Pay What You Want: A New Participative Pricing Mechanism

Ju-Young Kim, Martin Natter & Martin Spann
Journal of Marketing
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Executive Summary
Pay what you want (PWYW) is an innovative pricing model in which buyer’s control over the price setting is at a maximum level; that is, the buyer can set any price above or equal to zero, and the seller cannot reject it. Previous research suggests that participative pricing increases consumers’ intent to purchase. Thus, PWYW may be preferred by consumers for the level of control offered and the novelty of the mechanism. However, sellers using PWYW face the risk that consumers will exploit their control and pay nothing at all or a price below the seller’s costs.

In contrast to neoclassical economic theory, in which consumers purely maximize their utility, the results from three independent contexts—a restaurant lunch buffet, movie screenings in a cinema, and hot beverages at a deli—show that prices paid are significantly greater than zero. Prices paid at PWYW depend on buyer’s internal reference price and the proportion of how much the buyer is willing to share of his or her (potential) deal profit with the seller. Fairness, satisfaction, and income are identified as positive drivers of prices paid, whereas price consciousness has a negative influence. The analysis of revenues reveals that revenues are even higher with PWYW than baseline revenues using posted prices because of an increasing number of new customers at the restaurant and higher prices paid at the deli.

Overall, the results of the experiments indicate that PWYW might be suitable as a price promotion tool and may also help improve the seller’s credibility by letting the consumers decide about the prices of products. Implementing PWYW, the seller can demonstrate to consumers that he or she believes in the quality of the products because lower prices can compensate for lower quality without signaling low quality by lower posted prices. The application is also simple and easy to communicate to consumers. This may increase the chance of word of mouth and build up a positive pricing image among consumers. However, PWYW poses a risk that the price buyers pay will be much lower than the seller’s cost or even equal to zero. Especially for high-priced products, PWYW does not seem to be an appropriate pricing mechanism, because the incentives to realize a large deal profit may outweigh aspects of fairness. In such a situation, revenues will probably suffer if the seller cannot set a minimum price threshold.

In the three field studies of this article, a personal interaction between seller and buyer exists and potentially supports the applicability of PWYW. Further research should analyze the importance of such personal interactions on consumers’ decision process. Furthermore, PWYW might be a profitable alternative to free samples for new product introductions or money-back guarantees.

Biography
Ju-Young Kim is a doctoral student and research assistant at the Hans-Strothoff Chair of Retailing in the Department of Marketing at the University of Frankfurt, Main (Germany). During her studies of business administration, she gained numerous work experiences in the areas of brand management and advertising. Ju-Young’s current research interests are pricing, particularly participative pricing mechanisms and price fairness, as well as in-store marketing.

Martin Natter holds the Hans-Strothoff Chair of Retailing in the Department of Marketing at the University of Frankfurt, Main (Germany). Martin likes to develop and test marketing methodologies in real-world settings. He has developed marketing decision support tools for the (re)positioning of brands, for automated pricing of large assortments of a do-it-yourself retailer, and for planning multibrand promotions. Martin’s current research interests are in the fields of pricing, private label management, multibrand promotions, and new product management. His work has been published in journals such as Marketing Science, Management Science, Marketing Letters, Journal of Interactive Marketing, and the European Journal of Operational Research.

Martin Spann is Professor of Marketing and Innovation in the School of Business and Economics at the University of Passau (Germany). Before joining the University of Passau, he was Assistant Professor of Marketing and Electronic Commerce at the Goethe-University in Frankfurt (Germany). He has been a visiting assistant professor in the Marshall School of Business at the University of Southern California, Los Angeles, and at Bocconi University in Milan, Italy. Martin’s current research interests are pricing, e-commerce, virtual stock markets, and new product management. His work has been published in Journal of Marketing, Management Science, Information Systems Research, Journal of Product Innovation Management, Journal of Interactive Marketing, and European Journal of Operational Research.

Journal of Marketing, Volume 73, Number 1, January 2009
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Ju-Young Kim, Martin Natter & Martin Spann
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