I am collaborating with Adrian Payne and Pennie Frow on a research paper exploring this space from the perspective of how co-pricing (such as with PWYW) works in digital markets, and how two-way, interactive learning (such as in FairPay) affects the design and fine-tuning of value propositions. Suggestions of additional publications relevant to this work (and this resource guide) are invited. Please make contact if you know of or are considering doing similar studies. (FairPay [at] teleshuttle [dot] com)
An excellent and very readable overview of many innovative pricing strategies. Has a very current and helpful chapter on "Pay As You Wish," with eye-opening insight into why this deserves more serious attention that one might think (see chapter comments below). Also good background on Name Your Own Price, Subscribe and Save, and Pay If It Works, all of which have some relation to FairPay.
An excellent overview of the current crisis in revenue models for digital products/services. Builds a richly developed case for the power of Free (especially in the hybrid form of Freemium, with its many variations), arguing that “eventually the force of economic gravity will win,” driving prices down to zero.
A comprehensive and practical, step-by-step guide to pricing analysis and strategy development. Does not address PWYW or Freemium, and not oriented to digital products/services, but much useful background, including discussion of dynamic pricing models.
FairPay: Adaptively Win-Win Customer Relationships, Richard Reisman (September 16, 2016) Business Expert Press, Service Systems and Innovations in Business and Society collection.
The definitive book on FairPay -- with significant coverage of alternatives, including freemium and PWYW -- “an innovative and visionary methodology,” "groundbreaking," a "radically new perspective," "promises to transform business."
AKA: Pay As You Want (PAYW), Pay What You Wish, Pay What You Like (PWYL), Pay As You Wish, Pay As You Like (PAYL), Pay What You Will (PWYW), Pay As You Will (PAYW)
Pay what you want: a new participative pricing mechanism, JY Kim, M Natter, M Spann - Journal of Marketing, January 2009 - Am Marketing Assoc. (no free full-text URL found)
Apparently the first of a flurry of research papers on PWYW. It addresses the value of participative methods to enable individually differentiated prices, and the insights into willingness to pay that are obtained. Notes that the results depend on the proportion of "deal profit" a buyer is willing to share, and that that "is mainly driven by the consumer's fairness, satisfaction, price consciousness, and income" and secondarily, by altruism and loyalty.
Especially relevant to digital media content (music), insightful real-world analysis of Magnatune, an indie music distributor that applied a PWYW purchase business model with suggested price and min and max (apparently since changed, after a number of years, to a fixed-price subscription model instead of download sales), and which advertises a relatively high 50-50 split with artists. Applies behavioral and game theory to find significant factors to be the seller offering of pre-purchase access to try the product before setting price, as 1) creating a reciprocity motivation in buyer to pay fairly, and 2) reducing a buyer's need to under-price in order to offset risk of buyer remorse (from product disappointment, music being an experience good). Suggests strongest factor motivating good prices may be social reciprocity, but that social preferences ("warm glow"), and guilt (paying less than one should) may also be factors. Finds that individual type differences in their underlying motivation factors are significant in the pricing behavior patterns of repeat buyers.
Pay-as-You-Wish Pricing. Yuxin Chen, Oded Koenigsberg, Z. John Zhang. October 30, 2009, working paper.
Cites advantages of PWYW as 1) helps a firm to maximally penetrate a market; 2) allows a firm to price discriminate among heterogeneous consumers; 3) helps to moderate price competition. Suggests PWYW penetrates deeply into markets with low willingness to pay, and that it may not require very low marginal costs. Finds a suggested or minimum price to be helpful. Concludes that it enables autonomous price discrimination and thus moderates price competition -- firms "make the profit that fair-minded consumers are willing to give."
"Pay As You Wish" Pricing chapter in Smart Pricing: How Google, Priceline, and Leading Businesses Use Pricing Innovation for Profitability, Jagmohan Raju, Z. John Zhang. Wharton School Publishing; (April 5, 2010). (See book description above)
1. A product with low marginal cost
2. A fair-minded customer
3. A product that can be sold credibly at a wide range of prices
4. A strong relationship between buyer and seller
5. A very competitive marketplace
Suggests buyer-set prices depend on framing, and can involve combinations of anchor pricing (or reference pricing), value pricing (value to buyer), and fair pricing (fair return to seller).
The Pay-What-You-Like Business Model: Warm Glow Revenues and Endogenous Price Discrimination. RM Isaac, JP Lightle, DA Norton - May 21, 2010, papers.ssrn.com
Describes conditions where PWYW can increase profits. Favors use of a suggested minimum price, and finds key advantage of PWYW as "endogenous price discrimination," enabling sellers to obtain more than a suggested amount from rational buyers, "to earn more revenue and generate more efficient outcomes," and to benefit from reciprocity in the form of a "gift exchange."
Substituting Piracy with a Pay-What-You-Want Option: Does it Make Sense? G Grolleau, I Bekir, S El Harbi - CEAFE, tn.refer.org, June 2010.
Examines the Radiohead PWYW offer and implications for artists, publishers, and consumers, relative to piracy and fixed prices. Suggests artists and consumers may mutually benefit (and reduce piracy), with publishers being squeezed.
Shared Social Responsibility: A Field Experiment in Pay-What-You-Want Pricing and Charitable Giving. A Gneezy, U Gneezy, LD Nelson, A Brown - Science, 7/16/2010.
Very interesting findings that adding charitable giving to PWYW can significantly increase total revenue and profit, even over a conventional fixed price. PWYW+charity yielded significantly higher total profit than PWYW without charity, and also more than either a simple set-price, or set-price+charity. Individually, the PWYW buyers paid less than the set-price buyers, but far more of them made a purchase. In this case the product was a photo of the participant taken during an amusement park ride. Purchase rates were very low with standard pricing (at $12.95) and only slightly higher when 50% of that price went to charity. As summarized in the Discover blog, "...But when customers could pay what they wanted in the knowledge that half of that would go to charity, sales and profits went through the roof."
Focus here is on a lunch time buffet, finding PWYW very effective for this high fixed cost, low variable cost offering, and an effective customer acquisition method (leading to more profitable full-price dinners). As with earlier study by these authors, fairness and reciprocity are considered key motivators to pay well.
We’re In This Together: How Sellers, Social Values, and Relationship Norms Influence Consumer Payments in Pay-What-You-Want Contexts. Shelle Santana, Vicki G. Morwitz. Under Revision for Invited Review at Journal of Marketing, June 17, 2013.
Very interesting study that shows that consumers not only pay more than zero, but sometimes above their reference price, and explores how sellers can influence that. Buyers consider both their own welfare and that of the seller, and this varies depending on (1) their social value orientation (a trait) and (2) whether exchange or communal norms are felt to apply (a situational variable). This is particularly helpful in understanding how to maximize profit under PWYW, and especially under FairPay, as discussed in a blog post.
PWYW Pricing ex post Consumption: A Sales Strategy for Experience Goods. Henrik Egbert, Matthias Greiff and Kreshnik Xhangolli. Munich Personal RePEc Archive, 2/4/14.
The Pay-What-You-Want Game and Laboratory Experiments. Matthias Greiﬀ, Henrik Egbert. Munich Personal RePEc Archive, 11/22/16.
Important as the only work I have seen that focuses on the realization that PWYW can be far more effective when done as a repeated game that motivates cooperation and trust than as a single-shot game (as it is so far most common in practice). Defines a PWYW game as embedding the dictator game and the trust game as subgames. The basic repeated PWYW offers may be ended by the seller if results are not satisfactory, giving the seller a level of control and changing buyer behavior to seek to maintain PWYW offers. Concludes that success is enhanced by effective communication and reduction of goal conflicts. This is essentially the repeated game that FairPay applies, and so this work gives strong support to the expectations of success of the FairPay repeated game.
Commercial Successes and News items:
Numerous news items and analyses have addressed PWYW, including successful use in business -- such as the Radiohead offer, other music offers, numerous video games offers, restaurants (including Panera Bread), the Freakonomics movie PWYW preview offer, and fashion e-tailer Everlane. One particularly notable example is Humble Bundle, an aggregator of indie games, music, and e-books that raised $4.7 million from Sequoia Capital in 2011, and by October 2014 participating developers had grossed more than $100 million (while raising more than $50 million for charities). Links to a selection of such items are planned to be included in the future. (Referrals to other compendia will also be considered for inclusion.)
The Wikipedia entry on Pay What You Want also contains useful background, including actual business examples.
How-to guide: For those seeking to implement PWYW offers in their business an excellent practical resource, full of insights and experience on best practices, is "The Complete Guide to Pay What You Want Pricing" by Tom Morkes (2014), as described in a post here. (Bonus content available with that guide includes an audio interview of me about FairPay.)
Note to businesspeople: Many of the above works are not easy reading, and are based on advanced mathematical models with simplifying assumptions, or on analysis of simplified experiments. Nevertheless, they are generally consistent, and all suggest interesting conclusions that can be gleaned from scanning of selected sections. The caveat, of course, is that both experiments and mathematical models are only as relevant as the particular cases and assumptions (often oversimplified or different from cases of interest), and may be best taken as suggestive examples.
Other Pricing Models -- Value-based, Performance-based, Outcomes-based, Freemium, Micropayments, Microdonations, Post-pricing, Usage-based, etc.
Pending expansion of this section, please refer to these two surveys containing numerous reference links: