that you would make)

Interestingly, cost of production did influence respondents to pay differential amount, but mean price decreased from Rs.74.25 to Rs.61.51. This meant that when the cost of production is lesser than the WTP, the PWYW price comes down significantly. Similar would be the case if the cost of production is more than the WTP of a buyer.

Proceeds to charity You are informed that the 30% of the payment is given to a charity (Mention the payment that you would make)

Charity does seem to act as a significant anchor in the current case. The average price has increased to Rs.76 and almost 20% of the population is willing to pay Rs.100. Interestingly, charity as a moderator has shown greatest increase in the mean price. This however goes without saying that the percentage of charity (30% in the current case) will also affect the price being paid.

Display MRP  It is displayed on the package that the MRP of the product is Rs.80 (Mention the payment that you would make)

MRP also acts as a significant anchor in current case. Almost 48% of the respondents were willing to pay the MRP. The average price however stayed at Rs.68.4. There could be several reasons for this, one of them is the fairness element. When people come to know about the MRP, they would feel that it would be fair to pay at least the MRP price. This is the reason why PWYW price anchored around the actual price even though the buyers had an option to pay any price they wanted.

Set a floor price  You are told that the minimum amount that needs to be paid is Rs.60 (Mention the payment that you would make)

Again the minimum price acts as a key anchor in determining PWYW price as almost 61% of the respondents have anchored their price at the minimum amount. Hence minimum amount setting could be a key influencer.

Display average price by previous customers :The average price paid by the previous customers is displayed at the counter i.e. Rs.65) (Mention the payment that you would make)

Surprisingly, average cost hasn’t been able to persuade the buyers to increase the price they pay for the product.

Conclusion

In this study exploring the participative payment mechanism of Pay What You Want, we could identify that pricing behavior alters in the presence of various factors like  cost of production, altruism, minimum amount to be paid, MRP and average payment by previous customers. While most of the factors could influence pricing positively as per the survey responses, a negative trend was observed in the scenario when respondents had  to base their pricing decision on the average payment by other customers. It is interesting to note that though majority of the respondents were willing to pay a higher price initially without any specific factors being mentioned, their willingness to pay reduced considerably once the different situations are introduced. The differing pricing strategies adopted by the respondents in the different scenarios indicate that the interactive effects of the different scenarios being considered could offer better explanations to the variation in the pricing responses of individuals in the context of PWYW mechanism. However this aspect is beyond the scope of this study.

Disclaimer: Even though our prof didn't quite approve of this idea (little pun intended?) much (indicated by the dismal scores we got), we did find this idea very interesting. 
Let us know what you think of this.

The other authors of this work are Remya T.Jacob & Abhishek.

Get into touch for more details.

@reddys10fpm@iimk.ac.in