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PWYW: A new pricing strategy – is it really new?

, October 20, 2015, 0 Comments

pay-what-you-want-pwyw-marketexpress-inPay what you want – PWYW – as it is called is a pricing strategy. It is a pricing model that lets customers decide how much they want to pay, including zero, for a particular good or service received. This technique is being labelled as ‘new’. But is it really new or is it the case of old wine in a new bottle?

This pricing strategy – PWYW – was brought into limelight by a British Rock band called Radiohead when they released their seventh album ‘In Rainbows’ in October 2007. Instead of selling through a music company, as was the norm, they allowed the music to be downloaded from their website for a price to be chosen (including zero) by the customer themselves.

This strategy was so different that it caught everyone by surprise and created a lot of ado. Radiohead received wide publicity and the strategy yielded huge returns. One, the number of downloads was higher and two, they didn’t have to pay anything to a music company. The incredible attention that Radiohead received prompted others to think of PWYW. Amongst many, Moshpit Tragedy Records of Canada, Wheatus of US, and Taiwan music platform iNDIEVOX are few who adopted this pricing strategy.

Music companies are the not the only ones to adopt PWYW nor were they the first to do so. This strategy has long existed in every economy, such as the money paid to the street performers or to a charity. The strategy continues to exist even today, as can be seen when one visits the flowers (other perishable items) markets at the end of the day, the sellers sell at any price the customers may prefer. Indian Railway’s policy of upgradation of reservation at the time of chart preparation is another kind of PWYW; otherwise the vacant seats are a loss. PWYW is not limited to the perishable items only. Even some restaurants have adopted this strategy in their model.

Inspired by Swami Shantananda Saraswati, ‘Annalakshmi’ vegetarian restaurant in Kuala Lumpur started in 1984, has adopted this pricing strategy to this day. Today they have spread wide over the globe and developed into an international chain. The chain operates on the principle of trust in humanity and the patrons are free to pay what they think is appropriate.

Thomas Nagle, the author of the book Strategy and Tactics of Pricing, asserts that pricing of a product or a service should be the first decision that a business should make and the price should reflect its value. Yet, giving buyers the freedom to choose what they want to pay can be successful in some industries and in some situations. It can be successful as it arouses curiosity among the people and eliminates their risk of payment. This pricing strategy is effective for penetrating into the market and can also be adopted for introducing a new brand.

With this pricing strategy coming into prominence with the release of ‘In Rainbows’, some researchers have tried to find out its effectiveness and how it may be applied to wider offerings and in varied industries. One such experiment conducted in a large amusement park by selling roller coaster photos to the visitors showed though more people bought them under PWYW, the average price paid by them was very low resulting in no increase in profits. However, when the pricing was coupled with a charitable cause, the average price paid increased remarkably.

This resulted in both a substantial profit to the company and a significant amount for charity. The researchers also found that this pricing strategy may deter some from purchasing because, “individuals feel bad when they pay less than the ‘appropriate’ price, causing them to pass the opportunity to purchase the product altogether.[1] They conclude, “Our results provide strong support for the PWYW mechanism in different market contexts, by suggesting that this profitability can often be sustained in the long run”.

In an another research by Maket.al say, “However, in light of the extant literature that suggests a role for non-economic factors, we wished to assess whether PWYW can be a profitable strategy, even when consumers are not motivated by altruism or their innate sense of fair play”[2].

In US Panera Bread Cafe runs a bakery chain in five different locations; their pricing policy is take-what-you-want, leave-your-fair-share. Their optimism stems from their hope that those who do pay might cover those who don’t. Three years later, it has proved a success, with a reported 60% paying full price, 20% paying less or nothing, and 20% paying more.

The task of setting a correct price today for one’s offering is just as important, if not more, as it has always been. Even to this day, customers are a little skeptical about paying for goods and services online. PWYW may promote greater confidence and surely this strategy is at no risk with the products whose marginal cost is zero. Though this strategy is not new, the digital environment is a fertile ground to experiment. Only time will tell the suitability of this type of pricing mechanism.

[1] http://www.pnas.org/content/109/19/7236.full – accessed on 30/09/2015

[2] Mak, Vincent, Rami Zwick, and Akshay R. Rao. “Pay what you want” as a profitable pricing strategy: Theory and experimental evidence.” Proceedings of the Management Science and Operations Seminar Series. 2010.