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. 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. Please contact us if you know of or are considering doing
similar studies.
Copies may be redistributed for non-profit
use, given attribution to Richard Reisman, Teleshuttle Corp.,
teleshuttle.com/FairPay/FairPayResources.htm
(Draft in
progress - 10/4/10, 10/6/10, 8/14/11,10/10/14 to be 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.
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 Wish. Ju-Young
Kim, Martin Natter, and Martin Spann. Review 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.
Other PWYW References and News items:
Numerous news items and analyses have
addressed PWYW, including the Radiohead offer, other music offers, numerous
video games offers, restaurants (including Panera Bread), and the Freakonomics movie PWYW preview offer. 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 August 2013 had sales of
about $30 million (net after giving a $20 million share to charity). 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.
Note to business-people: 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. |
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