Is Pay-What-You-Wish Pricing Wishful Thinking?

In my last year of high school, I took 4 art courses (I was expected to go to art school, and I would have, had I not had such a disdain for computers – oh, the irony). I must admit that most of those classroom hours were actually spent outside the classroom in the smoke pit, wandering around downtown, or on my couch. Attendance was not taken, and assignments were not even looked at.

At the end of each semester, we were asked to write down what we were working on and assign ourselves a letter grade and percentage. That’s right, we graded ourselves (a dangerous task to delegate to bratty teenagers).

Some businesses have taken the same approach to pricing, allowing customers to “pay what they want” – even if that means pay nothing. “Pay what you wish” / “name your own price” (PWYW / NYOP) worked for Radiohead and appears to be working for some restaurants, but it’s a different ballgame online. The anonymity of the Internet removes the social pressure one feels after being served personally by a human being. It’s one thing to download Radiohead’s In Rainbows for $0.00, another to show up week after week for a legit dine-and-dash.

Nevertheless, there are some notable examples of PWYW / NYOP in ecommerce:

The Radiohead Strategy

Radiohead made waves in 2007 when it bypassed traditional distribution channels and offered its In Rainbows album for whatever fans wanted to pay. According to Comscore, In Rainbows was downloaded 1.8 million times, generating $2.26 per album (60% opting for the free download). Without costs of production, inventory, shipping or cuts to the middleman, Radiohead claims it actually made more money off the “pay what you want” release than any other album.

Today, pay what you want is still alive and kicking in the music industry. Mavaru.com is an mp3 marketplace for indie bands where every album is NYOP.

World of Goo

Indie game developers 2D Boy celebrated the one-year anniversary of its World of Goo game with a one-week NYOP sale, and blogged the results of the campaign here.

In one week, the San Francisco duo drummed up 57,000 new downloads with an average purchase price of $2.03. Even after 13% in PayPal fees – that’s not a bad chunk of change. A nice side effect was sales of other games Steam and WiiWare rose 40% and 9%, respectively due to the social media publicity and enthusiasm. Fascinatingly, some commenters on the blog post confessed they downloaded the game not because they wanted to play it, but to support the NYOP pricing model!

GapMyPrice.com

The Gap’s foray into PWYW offered customers a one-day opportunity to name their price for certain styles of khaki pants on the www.gapmyprice.com microsite. Lowball offers were returned with slightly higher prices by the Gap, which the customer had one chance to accept or decline.

In reality, this is not choosing one’s own price at all, rather an e-haggling approach to a daily deal sale. While it sounds so novel (and perhaps, insane) Gap’s approach is not new. eBay sellers have had the option to list a suggested price and invite customers to “make an offer,” which may be rejected by the seller for years.

To be a true pay-what-you-wish promo, the end user must be able to pay absolutely nothing or really next-to-nothing. This makes it very difficult to run such a promotion with physical goods that carry production, inventory and opportunity cost of giving away product that could be sold to others. Digital goods that have unlimited distribution potential are better suited to these promotions.

Name Your Own Price Tips

If you’re plucky enough to try this pricing strategy, keep the following in mind:

1. Determine whether your product is right for NYOP

In Smart Pricing, Z. John Zhang outlines the 5 key qualities shared by any successful “pay as you wish” campaign:

1. A product with low marginal cost
2. A fair-minded customer
3. A product that can be sold credibly at a wide range of prices
4. A strong relationship between buyer and seller
5. A very competitive marketplace.

Chapter One of Smart Pricing titled “Pay as You Wish Pricing” is available for download for the rock bottom price of $1.79, or you can buy the full book at Amazon for $23.99. How’s that for innovative content pricing models?

2. Consider a time-limited promotion

Certainly for retail products, pay what you want is not a sustainable promotion. It might work to drum up buzz, but like daily deals, the offer should be restricted to an hour or a day.

Digital goods companies can afford a bit more leeway in timing. World of Goo extended its promo for an extra week due to its success, and Humanoid Sound Systems appears to have adopted its NYOP strategy permanently, and may extend the model to other products.

3. Consider a suggested price

The suggested price has a powerful psychological influence on the price a customer is willing to pay – it can work for you or against you.

Setting a fair suggested price gives the customer a true sense of value. It won’t prevent low offers, but it will keep more buyers in your ballpark. Some may even offer more (Radiohead fans have claimed to have paid over $30 for the album).

If you set it suggested price too low, e.g. $5 for software that retails for $39, customers will assume that is not only a fair price and all you’re really expecting. BinaryNow used NYOP pricing for its Kingsoft Office and Internet Security applications, with a minimum price of $2 ($1 per app). 87% of customers paid the minimum, and 5% paid $5 for the bundle. Overall, the average customer paid $3.32.

However, a truly open field that includes $0 as an option makes a person think more about what they personally value the item/service as. It’s a good idea to split test a reference price against no reference price.

4. Don’t counter-offer

Coming back with counter-offers is merely e-bargaining. It reveals you have a reserve price, and instead of offering a sale, customers must “guess” how low you’ll go. At worst, customers may feel they are being gamed into pay more than a sale price.

Ashampoo Software (that’s not a typo) gets downright insulting when you sink too low below “regular price.” The snarky dialog box reads a condescending “This offer is much too low. Please enter a reasonable price.” Users don’t have time to play guessing game for what is a reasonable offer only to be ridiculed by a script.

5. Add some social pressure

In Maravu’s checkout, your offer is pasted on a graphic that shows its relative cheapness. While it’s an arbitrary scale, when it’s positioned to the low end, the customer may reconsider the price paid. If the scale is based on what others have paid, this may also make the person feel “cheap” and up their offer.

Above-average paying customers will pat themselves on the back, but they could also lower their offer. It would be a good idea to suppress the graph when the price is above average.

6. Include a survey

In checkout, Maravu asks what fans would be willing to pay for upcoming band concerts.

2D Boy asked surveyed customers with common reasons why they may have chosen their given amount. From survey data, they surmised that “few people chose their price based on the perceived value of the game. How much the person feels they can afford seems to play a much larger role in the decision than how much the game is worth.” Whether you decide to offer NYOP temporarily or forever, knowing (or at least, making an educated guess) how customers value the product and the price they would be willing to pay for it can help you price and/or craft your value proposition in the future.

7. Test copy

Simply running a name your own price promotion is not enough. How you rationalize why you’re offering it (and what your product is worth) is important.

For example:

Scanned Synth Pro 2 is now available for purchase worldwide (including the US)! Just click on the “Buy Now” link below and you will be guided through the secure payment process. We use the popular Paypal service for handling all payments. You do not have to have a Paypal account, a credit card will work fine too!

Scanned Synth Pro 2 is currently retailing at the excellent price of whatever you want to pay. I do urge you to have a good think about how much it is worth to you. If this works out well, then we will be selling all Humanoid Sound Systems software according to this pricing model. Obviously we cannot afford to do that if people pay the bare minimum. Where else could you buy professional-quality software like this for less than 99 Dollars?

Humanoid may wish to test a few different write-ups that stress the actual features and value of the product, rather than urging the customer to think how much it’s worth. Often, the customer really has no idea of the true value of the software, or a fair price.

And don’t forget to include your value proposition!

8. Know what to measure / how to interpret results

BinaryNow eroded margins dramatically, but managed to increase overall sales by 62% in one month for a product that carries little to no cost of sale (apart from PayPal fees). It also may have cut into the market share of competitors while generating the opportunity for re-marketing other software products, additional features/upgrades or mobile applications to these new users. It’s important to measure short and long term benefits, as well as the effect on sales of sister products.

The publicity generated also has value. All those links and tweets help SEO, which in turn can help drive organic traffic and sales on an ongoing basis.

While I don’t expect Name Your Own Price to become the new “free shipping” promotion, it’s an interesting model that’s worth consideration for certain businesses – if done smartly.

Looking for help with your ecommerce strategy and site optimization? The Elastic Path research and consulting division is available to enterprises selling digital goods and services. For more information, visit us at http://elasticpath.com/ecommerce-consulting/ or contact us at consulting@elasticpath.com.

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7 Responses to “Is Pay-What-You-Wish Pricing Wishful Thinking?”

  1. Great article, love the style and flow, one of your best in terms of style.

    Love the content to, thanks for illuminating this little-talked-about subject. We release tons of free white paper content on our industry that has more value than free, but we push moving the free line to show our customer base that we care about them.

    Adding a suggested price or possibly experimenting with a pay-what-you-want strategy are great tools to test out.

    As always, thanks!

  2. Joe Rozsa says:

    Very interesting article. I’ve been kicking around trying something like this with some of my sites for a while, and may just do so now. I’m surprised that so many sellers are in favor of this sort of model, and that it actually works out in most / many cases.

    Of course, many people are going to select the free option, but if it is a digital product, then giving away some of them really does’t hurt in terms of COGS, and the lost revenue could even be considered an advertising expense after the positive feedback that comes from it. Heck, you can’t even consider it lost revenue. Most people that offer zero weren’t ever going to pay you anyway. So if anything, it is a donation in order to create awareness of your product, not lost revenue.

  3. Very interesting article. While I’m uncomfortable with the mere idea of “pay what you wish” you’ve presented it in a compelling way. BTW, I think I paid $20 for In Rainbows.

  4. This is a very nice review of many practical aspects of PWYW.

    Taking a big step further, the radically new FairPay pricing process works over a series of transactions to motivate much more consistently fair results:

    1. Selectively offer to let the buyer set any price he considers fair after the sale (Fair Pay What You Want, post-sale).

    2. Let the seller (or a collective of sellers) track that price and use that information to determine whether to make further offers of that kind to that buyer in the future.

    This gives the buyer an incentive to price fairly, to get continuing (and more attractive) offers, and gives the seller the tools to manage his pricing risk.

    The FairPay process generates a cooperative and adaptive series of pricing actions, each based on feedback on how fairly the buyer sets his prices. …A participative, dynamic, differentiated pricing process that evolves toward increasing fairness.

    Background on Fairpay and its roots in PWYW is at http://teleshuttle.com/FairPay/.

    (A blog post pointing to some research on the behavioral econimics of PWYW is at http://www.fairpayzone.com/2010/10/pay-what-you-want-still-crazy-after-all.html.)

    • Interesting idea…I would be hesitant to use it because it in a way invites cognitive dissonance about pricing after the sale…if the person is asked if they think it was a fair price, if they purchased it was at least an acceptable price…if they are asked to think whether it was a fair price it might cast doubts in their mind, even prompt comparison shopping after the fact. Could this lead to cancelled orders or loss of repeat orders if they felt it was overcharged?

      I also think consumers really don’t know what a fair price is. Often consumers are ignorant of the overhead of a business and feel “at cost” or “slightly above cost” is the most “fair.” For example, I’ve heard many people outraged that a retail store would mark up an item 100% from wholesale price. Well, it should be marked up even higher than that if the store wanted to replenish inventory. If a retailer does not enjoy bulk pricing that a mega-store can receive, it cannot price the same, even if customers believe they could shave 10-25% off the price. Merchants should not take their cues from customer feedback, they should base pricing on their business and price testing of unobserved customers. It also depends on the product, some products/services are far more price elastic and profitability can be maximized with less customers at higher prices, or a higher price may attract the same number or customers – or even more customers.

      • Linda, thanks for your comments on FairPay.

        On the cognitive dissonance point, I suggest that FP prices generally be set by the buyer after they have used the product, so there should be no cognitive dissonance (or buyer remorse). Most PWYW deals set price before use, so they do invite dissonance, and tend to underprice because buyers discount for the risk of disappointment. After sale, the perceived value is what it is. (Even simple PWYW should work much better when set post-sale.)

        On your broader points about consumer understanding of pricing factors, yes, there are many issues to consider here. But I suggest applying FairPay primarily to products with low marginal cost, expecially digital products/services. In such cases this becomes more like the Radiohead example, but with a continuing relationship across a series of products/transactions. Here cost is less of an issue, and the real question is whether the seller can engage a dialog and build a relationship that the buyer values and is willing to compensate “fairly” for. (If you do not compete on price, no one can underprice you.)

        Some of these issues are especially clear in the dilemma of pricing for apps. Free apps “sell” best, $0.99 apps do well, and higher prices sell much fewer units. How do you maximize revenue? My post on “Cutting the Gordian Knot of Price Setting” addresses a Long Tail of Price Sensitivity, and how FairPay enables sellers to optimize across wide range of buyers. (http://www.fairpayzone.com/2011/03/cutting-gordian-knot-of-price-setting.html.)

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