Pay what you want pricing means a business or an individual offers a product upfront to the customers and then it is left up to the customer what the customer wants to pay or even if the customer wants to pay.
The pay what you want pricing model works well on two levels. One is that free products will attract many customers and as a result, you would be able to market your products at no cost.
The second level is that it projects confidence. You are telling your customers that you are so sure of the quality of your product that you know the customer would love your product and even pay for that product later.
There are also many cautionary tales associated with the pay what you want pricing strategy. You should probably be careful what kind of business you are in to even apply the Pay what you want a strategy.
If you have an e-book, a pay what you want pricing strategy is probably a good idea. But, if you are a restaurant, which operates on very thin margins, it is not a very good idea.
Take, for example, the example of a Chinese restaurant in China. The company decides to implement the Pay what you want strategy, it believed that the name of the restaurant will spread while also it will be able to gain repeat customers.
The temporary loss associated with pay what you want pricing would be recouped in the future. The people came pouring into the restaurant and it caused the company about one hundred thousand dollars. But, when they stopped the customers also stopped coming.
What they found out was not even a single customer came to the restaurant the next day. So, businesses should be careful when thinking of adopting the pay what you want pricing model.
How does the pay what you want pricing works?
The pay what you want pricing is divided into three main types. Each has its own advantages and disadvantages, and its own working method. The three pay what you want pricing models are shown in figure 1 below:
Figure 1: Pay what you want pricing types
The three types of pay what you want pricing are Ex Post pricing, charity elements and repeated transaction. Each type suits a particular type of business. The companies should make sure what type of pricing model suits them the best.
Ex Post pricing
Ex-ante means, ‘before the event’, and this is the usual sale model adopted by companies. For example, when you are buying something online, first you pay for it, and when you receive it.
The ex-post pricing means that first, the customer gets the product, and then he pays for it, of course in the pay what you want pricing if the customer even wants to pay for it. So, you would receive the money after the customer receives the product.
This is a great strategy to attract customers who are highly risk-averse. These people do not like to take risks when buying something new. So, Ex post pricing is a great pay-what-you pricing model to attract risk-averse customers.
The type of products for which Ex Post pricing should be used is products like e-books, cups, etc. The products can be used multiple times, for them, businesses should use Ex Post pricing.
The pricing element is by far the most widely used and famous pay what you want pricing strategy. You must have seen it being used somewhere. The usual line is, ‘ If you buy one of our products, a portion of it will be donated to the charity’.
This pays what you want pricing strategy is used to appeal to people’s empathy. This helps increase the sale of products as people feel good when they are buying that particular product. So, this strategy uses emotions to sell to people.
For example, this strategy is used by world-famous brands like Coca-Cola and Pepsi. The charity element should be included in the pay what you want pricing for products like consumer goods, single-use products, food products, and products like toilet paper.
This pays what you want strategy should be used for businesses who want to attract repeat customers. This is also called fair pay.
This works by data on transactions of a single customer. Then the seller can use this data to make the decision of whether to increase product offering to that particular customer.
This is basically an incentivization scheme. The customer knows that he/ she will get better offers in the future if he/she sticks with the fair pay system.
This allows the business to be able to get predictable and consistent payments, which is pretty rare for companies that use the pay what you want pricing strategy.
The products for which repeated transactions should be used are any products really; they can be single-use, multiple-use, consumer goods, and foodstuffs.
Biggest advantages of pay what you want pricing strategy
The biggest advantages associated with using pay what you want pricing strategy are as follows:
i) Attracting new customers.
ii) Getting your products to a much wider customer base.
iii) Ability to attract customers that are highly risk-averse.
iv) Building a highly loyal customer base.
v) Incentives for customers to buy more products.
Biggest disadvantages of pay what you want pricing strategy
As there are advantages associated with pay what you want pricing, there are also some huge risks associated with it. The biggest disadvantages are as follows:
1) If the strategy does not work as intended, the company will be left with huge losses.
2) A very risky proportion as customers do not pay for the products.
Pay what you want pricing is a high risk and high reward strategy. The company should do its research and find out whether this is the right strategy for it.