Experiment: does it pay to let customers set their own prices?

An experiment with a pay-what-you-want offering, including the option to not pay at all, increased revenues.
Written by Joe McKendrick, Contributing Writer

In reverse-auction transactions, such as those offered through Priceline.com, customers set the prices they're willing to pay, and wait to see which sellers bite. That's a one-to-many proposition. But what about a one-to-one interaction between a seller and a buyer in which the seller exclusively dictates the price?

Three University of California-San Diego researchers conducted a experiment in which an amusement park let customers set the prices they would be willing to pay for thrill pictures on one of the rides. They could even pay nothing. Sure, there's risk, but pay-want-you-want pricing also resulted in an eight-fold increase in sales, according to The Economist. (The findings were originally published in Science, paid registration required.)

As described, the experiment had an interesting result -- revenues from the thrill photos increased:

"The authors set up their pricing experiment at the exit of a roller-coaster ride at a large amusement park. Riders were offered a photograph of themselves, snapped mid-coast. The usual price was $12.95, but on one day riders were told they could pay what they wished, including taking the photo for free.... Allowing customers to set the price dramatically increased the percentage of buyers—from less than 1% to 8%. Even accounting for those who took a free photo, the amusement park collected more revenue on the pay-what-you-want day than when selling for the usual fixed price."

Another twist: when customers were informed that half the money they paid would go to a charity, revenues tripled.

Interesting strategy proposed by the professors -- but actually, it's been done before. Consider a place where this same model actually has been in force for years -- at museums. For example, the New York Metropolitan Museum of Art asks for voluntary donations of any amount up to the recommended adult admission of $20 per visit. About $30 million, or 15% of the museum's funding, came through admissions in fiscal 2010.

Charities operate on a pay-what-you-want model, and many have impressive revenues.

The big question is: is this a model that could work for businesses? Or are standard market mechanisms -- supply and demand -- enough?  With enough competition, after all, customers can simply walk away from a transaction to get the price they want. Should pay-what-you-want be more overt?

This post was originally published on Smartplanet.com

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