Pay-What-You-Want Pricing: Sustainable Model or Useless Gimmick?
Have you ever considered letting your customers decide how much they’ll pay for your products or services?
A few U.S. businesses have experimented with pay-what-you-want pricing strategies and achieved mixed results. Under this scheme, customers opt to pay a company’s suggested price, or more or less, or nothing at all. It's a little different from the sliding-scale fee model in that customers choose what to pay, rather than the business assigning a price based on the customer's income or other circumstances.
But does it work? Is PWYW a smart, attention-grabbing strategy that generates profits or just a silly gimmick? Let’s take a look at a few examples and best practices.
Back in 2010, Panera Bread began using the PWYW model at its five Panera Cares locations, allowing customers to pay whatever they choose for every item on the menu. These nonprofit “community cafes” bring in about 70 percent of a traditional Panera store’s revenue, which the company uses to raise hunger awareness and implement job-training programs for needy populations. The Panera Cares locations feed every person who walks through the doors, even those who can't afford to pay at all.
In early 2013, Panera tried a variation of the Panera Cares model, offering turkey chili with a PWYW price plan at 48 Panera Bread locations in the St. Louis area. A suggested price of $5.89 gave customers a benchmark for determining how much they’d pay. Despite a flurry of initial interest, Panera dropped the campaign about four months later after providing about 15,000 turkey chili meals. Panera plans to re-introduce the campaign, which is also designed to raise hunger awareness and provide meals to those who can't afford to pay, in early 2014 as a seasonal offering.
Java Street Cafe introduced a more successful PWYW model in the midst of the recession in 2009. The restaurant allowed customers to pay whatever they thought was a fair price for their order. Customers continued to pay amounts similar to what the business had charged before the campaign. The cafe was already established in the community, and its loyal customers wanted to see it stick around.
While Java Street Cafe actually saw a 13 percent increase in sales after the move, it was forced to close its doors later that year — but because of previous financial circumstances, not because PWYW didn't work. In a press release, owner Sam Lippert says PWYW is a successful business model, and even mentions plans to re-open a new location after clearing up some financial obligations.
PWYW pricing can be implemented in other industries, too. The band Radiohead offered its In Rainbows album using a PWYW model in 2007. Overall, about 38 percent of fans chose to pay, while the rest opted to download it free. The average price paid in the U.S. was $8.05, or $3.23 when factoring in the free downloads. The effort did capture attention, however. In just 24 days, the album had 2.3 million downloads, 400,000 via BitTorrent on the first day.
In the same year, Paste Magazine ran a one-year subscription as PWYW for a two-week period. The magazine’s effort resulted in 30,000 subscribers, which typically would have required 2 million pieces of direct mail.
Not Just for Big Business
PWYW pricing is fairly commonplace in the small-business world. If you’ve ever noticed a donation button on a blog or within a mobile app, you’re witnessing PWYW in action.
Tons of apps deploy this strategy, relying on loyal fans and users to throw a few bucks toward continued development. But it's not a good stand-alone strategy to fund your business. "This model does not have a significant impact on profits and should be used more as a marketing tool than anything else," says David Bakke of Money Crashers.
If you set some parameters, PWYW can work. Carol Tice of MakeaLivingWriting.com uses PWYW for freelance writing courses, setting a minimum price as well as a higher suggested price. "We usually have several people pay the higher suggested price ($79 on the recent $47 sale we did), and quite a few will pay more. We had many $50 and $55 purchases on PWYW over the $47 asking price, for instance," Tice explains. These sales are offered on a limited-time basis at deep discounts. Her PWYW courses often outsell those offered at a set higher price point, so she actually makes more money using this model.
How to Do PWYW Right
The experiments above suggest a few PWYW best practices.
- Use it with low-overhead products. Good examples are instructional videos, tutorials, or Carol Tice's writing courses. "If profits are your ultimate goal, you should create and offer paid complements to the base product offered," says Bakke, who notes that PWYW is better used as a short-term marketing strategy than a long-term revenue model. "Anyone offering a high end product or service that has a significant amount of built-in costs should not attempt a PWYW strategy – the risks are simply too high."
- Be consistent. When customers walk into a Panera Cares cafe, they know they can choose how much they pay for anything on the menu — it’s consistent. In contrast, the turkey chili was the one item on the menu that didn’t follow the same protocol, likely confusing many customers.
- Charity motivates. Panera uses “cause marketing” to encourage customers to pay more, and it works. Studies show that customers are willing to pay higher prices [PDF] for brands tied to charities.
- Create urgency. Paste Magazine grabbed attention with its limited-time offer, encouraging subscribers to take advantage of the deal while it lasted. It paid for itself with the direct-mail costs the company saved.
- Suggest a price. Suggested prices tend to stick in the minds of consumers. "People don't like to feel like they're cheapskates, so they often pay a bit over the minimum," Tice explains.
Is PWYW an effective long-term pricing strategy? Panera makes it work with the Panera Cares cafes because the company's overall revenue is sufficient to balance out any losses, which often isn't the case for small businesses. But as these examples suggest, PWYW can be a useful short-term means of gaining traction and visibility — if you plan carefully and work to minimize potential losses.