Pay what you want


Pay what you want is a pricing strategy where buyers pay their desired amount for a given commodity, sometimes including zero. In some cases, a minimum price may be set, and/or a suggested price may be indicated as guidance for the buyer. The buyer can also select an amount higher than the standard price for the commodity. Many common uses of PWYW set the price prior to a purchase, but some defer price-setting until after the experience of consumption. PWYW is a buyer-centered form of participatory pricing, also referred to as co-pricing.

Motivation

Giving buyers the freedom to pay what they want can be very successful in some situations, because it eliminates many disadvantages of conventional pricing. Buyers are attracted by permission to pay whatever they want, for reasons that include eliminating fear of whether a product is worth a given set price and the related risk of disappointment. For sellers it obviates the challenging and sometimes costly task of setting the “right” price. For both, it changes an adversarial zero-sum conflict centered on price into a friendly win-win exchange centered on value and trust, and addresses the fact that value perceptions and price sensitivities can vary widely among buyers. While most uses of PWYW have been at the margins of the economy, or for special promotions, there are emerging efforts to expand its utility to broader and more regular use.
Further reasons for sellers implementing PWYW pricing includes price discrimination and market penetration. Price discrimination occurs as a result of buyers with higher valuations of the product choosing to pay a higher price. Thus, price discrimination could result in higher revenues for the seller if costs are sufficiently low. PWYW is also an effective tool for penetrating a new market, perhaps to introduce a new brand, as even consumers with a very low valuation can pay small amounts for the same product.
Other names include "pay what you wish", "pay what you like", "pay as you want", "pay what you feel", "pay as you wish", "pay as you like", "pay what you will", and "pay as you will". "Pay what you can" is sometimes used synonymously, but is often more oriented to charity or social uses, based more on ability to pay, while PWYW is often more broadly oriented to perceived value in combination with willingness and ability to pay.
PWYW strategy may be used for a brief period of time only- like a introductory offer or surprise element. It is often misused in today's scenario until rolled out in a controlled environment. It is more aligned for digital products where add-on features can be bundled to escape the spiral of losses. Select invites, regulated or limited entries and other checks in place can make it worth it.

History and commercial uses

PWYW has long existed on the margins of the economy, such as for tips and street performers, as well as charities, and has been gaining breadth of interest.
With the prominence of the Radiohead experiment, economics and business researchers began a flurry of studies, with particular attention to the behavioral economic aspects of PWYW—what motivates buyers to pay more than zero, and how can sellers structure the process to obtain desirable pricing levels? One early such study was the one done by Kim et al. in January 2009.
In a large-scale experiment conducted in a large amusement park, Ayelet Gneezy, Uri Gneezy, Leif D. Nelson, and Amber Brown tested the effectiveness of PWYW by selling roller coaster photos to park visitors. Their results show that, although many more people buy the photo when it is offered under PWYW, the average price paid is very low, resulting in no income increase to the firm. However, when PWYW was coupled with a charitable cause the average amount paid increased substantially, resulting in a significant income increase to the firm in addition to generating substantial charitable contribution. In a follow-up research paper, Gneezy and colleagues found that PWYW may deter some customers from purchasing. Their results show that this is because, "individuals feel bad when they pay less than the 'appropriate' price, causing them to pass on the opportunity to purchase the product altogether".
In a series of controlled laboratory experiments, Klaus M. Schmidt, Martin Spann and Robert Zeithammer show that outcome-based social preferences and strategic considerations to keep the seller in the market can explain why and how much buyers pay voluntarily to a PWYW seller. They find that PWYW can be viable on a monopolistic market, but is less successful as a competitive strategy because it does not drive traditional posted-price sellers out of the market. Instead, the existence of a posted-price competitor reduces buyers' payments and prevents the PWYW seller from fully penetrating the market. When given the choice, most sellers opt for setting a posted price rather than a PWYW pricing strategy.
Another PWYW experiment looked at determinants for the price chosen by consumers of the application iProduct, which provided tutorials and lessons for potential application developers on the App Store. The application was offered as free with in-app purchases, including a gratuity mechanism that allowed users to pay/donate what they wanted for the projects included in the app. The study tested the significance of four determinants in deciding the PWYW price paid by consumers: fairness, loyalty to the seller, price consciousness, and usage. The study found that price consciousness negatively influenced the price paid, while usage and loyalty positively influenced the price paid for the product. Fairness was found to have no significant effect.
Further research focused on the long-term perspective of pay what you want. A study conducted by researchers of the Ruhr-University of Bochum examines repeated transactions in a pay what you want environment. By using latent growth modeling they find that the average prices paid decrease significantly; yet the decrease of prices paid declines with every transactions. They further show, that customers' preference for fairness and price conscientiousness influence the steepness of the individual price curves.
A broad review of the literature on PWYW and related forms of voluntary payment by Natter and Kaufmann published in 2015, examines many relevant factors as they relate to voluntary pricing strategies, including product characteristics, consumer-related characteristics, situational variables, relational techniques, and reference prices. It also addresses economic and communicative success, and underlying market motives.

Enhanced forms

Efforts have been made to expand on the benefits of PWYW, to make it more useful and profitable to sellers, while maintaining its inherent appeal to buyers.
One simple enhancement is to shift the time of pricing from the usual practice of ex ante pricing, which is done at the initiation of a transaction and prior to the consumption experience, to ex post pricing, which defers pricing to a follow-up step after the consumption experience. A commercial use that emphasizes this feature is book-seller OpenBooks.com. An academic paper explains that post-pricing “separates the decision to buy from the decision how much to pay. Information asymmetries about the quality of the good are reduced during the act of consumption so that buyers are informed about the product’s quality when they decide how much to pay. As a consequence, risk-averse buyers who would otherwise refrain from purchasing under a fixed price mechanism” “can be attracted to purchase under a PWYW pricing ex post consumption mechanism. In this case, the pricing mechanism itself constitutes a signal. … can be a profitable strategy … to attract risk-averse buyers for realizing economies of scale in production.”
Another such enhancement is reflected in the Humble Indie Bundle, which has added a buyer-directed charity component to further increase buyer willingness to pay. This is similar to the research study noted above. Humble bundle also encourages buyers to "beat the average" by adding additional content for customers paying more than the current average purchase price.
A further enhancement is an expanded process, called FairPay, which shifts the scope from a single transaction view, to an ongoing relationship over a series of transactions. It builds on the benefits of ex post PWYW pricing and adds a feedback process for tracking of individual buyers' reputations for paying fairly. It then uses that fairness reputation data to let the seller determine what further offers to extend to that particular buyer. In that way it seeks to incentivize fair pricing by buyers, and to enable sellers to limit their risk on each transaction in accord with the buyer's reputation. The FairPay architecture and how it builds on modern pricing strategy has been outlined on the Harvard Business Review Blog. FairPay integrates PWYW into a feedback/control cycle that continuously seeks win-win dynamic value propositions that reflect the customer’s dynamic perceptions of value and real willingness to pay—this enables it to optimize co-creation of customer value over the course of a relationship.