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Why Pay-What-You-Want Pricing May Not Be as Crazy as it Seems

Category: Blog & News

Imagine you are about to check out from your overnight stay at a hotel in Paris. You get to the counter and the receptionist smiles and asks “how much would you like to pay?”

Say what? A hotel where you can choose to pay what you want?

It’s not a dream. It’s happening right now in Paris where a group of hotels allow you to book one of their rooms and pay only what you think the stay was worth.

Is this risky business? Surely people will jump at the opportunity to short change the hotel, paying much less that the standard rate. After all, we all love getting stuff for free.

Well it’s probably not as risky for the hotel as it first appears. Availability is limited to a set number of rooms and the interest the promotion has generated will probably outweigh any margin they lose on the standard rate. But more importantly, behavioural economics suggests that most guests will probably pay a fair amount anyway.


Pay what you want pricing (PWYW)

As the name suggests, pay what you want (PWYW) pricing leaves it up to the customer to pay what they think the product/service is worth and has been trialled in a number of ways.

  • Musicians like Radiohead and Amanda Palmer have released music that can be accessed for free but where payment is requested. Fans being fans, both have ended up making more money than they would have through traditional retail releases.
  • Food outlets like Panera in the US provide access to food for those in need but end up being subsidised by those who can pay and who tend to pay more because they support the cause
  • Museums like The Met in New York often request a donation upon entry
  • The Freakonomics podcasters have requested that loyal listeners make a contribution to keep the show available for ‘free’

PWYW pricing gambles on the promise that people will pay for something they find valuable. But when customers can get something they need for free, why on earth would they pay?


Social pressure

Whether we think so or not, we are influenced by what we see others do and by what we think they think about us. Social norms mean we are more comfortable following what the normal thing to do is. This has an influence on PWYW in two ways;

1. We behave differently when we are being watched

A 2011 study by Ernest-Jones, Nettle & Bateson (PDF here) tested whether being watched changed behaviour. In this case people contributed more to the honesty box when it was decorated with a picture of eyes rather than a picture of flowers. The subconscious sense of being watched was enough to change behaviour.

This suggests that a PWYW scheme can improve the likelihood of fair payment if the customer has to look the service provider in the eye when deciding how to settle their account.

2. We do what others do

In the absence of explicit pricing, if we see other people paying a certain amount for a service we will be more likely to follow suit. No one likes looking cheap.

For a PWYW scheme it would therefore be helpful to provide “most people pay...” messages to help the customer come to a decision.


Frame of reference

Ask Australians what one of the biggest fears of visiting the US is and it’s likely to be tipping. Coming from a country where tips are relatively rare, Australians seek guidance as to what an adequate tip entails. 10%, doubling the tax, $1 per drink...these are the social rules that outsiders cling to so they don’t insult the service provider.

In the case of the Parisian hotels, customers will at least be able to judge the price relative to what a normal room rate would be, so they are not without a price ‘anchor’ against which they can assess value. This is important because it will mean they are most likely to pay nearer the anchor price than they would have without any frame of reference.

In situations where no frame of reference is available however, it is likely that your customers will feel anxious about determining a fair price. This can result in under payment, over payment or worst of all, avoidance.

I am probably not alone in admitting that I steer clear of situations where I have to pay what I want because the anxiety about how I should value the service outweighs the experience. Pricing is something I would prefer not to burn mental and emotional energy on and I’d rather deal with a business whose pricing is unequivocal.

And this is the risk that perhaps is least expected by PWYW businesses. Avoidance due to anxiety. How many people might you be turning off because they are too anxious about determining fair payment?


PWYW safe guards for your business

If you trial a PWYW system here are some suggested safe guards to make sure people pay;

  • Provide a reference for what is recommended - it will reduce anxiety amongst your customers and increase the likelihood they will want to participate
  • Consider using social cues like “most people pay...” to guide their decision
  • Assume that you will attract some freeloaders, but that they will probably be offset by people who pay above your standard rate
  • Customers who wish to return to your business will be more likely to pay so it may work best for businesses with repeat clientele
  • Linking your offer to a charitable cause will encourage generosity (more on a study that discovered that here)
  • Make the payment process personal. Eyeball the customer rather than allowing them to pay without any human interaction

PWYW pricing is a novel approach that depends very much on your ability to persuade customers to behave in a way you would prefer. It's not for the faint of heart but can set you aside from others in your market.

P.S. To discuss pricing psychology or how behavioural techniques can improve the effectiveness of your business get in touch for an obligation-free discussion. You have nothing to lose.

This article also appeared in Smartcompany.