The Psychology of Naming Your Own Price for a Purchase
Although it empowers consumers, this pricing method has significant downsides.
Posted Feb 04, 2019
Name Your Own Price (NYOP) was made famous by Priceline in the late 1990s and then adopted by other sellers including online fashion retailer Garmentory and eBay. In this post, we’ll look at the psychology behind the NYOP pricing method.
In some respects, NYOP is similar to Pay What You Want (PWYW) pricing that I’ve written about before. Both involve active consumer participation in deciding the price. But unlike PWYW, the seller has more control over how the consumer makes the offer and the final price paid. The seller sets the lowest price it is willing to accept and can reject the buyer’s offer if it falls below this threshold. It can also withhold information about the specific brand until after purchase to earn a higher profit. Because of these factors, NYOP is significantly more complicated than PWYW for buyer and seller.
How does the Name Your Own Price method work?
NYOP works as follows. (I’ve simplified the description slightly for the sake of exposition.) The seller provides information to the consumer about what is on offer but usually leaves some features hidden or unavailable. The best example to understand this is Priceline where the consumer can choose the hotel quality (three-star, four-star, etc.) and the general location, say Houston’s Galleria area. However, they cannot choose a specific hotel when naming their own price.
On the seller side, hotels listing their properties on Priceline set the minimum prices they are willing to accept. Not surprisingly, this information remains hidden from the buyer. For instance, on Priceline, a hotel may set $80 per night as its minimum threshold.
The customer names their own price by bidding for a four-star Houston-Galleria area hotel room. Priceline then randomly selects one of the listed four-star hotels and checks to see if the customer’s bid price exceeds this hotel’s threshold price. If yes, the transaction is consummated. The buyer’s credit card is charged, and the non-refundable purchase is completed. Priceline earns the difference between the hotel’s asking price and the customer’s bid price. The customer is then informed which four-star hotel they’ll be staying at.
However, if the customer’s bid is below this first hotel’s threshold, Priceline iterates through to the next four-star hotel on this list, and so on, until a hotel that has a lower threshold than the customer’s bid is found. If the customer bids below the thresholds of all four-star hotels in Houston’s Galleria area that have partnered with Priceline, they don’t get a room. If they want to bid again right away, they’ll have to revise their search criteria in some way (e.g., look for a three-star hotel) or wait 24 hours to bid using the same criteria.
Although NYOP requires active participation and gives consumers control over prices, it is far less attractive than PWYW for many consumers. Marketing experts call NYOP an “opaque pricing model” for two reasons. First, the seller does not provide an initial offer to kick off the negotiation, so there is no clear starting point the customer can use to haggle. Second, customers do not know the specific brand they’ll receive until after they’ve paid for the product. For someone with a strong brand preference, this can be disconcerting at best, and unacceptable at worst.
The business appeal of Name Your Own Price
Despite its relative complexity, NYOP is advantageous for businesses. First, because it is rare, the method acts as a differentiator, which can be compelling for a startup company in a crowded market. When online retailer Garmentory launched its site, for example, it sold all its merchandise from small fashion boutiques using NYOP pricing to attract attention and stand out from hordes of similar sellers.
Second, because the prices and offers are relatively hidden, consumer researchers have found that consumers incur substantial frictional costs when submitting additional bids. In one study conducted in Germany, for example, the frictional costs ranged from 3.5 Euros for purchasing an MP3 player to 6.1 Euros for a PDA. (The study was done in 2003, hence the MP3 players). This burden serves to lock consumers in and reduces price competition for the NYOP seller with other fixed price sellers.
Third, NYOP provides an avenue to sell excess capacity or outdated inventory and earn reasonable revenue from these extra sales without hurting the company's core brand. When an upscale hotel sells its spare perishable inventory of rooms through Priceline, for example, it is essentially shielding its brand from erosion behind the curtain of NYOP. Only customers who don’t care which hotel they stay at will avail of the lower NYOP price. Business travelers, on the other hand, will choose to buy through other channels llike an Online Travel Agency or the hotel's website and pay higher prices to derive the benefits of its loyalty program. In this way, the hotel is able to separate the different customer groups and offer prices according to their respective valuations of the offering. What’s more, some hotels may go a step further and design two different offers, a posted fixed-price offer to sell superior rooms through its own website and a NYOP offer for less desirable rooms (with obstructed views, located next to the elevator, etc.) through other venues.
Name Your Own Price poses challenges for consumers
The promise of empowerment and bidding entertainment notwithstanding, NYOP requires the consumer to perform considerable work. The process also snatches away important aspects of choice from customers, which can be a deal-breaker for those who want control over what features and brand they get, not just price. And finally, consumers can collaborate and game a seller’s NYOP process by exchanging information about bids and results with each other or bid in a coordinated way to discover price thresholds. For example, regular Priceline users share their bid amount and whether they were successful or not on sites like Betterbidding.com.
Because of these drawbacks, NYOP has failed to grow beyond a niche pricing method in the two-plus decades since its introduction. Even Priceline, its earliest and most famous exponent, has curtailed its use, dropping NYOP for airline tickets in 2016, and for car rentals in 2018. Marketing experts attribute this to the aforementioned weaknesses of the NYOP method compounded by changing customer expectations and newer competitive options. In the words of Sam Shank, CEO of HotelTonight.com, “Today’s booker isn’t looking for a commoditized roof over their head. They’re seeking unique and memorable experiences.”
Similarly, once an enthusiastic user, fashion retailer Garmentory has switched to mostly fixed prices, focusing on the exclusivity of the boutiques accessed through its site as its core differentiator instead of NYOP. The bottom line is that although Name Your Own Price sounds good in theory, it is not as fun to practice.