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How does Pay-What-You-Want Work?

K. Testa
K. Testa

The pay-what-you-want pricing system is a model used by several types of businesses. Instead of charging a set price for items, the business allows customers to pay whatever amount they feel is appropriate. The customer might decide to pay much more than the usual price, for instance, or nothing at all. Despite the financial risk, businesses usually depend on customers’ generosity and sense of fairness. Many of them utilize an honor system to collect payments. An example of this concept is a box for suggested donations, commonly seen at certain museums and parks.

The pay-what-you-want strategy has existed in cities such as Berlin and London since around 1999. In the U.S., it was introduced by a restaurant in Salt Lake City, Utah in 2003. The apparent impetus behind the Utah eatery’s pricing system was to raise awareness about the value of food, to prevent waste, and to promote local and organic products. The practice met with some success early on but was not sustainable in the long run. Since then, some other organizations have employed pay-what-you-want as an experimental concept.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

Pay-what-you-want policies have been somewhat less effective in restaurants and health care provider settings than in other areas. They have achieved greater success with digital products, such as movies and video games. In 2007, for instance, the band Radiohead offered its new album as an online download using the pay-what-you-want system, resulting in a large number of sales.

Some economists have argued that a one-time album download is different from potentially repeat visiting a restaurant, where the customer might feel pressure to pay a certain amount in order to feel charitable. Furthermore, whatever financial losses the band may have suffered could have been made up for by the increase in publicity. For instance, several other established musicians have been able to give away albums free and still sell out their concert dates.

More often than not, businesses tend to lose money when they implement a pay-what-you-want system. Another downside is that some people are uncomfortable with the feeling that they have to barter or negotiate a price with sellers. Many of them would rather know up front what the price is and pay it without feeling they have paid either too much or too little.

Others argue, however, that using pay-what-you-want and honor systems are more cost-effective for businesses since they do not have to actively monitor their patrons. Many people also feel that pay-what-you-want can also benefit charitable organizations. According to some studies, researchers found the concept to be more successful when consumers were told that a portion of their contributions would go to charity. Whether from a sense of shared social responsibility or a desire to be perceived as charitable individuals, most patrons in this situation paid more for the product than they otherwise would have spent.

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