Imagine what would happen if you allowed customers to decide how much they wanted to pay for your product or service?
At a time when discounts have become the norm and deal sites like Groupon and Living Social bombard customers with special pricing, some businesses have experimented with pay-what-you-want (PWYW) pricing strategies where customers opt to pay the suggested price, more, less or nothing at all. While some economists think PWYW is a marketing gimmick rather than a long-term pricing strategy, Alexander Chernev, professor of marketing at Northwestern University, says PWYW can be valuable for some companies if done right.
Let's look at some real-world examples of PWYW in action:
Panera Bread uses the pay-what-you-can model at its five Panera Cares locations, giving customers freedom to pay whatever they choose for every item on the menu. These nonprofit cafes were designed to both feed those in need and increase community awareness about poverty and hunger in the United States.
"We're encouraging our customers to understand the idea of shared responsibility and to do what they can within their means," says Kate Antonacci, director of societal impact initiatives. Cafes are equipped with cash registers allowing customers to pay with debit or credit, but payment is given anonymously. Panera offers suggested donation amounts based on prices in regular cafes.
On average, 60% leave the suggested amount. "In order for this to work you have to have people coming in who are able to contribute," says Antonacci. Although there are some months when the cafes don't bring in enough to cover operating costs, the goal is for them to become self-sufficient under the PWYW model.
What Panera does right:
- Suggested pricing provides guidance. Plus, these prices stick in the minds of customers, making them more likely to pay close to this amount.
- Provide a consistent experience. Panera Cares cafes look and feel like any other Panera cafe. "We knew we couldn't compromise the customer experience if we were to expect them to come in with regularity and continue to pay," says Antonacci.
- Leverage established relationships. Chernev says the PWYW strategy works for Panera because there is an established relationship between the company and the customer that can be leveraged. Four Panera Cares cafes were previously run as for-profit Panera cafes. "We had customer bases in these cities. They knew what our food cost and what they were accustomed to paying," says Antonacci.
Each year, business coach Jennifer Martin, owner of Zest Business Consulting, offers new clients the opportunity to pay what they want for a two-hour business strategy session.
"This offer allows people who aren't financially in a place to work with me a chance to consult with an expert, and a chance to pay for services based on the value they perceive they receive," she says. Martin says these clients are often happy to give her testimonials or offer referrals and 30% are converted into clients who pay regular rates after experiencing the value of her services.
What Zest does right:
Chernev says PWYW works best for companies with low marginal costs such as instructional videos or courses where it's important to gain more customers. "You can benefit because you can reach different types of customers. Some will pay nothing, but you might be able to gain customers that normally wouldn't purchase the [product or service]," says Chernev.
The customer support service company, Zugun, offered PWYW to existing clients during the Christmas holidays. They also added a charitable component, donating revenues to a suicide and homicide help center. CEO Scott Ostaffy says the promotion was a great success. "We didn't have a single case of a client opt not to pay," he says.
What Zugun did right:
Attaching the offer to a charity. The charitable component of Zugun's offer helped create a stronger partnership with existing clients. Ostaffy says many customers paid the regular price and some even offered to pay more to the charity.
Headsets.com tested the PWYW model last year by offering key products to customers who hadn't yet tried them. CEO Mike Faith says nearly all customers paid the full price on the invoice, with only 10% choosing to pay less. The company plans to roll out the PWYW model to their entire customer base later this year and Faith says it could become a long-term strategy. "Just as money-back guarantees were considered over-generous and dangerous when they were first introduced, they are almost a standard nowadays. There is no reason that trust-based pricing shouldn’t become a norm over the next decade," he says.
What Headsests.com did right:
Offer PWYW as a promotion. Chernev says while traditional discounting strategies can cheapen a product in the eyes of the customer, PWYW gives the company the ability to offer a lower price to familiarize new customers with a product in the hopes that some will become frequent customers, without the downside of discounting.
Adventure travel company Bonvoy Adventure Travel offers flex pricing on select domestic trips. The company provides transparent pricing and asks customers to choose a price for the trip anywhere between the asking price and the company's hard costs. CEO Sean Jackson says while most customers have chosen to pay somewhere in the middle, some have paid full price even when given the option to discount their trip.
What Bonvoy does right:
Set parameters. Giving customers free reign over pricing would likely cause Bonvoy Adventure to lose money on trips. Pricing guidance puts control in the customers’ hands without putting the company at risk.
[Image: Flickr user Quinn Dombrowski]