"Pay what you want" benefits companies, consumers, charities

By Kate Shaw

Businesses that engage in “corporate social responsibility” (think of those that choose environmentally friendly materials or sell fair trade goods) aren’t always as successful as they'd like to be. The authors of a new study in Science suggest that a promising new pricing strategy can sometimes boost companies’ profits while allowing customers to directly support causes they believe in.

The strategy is called “pay what you want,” and has gained a foothold in several markets in the last few years. For instance, Radiohead famously let buyers name their own price for the band’s “In Rainbows” album, and Panera Bread has recently opened a restaurant in which customers can pay however much they think the food is worth.

The authors of this study wanted to determine how “pay what you want” would affect purchase rates and profit margins when consumers are able to simultaneously dictate a price and support a worthy cause.

The experiment was carried out at a rollercoaster ride at a large theme park. After each of the 113,047 participants rode the rollercoaster, they were given the option to buy a souvenir photo of themselves that had been taken during the ride. In one condition, the price of the photo was fixed at $15.95; in a separate condition, the buyers could pay whatever they wanted—including nothing at all—for the souvenir. Then, an extra dimension was added: half of the participants in each treatment were told that the company would donate half of the proceeds to charity.

When the price was fixed at $15.95, just 0.50 percent of the participants bought the photo, and pledging to donate to charity barely raised the purchase rate, to 0.59 percent. The profit margins were also small in the fixed-price conditions, about 6¢ per rider without the charity offer, and 7 cents per rider with a charitable donation.

Under the "pay what you want" condition, riders were far more likely to purchase the photos, although at a much-reduced price. When no charity offer was made, 8.39 percent of participants bought the photo for an average of 92¢, although the profit per rider was negligible. When half the proceeds went to charity, fewer riders—about 4.5 percent—made the purchase, but they paid an average of $5.33. In this treatment, the profit per rider was a whopping 20¢, making “pay what you want” with a charitable donation the most profitable scenario by far.

Interestingly, riders who were able to dictate the price were less willing to buy the photo when part of their purchase price went to charity. The authors hypothesize that stingy people that aren’t willing to pay much for the photo felt bad for donating so little to charity and didn’t want to appear uncaring to others, so they refrained completely from buying. However, the prices paid by the other buyers more than made up for the difference in purchase rate and profit margin.

According to the authors, the “pay what you want” strategy works because it allows companies to chare social responsibility with consumers. When buyers are able to set prices in a way that directly shows their support for a cause, everybody wins.