Pay-what-you-wish pricing schemes have now been employed by everyone from musicians and restaurateurs to entrepreneurs. But new research suggests that the true path to maximizing profits is to combine pay-what-you-wish pricing with an appeal to charity. Ayelet Gneezy, a marketing professor at the University of California-San Diego, conducted a field experiment at a theme park (sample size: over 113,000). Gneezy presented four different pricing schemes for souvenir photos: a flat fee of $12.95; a flat fee of $12.95 with half going to charity; pay-what-you-wish; and pay-what-you-wish with half going to charity. At a flat fee of $12.95 per picture, only 0.5% of people purchased a photograph; when customers were told that half the $12.95 purchase price would go to charity, a meager 0.59% purchased a photo. Under the simple pay-what-you-wish variation, 8.39% of people purchased a photo, but customers paid only $.92 on average. The final option — pay what you wish, with half the purchase price going to charity — generated big results: purchase rates of 4.49% and an average purchase price of $5.33, resulting in significant profits for the theme park. “When the charity factor is introduced, these casual freeloaders balk at the idea of paying nothing, because it’s more likely to reflect badly on them,” writes Ed Yong. “Rather than naming a higher price, their preference is to avoid buying altogether — for them, it isn’t worth it. Sales fall, but the actual profits go up because the remaining customers are motivated by their desire for the product and for the cause, will pay for both.” (HT: Josh Shpayher)[%comments]
How to Maximize Pay-What-You-Wish Pricing
TAGS: pay as you wish
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I’m wondering what the effect of doing this on a large scale would be. My instinct tells me that people would become more aware of the psychological factors affecting their own choices, and the shame factor might decrease over time.
Chris-
A few quick calculations shows that after giving the money to charity, they still make more money overall with the fourth option. For calculation ease, suppose 10,000 people in each scenario. ‘x’ is the cost of producing one photo.
Flat fee:
50 people buy at $12.95, total profits $647.50 – 50x
Flat fee w/ charity:
59 people buy at $6.48, total profits $382.03 -59x (and $382.03 to charity)
Pay as you wish: 839 people buy at average $0.92, total profits $771.88 – 839x
Pay as you wish w/ charity: 449 people buy at average $2.67, total profits $1,198.83 – 449x (and $1,198.83 to charity)
If the cost of producing a photo is less than $1.50, then the company makes more profits (AND sends more money to charity) with the last option.
@IAN Kemmish
Dude why would people get their picture taken near a charity poster or a bank?
@Chris
Dude, they made more even if they gave half to charity.
@E.Nowak
Dude, Charities exploit people all the time to drive up donations. Think ASPCA commericals, Susan Sommers, the DNC, various minority religious groups, etc.
I suggest a study where we look at the demographic of the people who do Pay-What-You-Wish, then exploit them more to maximize return.
original data assuming a 10,000 person test (it isn’t clear above if it is 113,000 per test):
original: 50 purchases at 12.95 = $647.50
half/half: 59 purchases at 12.95 = $764.05/2 = $382.02
pay as you go: 839 * $0.92 = $771.88
pay as you go/half: 449 * $5.33 = $2393.17/2 = $1196.58
I don’t understand the comments about ethically wrong or deceptive practices. This benefits a charity by almost $1200 and add $550 profit to the picture business. Whereas any other pricing model tested gives less to charity. It would be interesting if they did a “pay as you wish 100% to charity” testing as well.
The park gets double the original money (presuming that overheads don’t soar due to the extra prints) and the named charity gets a tidy amount too.
Sounds fairly interesting to me.
@Huh?
Dude.
Fascinating. Thank you! .
Closed circuit to “Huh?” Do you think your overuse of the word ‘Dude’ cuts down on your credibility?
These results are incomplete and somewhat misleading. They would be more informative if we knew the full demand curve for the photo (with and without the charity component). To do this, the fix price offers (with and without the charity component) would be randomized (e.g. change the offer price every hour). Since the pay as you wish self identify along the curve, the differences in percentage of people who purchase could identify the proportion of buyers who self select out at every price. It would then really be possible for the amusement park to set the optimal pricing policy. As is, the $12.95 price appears way too high relative to people’s willingness to pay. As a result, these two treatments are not very informative.