01 Dec 2015
Faculty Q&A: The Price Is Right
Assistant Professor Shelle Santana on what happens when consumers choose how much to payby Julia HannaTopics:
Photo by Susan Young
What intrigued you about the pay-what-you-want (PWYW) model?
It’s very unusual for a firm or a seller to completely relinquish pricing power to their customers. Typically consumers encounter a price, and then they decide whether or not they want to pay that price. If not, they can walk away. PWYW is different in that consumers never have to walk away, as any price they generate will be accepted. Conceptually it’s a very efficient pricing model, but I was curious as to how it works from a practical standpoint. How do consumers generate a price? I wanted to unpack an experience that can be very complex emotionally, cognitively, and socially for people. I first encountered PWYW at New York’s Metropolitan Museum of Art. Then I discovered that Radiohead had released its In Rainbows album using a PWYW model. Now it’s used by digital media, restaurants, performing arts theaters, taxi companies, and others. Given these very different industries and consumption contexts, I was curious to see if there is variation in how people behave in these situations, what explains that variation, and whether sellers could subtly influence people’s payment behavior, because if a seller allows consumers to pay anything they want for a product, a rational consumer should pay nothing, and that’s not a business model anyone can sustain.
So how much do people tend to pay?
First, most consumers pay more than zero, but beyond that our data shows a pretty wide variance in how much people choose to pay. This raises a number of questions about who pays a lot...and who pays a little. Can sellers take low-cost subtle actions that will get the people who pay a little to pay a little bit more? Past research on social value orientation shows that when it comes to socially interdependent tasks, people tend to behave in one of two ways. Some people prefer distributions that are more beneficial to themselves—“pro-selfs”—and some prefer distributions that are equal to or maybe even more beneficial to the other person—“pro-socials.” In our data, we saw that pro-selfs consistently paid less than pro-socials. That brought us to the third question: Is there a way to essentially make pro-selfs behave like pro-socials in these PWYW situations? The answer appears to be yes. Situational factors and norms can influence consumer payments. Established findings show that interpersonal relationships are generally guided by one of two types of norms-exchange norms and communal norms. In exchange norms, benefits are conferred to the partner with an expectation of timely reciprocation. Benefits in communal norms, on the other hand, are based more on the partner’s needs, and timely reciprocation is not expected. Buyer-seller relationships tend to be based on exchange norms, whereas relationships with friends and family tend to be based on communal norms. As you might expect, people tend to pay less when exchange norms are salient and more when communal norms are salient.
Is it possible to nudge consumers to open their wallets a little more?
Yes, we believe so. In an 11-day field experiment, we designed a PWYW promotion for a pack of gum at a student café under two different scenarios. In the first, we set up a sign with a pair of hands shaking that read, “Special Promotion: It’s Your Turn to Set the Price Today!” In the second, the sign showed a group of hands on top of one another in a circle and the message read, “Because We’re Partners, It’s Your Turn to Set the Price Today!” The former was our exchange norm condition and the latter our communal norm condition. We rotated the signs throughout the days and found that payments were 21 percent higher (an average of 69 cents vs. 57 cents) when the communal norm signage was in place, and that pro-selfs paid as much as their pro-social counterparts in this condition. What this means is that if sellers can make communal norms more salient for buyers, then buyers will pay more for the same good than when exchange norms are salient. This was an easy, no-cost adjustment for a substantive shift in revenues.
Past studies have shown that the way consumers think about the value of different forms of currency—coins, cash, credit cards, loyalty points, foreign currency—varies considerably. So if you allow people to pay what they want in different forms of currency, will your overall revenues be higher as a result of those psychological differences? That’s something I’d like to study further.