How Important is the “PRICE”? Can a Trust-based Pricing Mechanism Work?

Economics has always focused on the price mechanism to solve the problem of efficient distribution of resources in the economy. Prices are assumed to act as signals whether there is a shortage or a surplus and inform the consumers and the producers to make their decisions accordingly. What happens if there is no fixed price for a commodity? Do consumers buy everything for free, considering that consumers are always rational and want to minimise their costs. One such pricing mechanism is the ‘Pay What You Can’ pricing mechanism. Pay What You Can (PWYC), as the name itself suggests is a participative pricing mechanism where the buyers can essentially pay anything ranging from zero to infinity for a product or service.

The idea of PWYC challenges the concept of ‘Homo Economicus’ man, the economics man who is perfectly rational and self-interested in his pursuit, and exchange processes. While there is every reason to free ride, backed by the economic theory of being rational, most research experiments have reported positive payments in such scenarios. Not only research experiments, but many businesses and organizations have been running this model successfully for years. From the perspective of the seller, it can be seen as an exogenous pricing model, where every buyer will pay according to its ability keeping in mind all the economic and social constraints. High value customers will pay more than the others, who merely look at this as an opportunity to get a bargain — getting a cheap deal. In common language, a person would be willing to buy a good for what it’s worth, and PWYC gives the buyer this opportunity to choose his own price in accordance with the value gained from the product. As the exchange takes place, buyers, and not sellers, have a final say in the price.

Every business organization is trying to innovate continuously in order to remain relevant in the contemporary world, some of the businesses are experimenting with their prices as well. PWYC is indeed a very risky experiment and that is why we do not see a lot of businesses using it. In recent times, some of the businesses, non-profit and cultural organizations have used this type of pricing. One of the most famous examples was when the famous British band, Radiohead, announced in 2007 that they would sell their new album ‘In Rainbows’ on a Pay-What-You-Want basis. There is no research data to prove if it was successful, but all their coming concerts were sold out within minutes which indicated a positive impact. There have been various studies and research experiments involving participative pricing to find out whether majority of the buyers free ride or pay some fixed price. There is a lot of variation in prices in different studies but, on the whole, there are significant buyers who pay more than zero.

As the famous saying goes, “There ain’t no such thing as a free lunch”. Buyers who want to free ride and get the product for a zero price have the risk of losing on something which might be essential for the long-term success of their business. In accordance with economic theory, everything has an opportunity cost which can be anything and does not necessarily have to be in monetary terms. If a buyer avails a cheap deal in PWYW , he runs the risk of losing on some other fronts, for example, his image in the market or his business relationships.

I conducted a small research experiment in collaboration with a firm who introduced the PWYC pricing model in June 2020 in Liverpool, United Kingdom. The timing of the introduction of this pricing is also significant as it was introduced when businesses started to reopen after the Covid-19 lockdown. Earlier research has identified altruism as one of the significant factors affecting the PWYC price and the level of reciprocity and goodness were increased overall due to the pandemic as the phrase ‘we are all in this together’ gathered much attention. Hence, the timing of the introduction of this pricing was also very crucial.

The aim of the study was to analyse how participative pricing works in a B-to-B setup and what social and economic factors drive the pricing decisions of the clients. The firm offered a suggested price for their services, but clients were free to pay anything. Even when the clients had the opportunity to free ride, they mostly decided not to with 89% of the clients paying the suggested price without any deviation. Further, an email containing a questionnaire was sent to the clients asking about the factors that affected their pricing decisions. According to the estimation results, the final PWYC price was significantly influenced by satisfaction from the product/service, self-image, and altruism. This indicated how social factors play an important role in the market mechanism.

PWYC is no doubt a risky strategy where a lot of things can go wrong, but the essence lies in minimizing the risk and only introducing it in a favourable external setting. In this study, the external environment post Covid-19 pandemic was high on altruism and supporting businesses and, hence, it led to an increase in sales. The businesses who run PWYC pricing have a certain confidence in the quality of their products/services that they sell, and they are sure that the buyer will pay for it. This analysis can also be beneficial to many new firms and entrepreneurs who are willing to experiment pricing innovations upon entering the market. PWYC can be used as a marketing strategy when entering a market as it can gain a lot of attraction because of its unique nature.

However, PWYC has so far has not been proven to be a profit earning strategy. It is essential to look at the long-term gains or losses from this strategy rather than the short-term impact it creates. The regression analysis was carried with a small sample of buyers only over the period of two months. It would be interesting to find out how the PWYC price and business relationship changes with the passage of time and whether the firm will continue with this pricing in the long term. In this study, PWYC strategy was introduced also as a goodwill measure for businesses affected by the coronavirus lockdown. The firm in the current study catered to the needs of only small and independent businesses who already have a high degree of social responsibility. It would be interesting to see how this pricing mechanism shapes out for big businesses. It is essential to investigate the long run viability of PWYC since in the real world there have been a lot of failures as well successes and many others have used it for advertising purposes. PWYC is indeed an innovative strategy and could draw attention, but the question still remains if it is sustainable in the long run.

This article was written by Marwah Koul, a recent MSc Economics graduate from the University of Liverpool. She is interested in pursuing a career in research and is deeply interested in the field of Behavioural Economics, Environmental Economics and Heterodox Economics.

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