In 2007, the alternative rock band Radiohead released its seventh studio album, In Rainbows. Although band members announced that their new album would soon be available in CD form, they also implemented what must have seemed like an extremely risky strategy: Fans who didn't want to wait for the CD could download the album directly from the Radiohead website in the form of a DRM-free ZIP file. Fans also had the option of ordering a CD version self-published by the band.
But no minimum price was set—people wanting the album were simply instructed to pay whatever they wanted.
From October 10, 2007, through December 10, 2007, when the download option ended, In Rainbows became one of the band's most successful albums—and its Pay-What-You-Want (PWYW) pricing model became part of rock legend. PWYW had been around in various forms for decades, the Radiohead release proved how successful it could be. Since that album's fateful release, PWYW has been adopted by other independent musicians and has even some restaurants, movie theatres, and digital distributors.
But how does PWYW actually work in practice?
While some customers might try to "game" the system by underpaying—or paying nothing at all—most people seem to feel obligated to pay enough (or even overpay) to keep PWYW businesses profitable. Part of the appeal seems to be allowing customers to decide for themselves how much a product is worth and ward off buyer's remorse. Still, seeing other people paying makes you more likely to pay yourself. Also, given that you usually have no idea what other people are paying, you are often more likely to err on the side of caution and pay more than you might otherwise have; nobody wants to be seen as a cheapskate.
One classic example of PWYW is tipping. We rely on certain “rules of thumb” to determine whether we are leaving a large enough tip (15 percent is a common norm) with factors such as quality of service affecting tip size. Though people are well aware that they could leave without paying any tip, the prospect of being seen as a “deadbeat” seems to be enough to ensure that tips are paid.
An even more provocative pricing scheme is known as Pay-It-Forward (PIF). Under PIF, you are free to pay whatever you want (including zero) but with an interesting difference: Customers are told that their product has been paid for by a previous customer and that their payment will be on behalf of a future customer. In one example of PIF in action, people eating at the Seva Cafe in Ahmedabad, India are told that their bill has been paid as a gift from a previous customer. The diners are then given the option of walking out without obligation or making a cash payment to benefit a future guest. There are also "suspended coffee" cafes in Europe and North America where customers can choose to pay for two (or more) cups of coffee instead of one. The extra coffee is made available to whoever wants it in future.
PWYW and PIF pricing schemes both allow customers to decide how much to pay for a product, but there is an important difference: PWYW is a direct financial transaction between the buyer and the seller while PIF also involves the buyer and the (usually anonymous) person receiving the gift.
So what motivates how much people are willing to pay with PWYW and PIF? And why are people likely to pay more with PIF than with PWYW (or even with conventional pricing schemes, for that matter)?
A new article published in the Journal of Personality and Social Psychology examines PWYW and PIF pricing schemes and attempts to explain what motivates people to pay. Researchers at the University of California at Berkeley and the University of California at San Diego conducted four field experiments examining factors influencing PWYW and PIF payouts.
The first experiment was done at San Francisco's Cartoon Art Museum, which hosts a PWYW Tuesday for visitors. Experimenters took over museum admission posts, and told visitors either that they could Pay What They Wish to enter the museum or assigned them the PIF condition. The PIF visitors were told: Today is a Pay-What-You-Wish Day. A visitor who came earlier paid for your admission. Since you are paid for, you now have a chance to pay forward the admission for another person who will come later today. How much would you like to pay forward for another person’s admission? The amount each visitor paid was recorded.
The researchers found that people consistently paid more in the PIF model than they did in the PWYW condition.
To eliminate any concerns that visitors in larger groups might have misunderstood the instructions and skewed the results, a second experiment was carried out, with instructions being made clearer for large groups. The results were largely the same. Another experiment also showed that visitors paying more under the PIF condition were just as likely to spend money in the gift shop as PWYW customers.
Did the museum setting influence people to donate more under PIF? Since a museum is a non-profit organization, consumers may be more inclined to be generous in making donations they feel would be for a good cause. So, as a final test, a fourth experiment was carried out at "Ola's Corner", a gourmet coffee shop in Oakland, California. Not only was the coffee shop a retail business offering products to customers, but people buying their products would presumably be less motivated to "pay it forward." Following the same guidelines as the first three field experiments, shop customers were assigned to either a PWYW or a PIF condition depending on the instructions they were given by researchers posing as store staff.
Despite the different setting the results were the same as they had been in the non-profit setting.
So why are people more likely to be generous with PIF than they are when with PWYW pricing? To understand what was happening, the researchers conducted a series of experiments, this time in a laboratory so they could examine underlying motivations a little better. Among the questions tested by the experimenters were:
- Did it make a difference whether donors had any direct interaction with the donor before them (the giver) or whoever came after them (the recipient)?
- Do people pay more (or less) if they were watched while making their donation for fear of being judged by how much they gave?
- Does knowing how much other people paid eliminate the PIF effect, making people less likely to be generous?
- Does knowing about a previous participant who was unusually generous (or stingy) affect how much people are likely to pay?
- Is the extra payout under PIF a result of people misunderstanding the instructions (not understanding that they can pay any amount they wish)?
What the researchers found was that people were more likely to pay more under PIF than they did under PWYW, but only as long as they were unaware of how much other people were paying. Not knowing how much others paid for the same product caused people to err on the side of caution and be more generous than they might be otherwise. When told how much others paid, donors under PIF tended to match that amount. No other laboratory manipulation appeared to affect what people paid under PIF.
Which brings us to the fundamental question: Why pay for a product when you might have it for free?
Based on these findings, it seems safe to say that people tend to model their actions on others' (or what they assumed others have done). Whether the payments are shaped by the fear of what others might think or simply by a sense of generosity, people do seem to be fairly predictable in the payments they leave.
As PWYW and PIF become more popular, learning more about what motivates people to pay (or overpay) can help us understand ourselves a little better as well.