Pay-What-You-Want Business Model- Does it work?

Does the pay-what-you-want business model work? I remember frequenting Annalakshmi, an Indian vegetarian restaurant in Singapore where the food is delectable and where you pay as you wish. It is listed as a non-profit and run wholly by dedicated 'full-time' volunteers. Now this may sound like a very low-end, hole-in-the-wall type of place but you'll be mighty surprised when you step inside. It is very posh and intricately decorated, and the food is of the highest quality. It has been so successful that it has now expanded into a global chain of restaurants with locations in Malaysia, India, and Australia. How does this work? Do people really pay enough for it to be considered a sustainable business venture?

Today, I came across another entrepreneurial venture based on Pay-What-You-Want. The Seattle Times featured Terra Bite, a cafe in Kirkland that lets you pay if and when you like. So I did a little more research and found that Radiohead actually released an album, 'In Rainbows', with this same price model. More recently, Championship Manager 2010 is using this price model (I HAD to download it!). The very existence of these ventures suggests that the business model is indeed a sturdy one, and I have a few thoughts as to why.

1. Price Discrimination (Maximizing Willingness-to-Pay)
This model allows for a very explicit form of price discrimination to take place. Those who are well-off will pay more and cover for those who are not able to pay as much. Simple as that. As the Seattle Times puts it, you can finesse the largesse of the well-off to cover the tabs of the less fortunate. Business always try to price discriminate but this is the best way to do it! By letting the customer decide how much he or she wants to pay!

2. Social Monitoring
Everyone is inherently good. And when people see good, they want to do good. As Erik Okada says, social monitoring- the feeling that people are watching what you do- can enforce payment. When the firm is clear in displaying that its intentions are good, and that it is not putting consumers on the spot by indirectly forcing them to pay higher than they would, patrons will actually pay more than they normally would for a similar fixed price product. This is because the transaction leaves them wondering if they paid too little or too much (there is no price to compare it to!), and most people who can afford it would rather err on the side of too much simply because their conscience may not allow them to 'cheat the system' by paying too little. When an open and transparent transaction process is used, consumers do not want to be viewed as being cheap and miserly!

3. Personal Touch
If there is a personal touch in the service being delivered, people are almost always guaranteed to pay more. This is because they become emotionally invested in whatever is being provided/offered and the sense of attachment to the provider leaves them wanting to not under-pay.

4. Low Markup, High Mass
In the case of Championship Manager and the Radiohead album, it is very easy to see why the model can be so successful. Both are available for download over the internet after purchase, meaning that the marginal cost of each additional download is practically zilch. People may pay less but the low markup over marginal cost can easily be compensated for by developing a large mass.


5. Marketing the Novelty of the Idea
That leads us to the question- How do you get mass? All you need to do is market the novelty of the idea. Word will spread like wildfire, and each consumer will pay it forward. When do you ever get to pay as you like for anything?! Never! So you will want to try it out just to experience the transaction. As long as the model remains a novelty and not in common existence, it can definitely be a successful one.