Pay What You Like

Pay What You LikeIn a recent Wall Street Journal article titled To Pay or Not to Pay…, author Sumathi Reddy highlighted the newest pricing model de jour: pay-what-you-want. The concept itself is not new; I can remember going to NYC’s Museum of Natural History a few years back with my kids and seeing the admission price listed as something like “Suggested Donation: $10.” As I was getting the $50 out of my wallet, a local standing next to me remarked, “Don’t worry about the sign, it applies only to tourists, not local New Yorkers.” Despite the advice, I paid the full ‘donation’.

What’s unique about this trend is that it is now crossing over from non-profit institutions to for-profit businesses–in this case, the restaurant business. According to the author:

One World Café in Salt Lake City opened in 2003 as a pay-what-you-want café. Several years later, founder Denise Cerreta created a nonprofit that has helped launch more than a dozen similar operations, including one in Red Bank, N.J., opened last month by rocker Jon Bon Jovi.

And Panera (yes, that Panera) created a nonprofit that now has three pay-what-you-want locations, in Detroit, Portland and St. Louis.

Ron Shaich, founder of Panera, gushed about the experiment in a recent interview and said there are plans to open more. The nonprofit carries the same menu and includes suggested prices, but customers pay in a donation box rather than a cash register. He said the average person leaves about 80% of the retail price.

As much as he favors the concept, he stresses that for a for-profit business it is more difficult “because it introduces a third question into the discussion…’What’s the profit?’”

Exactly, what is the profit? While we may be much more forthcoming with our dollars when it comes to helping museums meet their operating costs, that generosity becomes slightly more stingy when it comes to lining some owner’s pocket. Not a personal opinion, just an observation regarding human nature.

So what exactly is Paula Dourales, owner of the Santorini Grill, thinking?

Well, she says her restaurant isn’t doing so great. It’s a neighborhood place with a core clientele, but business is fickle. So she figured, why not? She’ll do it for a month and see how she fares. If it works, she may continue.

Sounds like your proverbial “Hail Mary” tactic to me. Restaurant doing poorly? We’ll try anything. What I’d like to see is a thriving restaurant with healthy profit margins successfully make the switch. Once that happens, then it gets interesting.

Here’s the takeaway: Consumer behavior to “pay what you feel like” pricing differs greatly depending on perceptions of where the money ends up. If it covers operating costs for non-profits, we all seem to be generous in opening our wallets (with the exception, of course, for local New Yorkers who frequent the museums). On the other hand, if it covers that vacation house in the Hamptons for the owner, our wallets don’t seem to open as wide. A valuable lesson to all for-profits thinking of adopting this new pricing model.

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Patrick LeflerPatrick Lefler is the founder of The Spruance Group – a management consultancy that helps growing companies grow faster. He is a former Marine Corps officer; a graduate of both Annapolis and The Wharton School, and has over twenty years of industry expertise.

This entry was posted in Business Models, Innovation, Strategy, marketing and tagged , , . Bookmark the permalink.

4 Responses to Pay What You Like

  1. I agree the bottom-line is “where’s the money” going and the success of programs like the Humble Indie bee even show that letting customers decide where the money goes can be an even stronger angle.

    My company has had success for over 20 years in the elearning industry. This past month we started a pay what you want model (50% donated to charity). The idea behind the movement is to open up to a much larger userbase that currently cannot access most elearning applications. The potential user base is enormous and largely untapped because few traditional marketing tactics can afford to go so low. We’re relying mostly on social media and word of mouth. Been 2 weeks and very exciting results so far.

  2. Good points. I agree, just want to note that this is everything but new. Exactly, it might be new in for-profit organisaitons but we all may know some Doctors (medicine),homeopaths and self-claimed super natural performers (future tellers, healers) that use this model in a veeeery successful way I should say. I like the fact that someone wondered “why not” and tried for a “traditional” business.
    The tricky psychological issue is interesting as well mostly on established companies. Branding is key here. What you want to say?

    Good luck Brad.

    • I agree, Cesar (and yes this kind of bartering was probably the law of the land pretty much everywhere until a few hundred years ago).

      Branding is key because it’s all about establishing value. Since the value is now negotiated it really boils down to the communication and of course the user’s perception thereof.

      Thanks and best to you in 2012 !

  3. Stina says:

    That’s very very interesting field, freemiums and premiums and all. When we were creating our publishing platform, (where you can thank the artist about her post with any sum you choose and get commentspace after paid), we saw that the most important thing is to set some minimum price.
    If the customer can choose to pay or not, she probably decides not to pay. But if she needs to choose to give $0,10 or more, it’s usually more. She has like already paid the effort to pick up her wallet, and when done so, it doesn’t matter any more to give a bit more than a minimum.
    Making any sense? :)

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