In 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.
Patrick 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.