Name Your Price. Really.

 
 
Is it worthwhile for retailers to experiment with "pay what you want" pricing? Shelle Santana unmasks the surprising logic behind how much customers will pay, and when. One finding: sellers can dramatically change what some buyers are willing to pay.
 
 
by Michael Blanding

Years ago, when I was a student in New York (and like many students, perpetually broke), I would often go to the Metropolitan Museum of Art for entertainment. The museum had a policy that visitors could pay whatever they wanted, so for as little as a penny, I could spend the afternoon wandering the galleries.

But there was a catch: I couldn't just put my money in a slot; I had to stand in line with everyone else, many of whom were paying the suggested donation of $15. Sometimes, I boldly told the clerk I would pay 5 cents. Other times, however, I paid $1, $5, or even $15.

“If you can nudge people into a more communal relationship, they have a higher willingness to pay”

According to Shelle M. Santana, an assistant professor in the Marketing unit at Harvard Business School, I may have been influenced by communal norms.

Santana has closely studied "pay-what-you-wish" (PWYW) pricing—a phenomenon that admittedly makes no rational economic sense. When presented an opportunity for a freebie, "classical economic theory says you should pay nothing," says Santana. "Why buy something when you can get it for free?"

And yet, research has shown that when people are able to set their own prices, almost everyone pays something—and sometimes well over the suggested price. "I was really interested in that broad variance and who pays a little and who pays a lot and under what circumstances," says Santana.

Sellers Can Influence What Buyers Pay

In a series of experiments—including a field experiment where she posed with students as snack bar employees—Santana found that by subtly manipulating the environment, sellers can dramatically change what some buyers are willing to pay.

Retailers are experimenting with allowing customers to write
their own price. ©iStock.com/Rawpixel Ltd

Examples of PWYW pricing abound in all industries: Radiohead's self-released its In Rainbows album with "name your price" downloads; the Dallas Theater Center holds "Pay-What-You-Can" nights to draw in new patrons; Boston Pedicab operates under an "open fare" system; and Panera Bread runs four nonprofit "Panera Cares" locations with PWYW pricing.

Oftentimes, businesses use the strategy as a promotion to get new customers, sometimes with a social tie-in for extra incentive—for example, a restaurant will run a PWYW promotion and donate part of the proceeds to a charity to feed the hungry.

Not all PWYW strategies are created equal, however. Santana investigated data from a pet adoption agency in New York, finding that on average patrons paid close to the $150 adoption fee, with some paying as much as $260. For a PWYW premiere of the documentary Freakonomics, however, by far the most typical ticket price paid was a penny. "It got me thinking, why are these situations so different," says Santana.

Borrowing from social psychology literature, she surmised it might have something to do with how the way customers think about the transaction influences their behavior.

"Exchange norms" are defined by reciprocity—I get this, you get that. It's the kind of interaction we have with business associates or when we are buying a house or a car. On the other hand, "communal norms" are based on relationships between people, and don't necessarily need to be balanced evenly. It's the kind of interaction we have when taking a friend out to dinner. "If you give me a dollar, I may not feel the need to give you back the dollar immediately," says Santana.

Are Consumers Pro-social Or Pro-self?

Furthermore, Santana borrowed a concept from strategic games and socially interdependent decision-making that divides people based on their "social value orientation" (SVO). When faced with a decision on how to allocate resources between themselves and others, some people are "pro-social," meaning they are likely to value more equal distributions of resources, while others are "pro-self," meaning they try and maximize value for themselves. She wondered, when faced with a PWYW situation, would people with pro-social ideals pay more?

Santana explores these questions in a new working paper, Because We're Partners: How Social Values and Relationship Norms Influence Consumer Payments in Pay-What-You-Want Contexts, written with Vicki G. Morwitz, the Harvey Golub Professor of Business Leadership and Professor of Marketing at New York University's Stern School of Business.

For their first experiment, Santana and Morwitz asked participants how much money they would pay for a cookie sold at a local café. Those who elected to purchase a cookie paid anywhere from zero to $2, with an average price of 89 cents.

At the same time, participants completed a questionnaire to determine their SVO. Sure enough, those with a pro-social orientation forked over an average of $1.22 for the cookie, while those with a pro-self orientation paid an average of 62 cents. "Just as we expected, people who were pro-self paid less, and people who were pro-social paid more," says Santana.

She and Morwitz then took the findings a step further, to see if they could change the results by changing the nature of the transaction. In a new experiment, they offered a scenario in which a local coffee shop was promoting a PWYW cup of coffee. The researchers presented the deal in two ways: In the first description, they stressed that the shop offered great coffee with great value and efficient service, setting up an exchange norm. In the second, they emphasized that the servers always offered a warm greeting, took an active personal interest in the lives of their customers, and recommended new coffees based on their preferences, signaling a communal norm.

When asked what they would pay for the coffee, pro-social participants increased the amount they paid under the second condition but only by 13 percent, $2.45 to $2.79. But significantly, pro-self participants paid almost a third more, $1.98 to $2.63, raising their price to almost as much as the pro-social group.

"In the context of a communal norm, their motivations shifted," says Santana. In other words, just by changing the context of the situation, they were able to suppress pro-self's ordinarily selfish behavior and make them temporarily more generous.

Into The Field

It's one thing to test this theoretically, it's another to put it into practice in the real world. For their last experiment, Santana and Morwitz went into the field, designing a PWYW promotion for a pack of gum at an NYU student café. Again, they presented two scenarios. In the first, they set up a sign with a pair of hands shaking that read, "Special Promotion: It's Your Turn to Set the Price Today!" In the second, they put up a new sign, which was rotated throughout the day, with a group of hands in a circle that read, "Because We're Partners, It's Your Turn to Set the Price Today!"

Over the course of 11 days of sales, that subtle change in messaging clearly changed what students were willing to pay—increasing the price 21 percent from an average of 57 cents to an average of 69 cents. For companies interested in doing a PWYW promotion, Santana says that finding implies they can mitigate the risk, and achieve better results, just by shifting the context to create a communal norm.

"Sellers have more power to shift these norms than they might think they do," she says. "If you can nudge people into a more communal relationship, they have a higher willingness to pay."

Furthermore, while past research has shown that customers are willing to pay more when a portion of the proceeds is donated to charity, Santana and Morwitz's research shows that such an expensive tie-in may not be necessary.

"It doesn't have to be costly to move to these communal norms," says Santana. "What we showed is there are simple, subtle, low-cost ways to get people to pay a little more."

About the Author

Michael Blanding is a writer based in Brookline, Massachusetts

Post A Comment

    • AJ
    • Director, Leadership Consultant
    Interesting findings, not entirely surprising. The last line, though, had me wondering about the purpose of this research. If it is ultimately to find low cost ways to get people to pay more, how is that not a pro-self mindset in itself? The article seems to be about evoking others' pro-social orientation for pro-self value.
    • Tahir Qazi
    • CEO, iQuasar
    Great observation that by shifting to a communal norm, sellers can tap into the "pro-social" roots of even the pro-self consumers. It will be interesting to find out how this will work when offering a service, instead of a product. We will set up a small experiment and analyze results.
    • Wiley Pickett
    • President, Blackstone Risk Management, LLC
    I was very interested in this article because in a nearby town, Dearborn, MI, there is a "Panera Cares" outlet that hires and trains unemployed people as workers. They have a suggested price for the things you buy and you can pay more or less than that amount. The objective of the outlet is plainly stated. which, in my view, provides an extremely strong social incentive to pay equal to or greater than the price (which I do). {Note: I am not affiliated in any way with Panera.]
    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited
    So interesting to know such sellers exist and that they leave it to the buyers to pay whatever they wish to.
    My experience is only around religious places where the services are free with option, but no compulsion, for the beneficiaries to offer any monetary contribution in lieu of what they received.
    It looks like a philanthropy though it is not exactly that.
    A reverse of this is when you pay to help the needy without expectation of any reward not even a 'thank you'.
    • Tom Morkes
    • CEO, Insurgent Publishing
    Love that this pricing technique is getting some exposure. Generosity is powerful stuff. The Rule of Reciprocity (if you can call it that), makes it difficult to receive without wanting to give SOMETHING in return.

    I've experimented with books, consulting, and larger programs, raising over $41,000 for an in person business incubator program a couple years ago.

    I still sell about 95% of my products as PWYW, including my book on the subject: "The Complete Guide to Pay What You Want Pricing" by Tom Morkes :D
    • Alexandria King-Close
    • Harvard T. H. Chan School of Public Health
    Though this article shows the power of subtle changes to affect people's tendencies, the section here on 'pro-social' and 'pro-self' frames those two identifiers largely as either-or.

    I'd wager that consumers fluctuate more widely between being more pro-social or more pro-self, depending on the situation - time, place, circumstance, etc.

    I wonder if any research has looked into the degree to which people tend to stay in one camp, or fluctuate between them?
    • Jonathan Donado
    • Founder, eWebsiteBroker
    Outstanding article. I enjoyed the findings. I wonder what it is the effect in which there is only one buyer, then the Seller may not be able to influence the price outcome. If you let the Buyer decide the price, then it is up to (and only) the Buyer.
    Thanks.
    Jonathan
    eWebsiteBroker.com