Pay What You Want Works Much Better With A Charity Component

Business Models

from the empirical-research dept

We’ve talked a lot about different types of business models with “pay what you want” being a popular one that comes up often. I still think there are some problems with it, but there’s growing evidence that it can work very well. When Radiohead got a ton of attention for using it, the band made more from the digital “donations” than any of its previous albums’ digital releases — even though plenty of people still chose to pay nothing, and the average price was a lot lower than standard. But average price is kind of meaningless when judging the success of such a program. It’s really the net that matters, and on that front, Radiohead did quite well.

We’ve seen the general model work elsewhere as well. A taxi driver had some success with it, as have many musicians who have used it with merchandise at shows. Even Panera Bread is testing it out. Earlier this year, there was a lot of attention paid to the really, really successful story of the Humble Indie Bundle that did pay what you want for a group of video games. That had an added component as well. Some portion of what you paid could be designated to go to specific charities (EFF and Child’s Play).

It seems that the folks behind the Humble Indie Bundle are on to something.

A fascinating new study has shown that “pay what you want” offerings seem to maximize the net take for those using it if they include charitable giving. The study was done at an amusement park, where people could buy a photo of themselves on a roller coaster, and four different situations were tested: (1) the standard “pay a fixed price” (2) a straight “pay what you want” (3) fixed price with part of the money going to charity and (4) pay what you want with part of it going to charity.

What’s amazing is that the fourth one was the best one in terms of the net amount to the seller (yes, after giving the portion to charity). Sales were much higher and the net dollar amount to the seller was much higher than the straight “pay what you want.”

Specifically, when people were asked to pay the flat price of $12.95, only 0.5% did. The $12.95 price, where half went to charity, barely increased the number of buyers. Then only 0.57% of people bought, and (obviously) after the charities cut was taken out, the net was way down. If it was pure “pay what you want,” a lot more people bought: 8.4%, but the amount was much, much lower (average: $0.92). In terms of overall revenue, the gross is up, but the net definitely depends on the cost of the photos. If there’s no marginal cost, then net revenue would go up as well (what Radiohead found). But in the final scenario, where it was pay what you want, but half went to charity, the overall reaction was the highest. 4.5% bought, and the average price was $5.33. Even when you take out the half going to charity, the revenue is much, much higher.

Now, there are a few caveats I can think of here. The $12.95 price appears to be pretty high. It’s entirely possible that there could be another, lower, price that would do a better job maximizing profits. Perhaps at $5, the results would be somewhat different. So I’d definitely like to see more research done with different pricing points. Separate from that, I also find it… odd, that the yield rate when charity is added to pay what you want seems to be almost half of the pure pay what you want. Perhaps I’m missing something, but I can’t see how that makes much sense. The “cost” to the user is the same, effectively, and clearly a lot of people value it a lot more. But nearly half don’t value it at all? That seems… odd. Perhaps there are some more details that are missing from the summary of the study.

Overall, though, a fascinating experiment that shows how helping a charity can not just be good for the charity, but can also maximize your own efforts. Just don’t tell that to the financial columnist who thinks charitable lemonade stands are destroying America.

Filed Under: charity, pay what you want, studies