Why you should care

With alternative market platforms taking off, “pay what you want” is not wholly academic.

Imagine dollar signs gone from the Applebee’s menu or the Starbucks’ board. No price tags on designer dresses. Imagine paying the phone company, the dentist or the bus driver whatever your conscience and wallet allowed.

Utopian? Perhaps. But around the world, a smattering of businesses are experimenting with a pricing model that would turn Western consumerism on the head: Let the customer pay what he wants.

“Take what you need, leave your fair share,” read the signs at five outposts of Panera Bread. Radiohead famously let buyers choose how much to pay for its 2007 album, In Rainbows, and in 2012, punk rocker Amanda Palmer rose to mainstream fame by exhorting artists to trust their audiences: Ask and ye shall receive, she said at a TED Talk. A few theaters let audience members pay what they want for tickets, as do some savvy shoe shiners and executive coaches.

The restaurant closed up shop after four months. Too many diners apparently wished to eat for free.

While “pay what you want” is unlikely to go mainstream anytime soon, it’s getting much more attention these days. One reason is the rise of alternative market channels: eBay and other online marketplaces have given consumers more information about prices and more say in price determinations. Some sellers adopt PWYW to signal an anti-corporate, pro-community ethos. The phenomenon fascinates academics, who’ve been running trials to figure out when, where and why PWYW might work.

“It’s not so much about the changing economy as the changing culture,” says Ayelet Gneezy, a professor at UC San Diego’s Rady School of Management and an expert on PWYW. Among the changes: a rise in social entrepreneurship, the sharing economy, a mistrust of corporations and an unprecedented ability of consumers to price shop. “The social responsibility trend, let’s call it.”

Like every other pricing strategy, it’s a gambit — except this one is a bet on human nature. Oftentimes PWYW flops. Last December, the earnest Chinese restaurateur behind Five Loaves and Two Fish, in Fuzhou, closed up shop after four months. Too many diners apparently wished to eat for free, and the restaurant had been losing about $10,000 per month.

And in 2013, the ride-sharing platform Sidecar abandoned its “donations” model, which gave riders a recommended price, as well as the option to pay more or less than that, all the way to zero. Riders who paid nothing were very rare, “way less than 1 percent,” says CEO and co-founder Sunil Paul. But these, ahem, free riders were the bane of drivers’ existence. Drivers smarted when a passenger paid them nothing, says Paul: “It topped their list of complaints.”

Man taking money out of wallet at restaurant

Source Getty

… services and interactions that evoke a payer’s charity, guilt or vanity.

PWYW is definitely a hit with academics — thanks partly to the rise of behavioral economics, says Robert Zeithammer, a professor at UCLA’s Anderson School of Management. Behavioral economists study actual behavior, and don’t assume people are constantly recalculating their own best financial interest. They caution PWYW works only under specific circumstances. Whatever you sell, goods or services, must have a low cost structure — which means each one costs little extra to produce. One pricing consultant suggests services and interactions that evoke a payer’s charity, guilt or vanity. Few are asshole enough to look someone in the eye and pay her nothing for, say, shining our shoes.

Zeithammer’s work sheds light on the reasons why at least some consumers pay when they don’t have to. In an experiment that tested PWYW in a computer simulation, buyers and sellers were anonymous, sitting at different computers and sometimes in different rooms, though the buyers knew that a real person was there. It was set up to make paying nothing easy, says Zeithammer. “It wasn’t like going to dine in a neighborhood restaurant and looking them in the eye and giving them zero.”

But they found that only one in five buyers paid zero. About 65 percent paid above the seller’s cost, giving the seller a profit, and the rest paid somewhere above zero but below cost.

The study also found that we play nicer early on, when we know we’ll be repeat customers. When they played five rounds, for instance, buyers tended to pay more in the first three rounds, and then became greedier. Reputation matters, says Zeithammer, if you still have to buy. The lesson: “People will keep the seller in business, but if there’s an end point to the service — say, a seller at a weekend fair or a holiday resort — toward the end, people will become less nice.”

The theory revolves around “self-signaling” — how you tell yourself what kind of person you are.

Also vexing: figuring what to pay. People tend to dislike that burden, because they have to confront how generous or selfish they are. That’s why, in one of Gneezy’s studies, people opted for a fixed, low price rather than having to decide.

Gneezy has seen the problem live. At an event in Tel Aviv with her husband, the couple sold books PWYW outside. Books cost about 80 shekels in Israel, she says, and most of the people who bought paid 50 shekels. All at once, a woman charged up to the table, slapped down five shekels, grabbed a book and ran off. “I think she was upset that I put her in that position,” says Gneezy.

The theory revolves around “self-signaling” — how you tell yourself what kind of person you are. “If there is any threat to my ability to self-signal that I’m a nice person,” like having to determine a fair price, “I probably won’t buy at all,” says Gneezy.

In other words, if you go out to buy a gallon of milk, you’re probably not looking for a moral conundrum.

This OZY encore was originally published July 23, 2014.

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