What is a “Pay What You Can” business model? How does it work and what are its pros and cons? Here is everything you need to know about PWY. CPay what you can (PWYC) is a non – profit or revenue driven plan of action which does not rely on set costs for its products or merchandise, instead it requests that clients pay what they feel the item or administration is worth to them. It depends more on correspondence and trust to succeed.
Table of Content
- How Does “Pay What You Can” Business Model Work?
- 1. Increases reach
- 2. Allows for price discrimination
- 3. Undercut business competitions
- 4. Maximizes Customer Value
- Cons of “Pay What You Can” Business Model
- 1. Increases business risk
- 2. Location and customer demographic constraint
- 3. Doesn’t work with every product
- 4. Discourages customers
How Does “Pay What You Can” Business Model Work?
This business model is often seen as a donation and not actually as purchasing a product for the organization to make a huge profit. Pay what you can organisations implement this business model once they have achieved profit from previous sales and advertisement, hence the ability to implement a Pay what you can strategy.
As the name suggests, pay what you can (PWYC) pricing leaves it up to the customer to pay what they think the product/service is worth. In the music world, Radiohead and Amanda Palmer have released music that can be accessed for free but where payment is requested. Fans being fans, these two musicians ended up making more money than they would have through traditional retail releases.
Also note that outlets like Panera in the US provide access to food for those in need but end up being subsidised by those who can pay and who tend to pay more because they support the cause. Museums like The Met in New York often request a donation upon entry.
Even the Freakonomics podcasters have requested that loyal listeners make a contribution to keep the show available for ‘free’. However, this pricing model gambles on the promise that people will pay for something they find valuable.
While most uses of this business model have been at the margins of the economy, or for special promotions, there are emerging efforts to expand its utility to broader and more regular use. Other names include “pay what you wish”, “pay what you like”, “pay as you want”, “pay what you feel”, “pay as you wish”, “pay as you like”, “pay what you will”, and “pay as you will”.
“Pay what you can” is sometimes used synonymously, but is often more oriented to charity or social uses, based more on ability to pay, while PWYW is often more broadly oriented to perceived value in combination with willingness and ability to pay.
Pros of “Pay What You Can” Business Model
Giving buyers the freedom to pay what they want can be very successful in some situations, especially since it eliminates many disadvantages of conventional pricing. Note that buyers are attracted by permission to pay whatever they want, for reasons that include eliminating fear of whether a product is worth a given set price and the related risk of disappointment (“buyer’s remorse”). Here are few other benefits of using this business model.
1. Increases reach
Free spreads faster than expensive, low cost items are purchased more often and in larger quantities than luxury goods, and when price isn’t a barrier, more people buy (and share). This business model entices members of the public to engage with the business or organization (potential future customers). Attracts a large number of potential customers from friends and families of current customers (word of mouth).
2. Allows for price discrimination
Normally this means companies try to extract the most a customer would be willing to pay by offering different services, such as extra legroom on planes. For instance, consider how much you would pay for a grilled potato breakfast. For some people, the answer is $12. For others it is $18.
A restaurant that prices its smashed potatoes at $16 may be losing some customers (those willing to pay only $12) and also fail to capture the full value from other customers (those who would have been willing to pay $18). By allowing people to pay as they can, the restaurant can successfully cater to both types of customers.
3. Undercut business competitions
Pay – as – you – can is also used to undercut the competition. After a competitor must have posted its prices in a menu or on a website, customers can always pay less at the pay – as – you – want business. This can not only increase the number of customers to the pay – as – you – want business, but could drive competitors out of the market.
4. Maximizes Customer Value
Customer Value Maximization (CVM) is a marketing term that entails getting as many sales as possible, for as much money as possible, from as many potential customers as possible. For most companies in the United States, their CVM strategy includes lots of discounts, clearance sales, group purchase deals, limited time offers, upsells, etc.
In some cases, there are hundreds of people in a marketing department working year round trying to increase this number. With Pay What You Can, though, you don’t need a marketing team – the pricing technique itself maximizes customer value.
Cons of “Pay What You Can” Business Model
The last couple of years have seen the rise of restaurants, museums and other businesses allowing customers to pay as they can. Indeed there may be altruistic reasons for companies to adopt this pricing, but research shows that this business models homes with some limitations and disadvantages too.
1. Increases business risk
Adopting pay – what – you – can does increase the risk for businesses, as customers can easily pay nothing, or less than the seller’s costs. Surely people will jump at the opportunity to short change your business, paying much less than the standard rate.
After all, we all love getting stuff for free. Also, this business model all comes down to perceived value, willingness and ability to pay. So if you are selling, don’t try this model unless you believe 200 percent in your offering and the value it holds for your customers, otherwise you’ll come up short on the income side.
2. Location and customer demographic constraint
As a seller, you are depending heavily on the kindness of your customers, as well as their willingness and ability to pay. So if you are attracting cash – strapped teenagers, students, pensioners and bargain hunters looking to pay next to nothing, this business model may not work.
It could even bankrupt your business if you don’t sufficiently cover your costs. You also require a strong connection between buyer and seller. For example, you may support a cancer charity (and give them bigger donations more often) because a close friend passed away of cancer.
3. Doesn’t work with every product
For this business model to work, the cost of producing one more item is expected to be low. A product that can realistically be sold at a wide range of prices, like high – ticket assets like art, used cars and property tick yes for this criterion.
4. Discourages customers
To add more uncertainty to this business model, a 2012 study stated that the “Pay What You Can” may discourage some customers from buying a product altogether. Why? The researchers proposed that “individuals feel bad when they pay less than the “appropriate” price, causing them to pass on the opportunity to purchase the product altogether.”
This business model is a novel approach that depends very much on your ability to persuade customers to behave in a way you would prefer. It’s not for the faint of heart but can set you aside from others in your market. For sellers it obviates the challenging and sometimes costly task of setting the “right” price (which may vary for different market segments).
For both, it changes an adversarial zero – sum conflict centred on price into a friendly win – win exchange centred on value and trust, and addresses the fact that value perceptions and price sensitivities can vary widely among buyers.