Price tags—they’re a classic case of can’t live with 'em, can’t live without 'em.
Often, the only thing keeping us from designer handbags and sleek new phones is the number at the register. But without prices, our economy would grind to a halt, right? The answer might surprise you.
From restaurants to record labels, services are tossing out price tags and instead asking customers, “How much do you want to pay?” It’s a revolutionary new system that could either bring out the best in human nature—or bankrupt businesses. So what will it be?
Music for Free?
Back in 2007, Radiohead caused quite a stir when they announced that their seventh album wasn’t going to be immediately available in stores. Rather, In Rainbows could be downloaded online for whatever amount the customer felt the album was worth. Music industry bigwigs reeled at the idea, but they were in for a shock: In Rainbows topped the charts, selling 1.2 million copies in just the first day. Even though fans paid less than they would have for a full-priced album—the average customer paid between $2 and $8—Radiohead ended up selling a greater number of albums and bringing in more money than they did with previous album releases.
Since Radiohead, many other artists, such as Nine Inch Nails, have adopted the band’s marketing strategy, with varying degrees of success. Lesser-known singer Saul Williams released his album and was disappointed when a mere 18.3% of people paid to download it (the rest took it for free). But what Williams lost in sales revenue, he gained in publicity: “Saul's music is in more people's iPods than ever before,” says music producer Trent Reznor.
Pay-what-you-want (PWYW) has swept the globe as more industries give it a try. It's popular in the yoga community (which has always felt conflicted about charging high prices). Yoga to the People in New York, Washington and California is just one chain of studios using the novelty payment system successfully. The classes are crowded, but at least they are affordable.
But the most enthusiastic proponent of this honor code is by far the food industry. Step into the Lentil as Anything chain stores in Australia or One World Everybody Eats in Salt Lake City, and you’ll get delicious food with the option of placing money into a donation box. While there are customers who choose to walk away with free meals, many will actually pay extra. “Our customers were so enthusiastic that they were paying more than their fair share,” says Natalie Deewan, a co-owner of Der Wiener Deewan in Vienna, Austria. Even Panera Bread has opened a pay-what-you-want location near St. Louis, where customers also have the option of volunteering at the restaurant in exchange for soups and salads.
Ask for a Discount!
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PWYW and Feel-Good Profit
So how does the pay-what-you-want model actually lead to a profit? The idea plays on our sense of fairness, so we're willing to pay more when doing so makes us feel more altruistic. For example, charity is a key part of the St. Louis Panera Bread's success. The restaurant advertises itself as a non-profit organization, and excess revenues, as well as leftover food, are donated to the needy. Most customers recognize a good cause, forking over more than the retail price for their rations: One customer even paid $500 for a meal. All of this has allowed Panera to donate millions of dollars to charity and open two more similar stores in Dearborn, M.I. and Portland, O.R., with more on the way.
Science validates the PWYW effect. A study conducted by Ayelet Gneezy, a marketing professor at the University of California, San Diego, found that people are willing to pay the most when they can pay what they want and have some of their money go to charity. In the study, Gneezy offered amusement park patrons four options for paying for photos of themselves on the rides: PWYW, a flat rate, a flat rate with a portion going to charity and PWYW with a portion going to charity. The last option generated the most profits: the theme park stood to make $600,000 in profits if it continued the strategy, even after half of the proceeds were donated to charity.
Coming to a Cash Register Near You?
Will donation boxes soon replace cash registers? Probably not. We don't see Apple letting you set your price for a Macbook anytime soon. But it's certainly an interesting idea. Got an Etsy shop? Or hosting a bake sale? You can try the PWYW strategy yourself. You never know how much people will pay for a cupcake when given the choice.
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Image credit: samantha celera/Flickr