Name
Your Price. Really.
Is it worthwhile for
retailers to experiment with "pay what you want" pricing? Shelle
Santana unmasks the surprising logic behind how much customers will pay, and
when. One finding: sellers can dramatically change what some buyers are willing
to pay.
Years ago, when I was
a student in New York (and like many students, perpetually broke), I would
often go to the Metropolitan Museum of Art for entertainment. The museum had a
policy that visitors could pay whatever they wanted, so for as little as a
penny, I could spend the afternoon wandering the galleries.
But there was a catch:
I couldn't just put my money in a slot; I had to stand in line with everyone
else, many of whom were paying the suggested donation of $15. Sometimes, I
boldly told the clerk I would pay 5 cents. Other times, however, I paid $1, $5,
or even $15.
According to Shelle M. Santana, an assistant professor in
the Marketing unit at Harvard Business School, I may have been influenced by
communal norms.
Santana has closely
studied "pay-what-you-wish" (PWYW) pricing—a phenomenon that
admittedly makes no rational economic sense. When presented an opportunity for
a freebie, "classical economic theory says you should pay nothing,"
says Santana. "Why buy something when you can get it for free?"
And yet, research has
shown that when people are able to set their own prices, almost everyone pays
something—and sometimes well over the suggested price. "I was really
interested in that broad variance and who pays a little and who pays a lot and
under what circumstances," says Santana.
SELLERS
CAN INFLUENCE WHAT BUYERS PAY
In a series of
experiments—including a field experiment where she posed with students as snack
bar employees—Santana found that by subtly manipulating the environment,
sellers can dramatically change what some buyers are willing to pay.
Examples of PWYW
pricing abound in all industries: Radiohead's self-released its In
Rainbows album with "name your price" downloads; the Dallas
Theater Center holds "Pay-What-You-Can" nights to draw in new
patrons; Boston Pedicab operates under an "open fare" system; and
Panera Bread runs four nonprofit "Panera Cares" locations with PWYW
pricing.
Oftentimes, businesses
use the strategy as a promotion to get new customers, sometimes with a social
tie-in for extra incentive—for example, a restaurant will run a PWYW promotion
and donate part of the proceeds to a charity to feed the hungry.
Not all PWYW
strategies are created equal, however. Santana investigated data from a pet
adoption agency in New York, finding that on average patrons paid close to the
$150 adoption fee, with some paying as much as $260. For a PWYW premiere of the
documentary Freakonomics, however, by far the most typical ticket price
paid was a penny. "It got me thinking, why are these situations so
different," says Santana.
Borrowing from social
psychology literature, she surmised it might have something to do with how the
way customers think about the transaction influences their behavior.
"Exchange
norms" are defined by reciprocity—I get this, you get that. It's the kind
of interaction we have with business associates or when we are buying a house
or a car. On the other hand, "communal norms" are based on
relationships between people, and don't necessarily need to be balanced evenly.
It's the kind of interaction we have when taking a friend out to dinner.
"If you give me a dollar, I may not feel the need to give you back the
dollar immediately," says Santana.
ARE
CONSUMERS PRO-SOCIAL OR PRO-SELF?
Furthermore, Santana
borrowed a concept from strategic games and socially interdependent decision-making
that divides people based on their "social value orientation" (SVO).
When faced with a decision on how to allocate resources between themselves and
others, some people are "pro-social," meaning they are likely to
value more equal distributions of resources, while others are
"pro-self," meaning they try and maximize value for themselves. She
wondered, when faced with a PWYW situation, would people with pro-social ideals
pay more?
Santana explores these
questions in a new working paper, Because We're Partners: How Social
Values and Relationship Norms Influence Consumer Payments in Pay-What-You-Want
Contexts, written with Vicki G. Morwitz, the Harvey Golub Professor of Business
Leadership and Professor of Marketing at New York University's Stern School of
Business.
For their first
experiment, Santana and Morwitz asked participants how much money they would
pay for a cookie sold at a local café. Those who elected to purchase a cookie
paid anywhere from zero to $2, with an average price of 89 cents.
At the same time,
participants completed a questionnaire to determine their SVO. Sure enough,
those with a pro-social orientation forked over an average of $1.22 for the
cookie, while those with a pro-self orientation paid an average of 62 cents.
"Just as we expected, people who were pro-self paid less, and people who
were pro-social paid more," says Santana.
She and Morwitz then
took the findings a step further, to see if they could change the results by
changing the nature of the transaction. In a new experiment, they offered a
scenario in which a local coffee shop was promoting a PWYW cup of coffee. The
researchers presented the deal in two ways: In the first description, they
stressed that the shop offered great coffee with great value and efficient service,
setting up an exchange norm. In the second, they emphasized that the servers
always offered a warm greeting, took an active personal interest in the lives
of their customers, and recommended new coffees based on their preferences,
signaling a communal norm.
When asked what they
would pay for the coffee, pro-social participants increased the amount they
paid under the second condition but only by 13 percent, $2.45 to $2.79. But
significantly, pro-self participants paid almost a third more, $1.98 to $2.63,
raising their price to almost as much as the pro-social group.
"In the context
of a communal norm, their motivations shifted," says Santana. In other
words, just by changing the context of the situation, they were able to
suppress pro-self's ordinarily selfish behavior and make them temporarily more
generous.
INTO
THE FIELD
It's one thing to test
this theoretically, it's another to put it into practice in the real world. For
their last experiment, Santana and Morwitz went into the field, designing a PWYW
promotion for a pack of gum at an NYU student café. Again, they presented two
scenarios. In the first, they set up a sign with a pair of hands shaking that
read, "Special Promotion: It's Your Turn to Set the Price Today!" In
the second, they put up a new sign, which was rotated throughout the day, with
a group of hands in a circle that read, "Because We're Partners, It's Your
Turn to Set the Price Today!"
Over the course of 11
days of sales, that subtle change in messaging clearly changed what students were
willing to pay—increasing the price 21 percent from an average of 57 cents to
an average of 69 cents. For companies interested in doing a PWYW promotion,
Santana says that finding implies they can mitigate the risk, and achieve
better results, just by shifting the context to create a communal norm.
"Sellers have
more power to shift these norms than they might think they do," she says.
"If you can nudge people into a more communal relationship, they have a
higher willingness to pay."
Furthermore, while past
research has shown that customers are willing to pay more when a portion of the
proceeds is donated to charity, Santana and Morwitz's research shows that such
an expensive tie-in may not be necessary.
"It doesn't have
to be costly to move to these communal norms," says Santana. "What we
showed is there are simple, subtle, low-cost ways to get people to pay a little
more."
by Michael Blanding
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