Resource Guide to Pricing -- Finding Fair Value Exchange

Annotated links and references

This resource guide is on general topics relevant to FairPay pricing processes, and on work specific to the related area of Pay What You Want (PWYW) pricing (both forms of co-pricing or participative pricing).  It is a work in progress, to be expanded, and may include added topics as they become relevant.

As described elsewhere on this site, FairPay is a radically new pricing process that takes elements from PWYW, Freemium, Name Your Price, and others, and adds Internet feedback on individual pricing history to create a dynamically adaptive, individualized pricing process that improves upon all of these.  As noted below, these studies are strongly suggestive that PWYW is far more promising than generally understood, and that FairPay can be expected to work even better. 

A motivation for promoting this work is to identify the benefits of FairPay, and to encourage similar studies specific to FairPay.

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)

(Copies may be redistributed for non-profit use, given attribution to Richard Reisman, FairPayZone.com, http://www.fairpayzone.com/p/pricing.html)

(Draft in progress - 10/4/10. Last revised 2/23/17, to be further revised and expanded.)


Pricing in General

Smart Pricing: How Google, Priceline, and Leading Businesses Use Pricing Innovation for Profitability, Jagmohan Raju, Z. John Zhang.  Wharton School Publishing; (April 5, 2010).
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.


Free: The Future of a Radical Price, Chris Anderson.  Hyperion (July 7, 2009).
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. 


The Strategy and Tactics of Pricing (5th Edition), Thomas Nagle, John Hogan, Joseph Zale.  Prentice Hall; 5 edition (March 12, 2010).
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

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."

Pay What You Want (PWYW)
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)


These works provide valuable insights into PWYW pricing, in a flurry of work since the Radiohead offer brought this model to wide attention..  While PWYW has been neglected as not a viable option for most businesses, it can be surprisingly effective in many situations, such as for selected product lines, for sellers who are viewed as deserving of compensation, and in combination with charity.  In spite of its limitations, many sellers would do well to consider how it might apply in selected contexts, and to consider the larger lessons about pricing that it demonstrates.  As this research shows, buyers can be surprisingly fair and even generous.  PWYW can sometimes increase profitability over conventional models, and can be useful for both real and digital products/services.  It also shows that when you let buyers set prices, no one can compete with you on price, and you can expand your market to make all of "the profit that fair-minded consumers are willing to give."  (And of course much of this should apply to and work even better with FairPay -- studies of that could be very illuminating.)

Research papers

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.

Pay What You Like.  J Fernandez, B Nahata - April 2009, Munich Personal RePEc Archive.
Explores motivations for consumers and firms.  Notes that PWYW is polar opposite from "buffet pricing (or flat-fee pricing)" [aka "all you can eat"] where consumer decides how much to consume for a given price.  Models how consumer maximizes long-term utility by not threatening survival of seller.  Seller benefits include reduction in price-setting costs, and maximizing inclusion of consumers in the market (including those with low willingness to pay).  Models show "that PWYL pricing would be more successful in sectors where products are more differentiated (or have fewer substitutes) such as music and specialty foods, but would fail in sectors where the service or product is homogenous (or has many close substitutes) such as gasoline."  If a market is "sufficiently differentiated it facilitates a voluntary segmentation based on consumers self selection thus making a 1st-degree price discrimination feasible, but without incurring the cost such practice generally requires."

Do consumers pay voluntarily? The case of online music.  T Regner, JA Barria - Journal of Economic Behavior & Organization, August, 2009.
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) 
Gives very readable and insightful overview of Radiohead offer, high costs of price-setting ("menu cost"), personalized selling to all interested buyers, elimination of piracy, applicability to restaurants as well as media, incentives for better service and customer relationships, and reduced payments to middlemen.  Explores five key qualities for successful use:
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."

Kish: Where Customers Pay As They WishJu-Young Kim, Martin Natter, and Martin SpannReview of Marketing Science, Special Issue: Marketing Science in Practice, August 05, 2010. 
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 GoodsHenrik Egbert, Matthias Greiff and Kreshnik Xhangolli. Munich Personal RePEc Archive, 2/4/14.
Highlights the potentially very significant benefits of an underexploited variant of PWYW. From abstract: “This paper addresses PWYW pricing for bundles of experience goods. … a PWYW pricing mechanism, if applied ex post consumption, separates the decision to buy from the decision how much to pay. Information asymmetries about the quality of the good are reduced during the act of consumption so that buyers are informed about the product’s quality when they decide how much to pay. As a consequence, risk-averse buyers who would otherwise refrain from purchasing under a fixed price mechanism, can be attracted to purchase under a PWYW pricing ex post consumption (PWYW-EPC) mechanism. In this case, the pricing mechanism itself constitutes a signal. The paper concludes [this] can be a profitable strategy … to attract risk-averse buyers for realizing economies of scale in production”  They suggest that " sending such a signal may be the beginning of a relational contract initiated by the seller’s choice to implement a PWYW pricing mechanism.”

Voluntary MarketPayments: Underlying Motives, Success Drivers and Success Potentials. Martin Natter, Katharina Kaufmann. Journal of Behavioral and Experimental Economics (August 2015), doi: 10.1016/j.socec.2015.05.008
Perhaps the most comprehensive survey to date of PWYW and related forms of voluntary payment (tipping, donations, gifts) -- part of a special issue on that topic. Examines many relevant factors as they relate to voluntary pricing strategies, including product characteristics, consumer-related characteristics, situational variables, relational techniques, and reference prices. Also addresses economic and communicative success, and underlying market motives.

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 the survey (with numerous reference links) that is provided in this post: Beyond the Deadweight Loss of "All You Can Eat" Subscriptions.