Consumer response to design variations in pay-what-you-want pricing

Abstract

Recent literature has identified consumers’ fairness and image concerns as the primary drivers of payments under pay-what-you-want (PWYW) pricing. Consequently, managers have employed a variety of design variations to invoke/alleviate these concerns to attract more customers and increase payment magnitudes. We develop a theoretical approach that combines both prosocial and self-interested motives to examine consumers’ four possible responses to design variations in PWYW exchange: (1) opt-out, (2) free-ride, (3) default to recommendation, or (4) other payment. We confirm model predictions using an empirical approach that jointly estimates the multipartite customer response. We report findings pertaining to four managerially controllable variables namely, ‘payment visibility’, ‘information on payment recipients’, ‘timing of payment’, and ‘explicit price recommendations’ using both secondary data and controlled experiments. We show that design variations have a heterogeneous effect on different types of consumer responses leading to countervailing effects on revenues. We derive several actionable managerial recommendations.

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Notes

  1. 1.

    A sample list of businesses (trademark names) that have recently used PWYW pricing to sell their products: Panera Bread, Radiohead, Larion Studios, Humble Bundle, Magnatune, Everlane, OpenBooks, Perlin Winery, Zoho, Headsets.com, Big 4 Holiday Parks.

  2. 2.

    https://www.cnet.com/news/humble-bundle-has-something-to-brag-about-100m-to-charity-so-far/

  3. 3.

    Although online payments can guarantee a high level of anonymity, some donation websites choose to share payer identity to others threatening anonymity. Frequently, firms assure customers that their credit card information will not be stored in their servers unless customers provide an explicit approval. This can guarantee a relatively high level of anonymity.

  4. 4.

    Although consumers’ personal valuation is latent at the outset, we can employ a variety of statistical techniques to derive the distribution of consumer willingness-to-pay (reservation price) for a good sold under PWYW (Wertenbroch and Skiera 2002; Ding et al. 2005; Meyer et al. 2018).

  5. 5.

    We thank an anonymous referee for making this point.

  6. 6.

    Equation (8) describes the log-likelihood with independence assumption between marginal distributions as a base case. However, when using this modeling approach to analyze data pertaining to our empirical studies, we test for possible dependence between marginal distributions corresponding to the non-zero payments and choice variables (opt-out decision, defaults to recommendation) using a copula function.

  7. 7.

    ‘Creative commons’ is an alternative to the ‘All rights reserved’ copyright that retains some rights to the authors but provides as much flexibility to buyers for modifying, copying etc., within the confines of the license specification adopted. See https://creativecommons.org/ for more details.

  8. 8.

    The fixed-fee subscription model was in line with the general shifting trend in online music from downloading to streaming for which a subscription fee was a better fit. As the marginal cost of reproduction was negligible, almost all of PYWY payments were profits for the firm. The company employed PWYW for subscriptions in 2008.

  9. 9.

    We acknowledge that this is not the same as total anonymity, which we address in subsequent studies. It is hard to guarantee complete anonymity in an online payment setting where sellers are generally not privy to at least some personally identifiable information such as customers’ credit card numbers. This is more a relative measure of anonymity.

  10. 10.

    The visitors of the website did not have an equivalent fixed price option to opt out of PWYW and the pricing design was relatively unchanged over a long period. Moreover, visitors always had the option to choose the explicit recommendation price. As a result, we believe the possible dependence between participation decision and freely chosen payments is not of serious concern in this case. Nevertheless, we acknowledge that we can generalize the findings only to the participating population with customer self-selection potentially biasing the estimates. We address this weakness using controlled experiments.

  11. 11.

    Unlike the snack sale experiment, in this study, students selected for the real exchange get a cash payment in addition to course credit. As wine is more expensive and can entail larger valuations, we were unable to enforce that students bring their own money to fulfill the exchange on the same day. We realize that this can introduce a possible endowment effect. However, we show that PWYW payment distributions are different from actual WTP for the product. We do this by first conducting a BDM auction to elicit their maximum WTP before explaining the rules of a PWYW mechanism.

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Acknowledgements

The empirical section of the paper is partly based on one of the essays of the first author’s dissertation. Fernando Machado acknowledges the support from FCT – Portuguese Foundation of Science and Technology for the project UID/GES/00407/2013. The authors thank Rik Pieters, Kalpesh Desai, Jeff Johnson, three anonymous reviewers, and the editors for their helpful comments and suggestions. The authors are grateful to their friend and collaborator late Rajiv K. Sinha for his guidance at the early stages of this research.

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Correspondence to Fernando S. Machado.

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Appendix

Appendix

Experiment I Artifacts: Snack Food Sale Experiment

Public pay instruction

At this time, please make a payment to the lab assistant for the snack you received. Please let them know of your LAB ID. Remember, there is no fixed price for the snack. You can pay what you want for the snack including nothing. Whatever you pay will go to the snack supplier and is not retained in the lab.

Private pay instruction

At this time, please make a payment using the plain unmarked envelope given to you, seal it, and leave it at your desk. Remember, there is no fixed price for the snack. You can pay what you want for the snack including nothing. Your payment is completely anonymous. Whatever you pay will go to the snack supplier and is not retained in the lab.

Payment recipient description

The snack food made available to you today is a new candy from a local candy shop/(alternative condition): large national brand. Please enjoy the candies as you watch the short film.

Experiment II Artifacts: Wine Sale Experiment

Product description

The product that you have the opportunity to buy is this wine bottle. This is a bottle of Chateaux Haut-Canteloup, from 2014. This wine is made from merlot, cabernet sauvignon and cabernet franc grapes from the Bordeaux region. It has been awarded with the Golden Medal at the Agriculture General Contest in 2016, in Paris. You can see the bottles in the lab, by the lab assistant.

Payment elicitation with manipulations (Price recommendations and public/private conditions)

Please write down your ID number: …

You can choose any price to pay for the wine. [under recommendation condition]** The seller recommends a price of [recommendation magnitude within $4–$14 bound uniformly distributed] euros.

Please, choose an answer and indicate your price accordingly: 1. [ ] I wish to buy the wine and the price I will pay is ____ euros and ____ cents. 2. [  ] I do not wish to buy the wine even though I can pay whatever I want for it. [under private condition] Please, after filling it, fold this sheet and leave it in the drop box placed in the corner of the lab.

[under public condition] Please, after filling it, hand this sheet to the lab assistant as it is, without folding it or flipping it around.

Note: ** The exact statement introducing the recommendation prices comprised three variations with equal probability of occurring in the sample: (1) The seller recommends a price of $X euros; (2) Other buyers have been paying $X euros; (3) The market price is $X euros. The variations mimic the variety observed in the market place and reduces participant perception of consequences of for not abiding by seller recommendation in a lab setting. We found no significant differences in the magnitude of payments or opt-out proportions in response to these variations in introducing the price recommendation.

Payment elicitation for supplementary tasks

[BDM Auction for Max WTP] The most I am willing to pay for the [PRODUCT] is: … euros and … cents.

[Market price estimate] My estimate of the retail price for the [PRODUCT] is: …euros and … cents.

BDM Auction Pre-elicitation Instructions

[Introduction] …one participant among the participants of this week’s experimental sessions will be randomly drawn for this specific task to be the “buyer” and will have the opportunity to buy the bottle of wine from the assistant. You will be asked to write down the most you are willing to pay for the bottle of wine.

[The following three-step procedure for exchange was explained both verbally and in writing with additional time for clarification. Furthermore, participants were informed that the optimal strategy under this procedure for exchange is to bid the true WTP]

  1. 1.

    A price is randomly selected in each session using an urn. The urn is composed of prices from 0 to X euros (in steps of 0,10 euro, zero excluded).

  2. 2.

    If the buyer’s stated willingness to pay is greater or equal to the randomly drawn price, then he/she will purchase the product from the assistant for the randomly drawn price. (Note: payment will actually take place.) In this case, the buyer receives the product and the remaining amount of money.

  3. 3.

    If the buyer’s stated willingness to pay is lower than the randomly drawn price, then he/she will not purchase the product and will walk away with X euros.

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Christopher, R.M., Machado, F.S. Consumer response to design variations in pay-what-you-want pricing. J. of the Acad. Mark. Sci. 47, 879–898 (2019). https://doi.org/10.1007/s11747-019-00659-5

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Keywords

  • Pay-what-you-want pricing
  • Pricing design
  • Price recommendations
  • Anonymity
  • Hurdle models