| Key Partners | Key Activities | Value Propositions | Customer Relationships | Customer Segments | |||||
| Key Resources | Channels | ||||||||
| Cost Structures | Revenue Streams | ||||||||
How: Rely on the existence of social norms and morals and let customers influence the price they pay for your product or service. Consider putting a minimum floor price in effect or providing specific price tiers to choose from.
Why: Attract a higher number of customers as it is easier to meet the customer’s willingness to pay.
This business model is part of the Business Model Patterns printed card deck.
A collection of business models that will help you understand the key drivers of business model success. The card deck will be ready for purchase in the end of 2023 and is now undergoing rigorous testing.
Reserve your deck!In the Pay What You Want business model, the onus of determining the price to be paid for a product or service lies with the customer. The vendor, in turn, commits to accepting the price offered, regardless of whether it is zero or significantly lower than the actual value of the offering. While a price floor or suggested price may be provided for guidance, the customer ultimately holds the power of discretion.
This model of pricing can be particularly effective in competitive marketplaces where products have low marginal costs and a strong relationship exists between vendor and customer. The Pay What You Want model has been shown to attract a wide customer base, as it allows them to exercise control over the cost of the product or service.
Contrary to popular belief, customers do not typically take advantage of this business model. Research has shown that prices paid for Pay What You Want services differ significantly from zero. Social norms such as fairness serve as a form of control mechanism in the pricing process. Additionally, customers often base their prices on the cost of comparable products, and perceive Pay What You Want schemes as advantageous as they are enabled to control incidental costs.
For vendors, the Pay What You Want model can have the added benefit of generating positive press and an increase in custom. This, in turn, can lead to a marked increase in revenue and customer loyalty.
Where did the Pay What You Want business model pattern originate from?
The concept of Pay What You Want has been in existence for a considerable period of time, with examples such as money given to buskers or tips to waiters. However, it was not until the early 2000s that the Pay What You Want model was first applied commercially.
This occurred at One World Everybody Eats, a restaurant based in Salt Lake City, which opened its doors in 2003. One World Everybody Eats not only allows customers to pay what they want for their food and drinks, but also allows customers to pay in kind, such as volunteering to wash dishes or work in the garden. This concept not only makes good food accessible to those who are less fortunate but also promotes the idea of community and social responsibility.
Applying the Pay What You Want business model
The Pay What You Want model is rooted in the belief that customers have the ability to understand the value of a product and will pay an appropriate amount for it. This model is primarily applied in the B2C consumer market, but also has applications in the B2B sector.
Pay What You Want in B2B
In the B2B sector, the Pay What You Want model is not always applied to the entire offering, but rather to a certain percentage of the product or service. For example, some consultants offer the option for customers to pay a share of the consulting fee based on their level of satisfaction with the services rendered. This allows the customer to determine the value of the service and pay accordingly, based on their level of satisfaction with the services rendered.
The Simplicity of Pay What You Want Pricing
The Pay What You Want model is straightforward: provide a high-quality product to customers, allow them to enjoy it, and then give them complete discretion to pay whatever they desire for the product. No bills, no demands, and no pressure to pay - the customer is given complete autonomy to decide if, and how much, they would like to pay.
The business logic behind the Pay What You Want model is twofold:
- It conveys a sense of confidence on the part of the company, effectively communicating to the customer “we are so confident in the quality of our product that you will be willing to pay for it.”
- It empowers customers by giving them total control to determine the value they have received from the product and pay an appropriate price.
However, this transfer of power can also be a double-edged sword. With PWYW pricing, there is a risk that some customers may take advantage of the system and walk away without paying anything or underpaying significantly, causing financial strain on the business. Additionally, other customers may feel uncertain about what the appropriate price is and avoid the product altogether.
Common successful applications of the Pay What You Want model
There are certain instances in which the model has shown to be effective.
- Filling Empty Capacity. In situations where a product is perishable, such as empty seats on an airplane or hotel rooms, the Pay What You Want model can be used to fill capacity at the last minute. For instance, the Tricycle theater in Kilburn, England utilizes Pay What You Want tickets for select performances that can only be purchased on the day of the event. This allows the theater to fill seats with thrifty patrons who purchase last-minute tickets at a lower price.
- Established Emotional Customer Relationships. The Pay What You Want model can be successful when the customer has a previous personal relationship with the business. When customers have an emotional attachment to the business and have to hand over money face-to-face, they tend to pay fairly. This has been observed in small, locally-owned businesses where the owner has a personal connection with the customers.
- Charitable Giving. When the earnings from the Pay What You Want model are given to a charity, it has been shown to be effective. In a 2010 study, researchers found that customers paid significantly more for souvenir photos when they were told that half the proceeds would go to charity. Similarly, restaurants in England use PWYW pricing to sell food that would have been thrown away and raise money for charity.
It is important to note that while the Pay What You Want model can be an effective strategy in specific instances, it is not a suitable pricing model for most companies. It is often used as a specialized pricing strategy for specific reasons, such as filling empty seats or raising money for charity.
Trigger Questions
- Can you increase reach with pay-what-you-want pricing in an industry otherwise competing on price?
- Can you provide some kind of bonus material to incentivise customers to pay above average?
Examples
Humble Bundle
Video game bundles are offered for a price determined by the customer. When the average price is beaten, extras are awarded.
Panera Cares
At the once-financially-viable non-profit café and bakery, customers were told to pay what they wanted for their meals.
Restaurants in the UK
Restaurants all over England use Pay What You Want pricing model to sell food they would have thrown away, doing two positive things at the same time: generating additional revenue and reducing food waste
Source: In the cafe where you can pay what you want, what would you choose?
Radiohead
The British rock band famously employed the Pay What You Want model in 2007 with their album, “In Rainbows.” Fans were given the option to pay whatever price they chose for the album, and the band found that even though the average price was less than market value, the album was downloaded more often than all of their previous albums combined, resulting in increased popularity.
Source: Radiohead- Adopting Pay What You Want Pricing Strategy
NoiseTrade
The online music service allows unsigned artists to promote their music by uploading songs to the website free of charge. Fans can download tracks and donate money in return, while also supporting the artists by providing their contact information, testimonials, and spreading the word through social media links and widgets. NoiseTrade receives revenue from website advertising and commissions on donations.
Panera Cares
At the once-financially-viable non-profit café and bakery, customers were told to pay what they wanted for their meals.
Related plays
- Business Model Navigator by Karolin Frankenberger and Oliver Gassmann
- When Does Pay What You Want Pricing Work? by Psychology Today
- Pay What You Want
- 3 Ways Pay What You Want Leads to More Profit than Fixed Pricing
- Pay What You Want at Panera by Stephen J. Dubner
- Shared Social Responsibility: A Field Experiment in Pay-What-You-Want Pricing and Charitable Giving by Ayelet Gneezy, Uri Gneezy, Leif D. NNelsonn, and Amber Brown