Pay What You Want Works Much Better With A Charity Component

from the empirical-research dept

Wed, Jul 21st 2010 11:16am — Mike Masnick

We've talked a lot about different types of business models with "pay what you want" being a popular one that comes up often. I still think there are some problems with it, but there's growing evidence that it can work very well. When Radiohead got a ton of attention for using it, the band made more from the digital "donations" than any of its previous albums' digital releases -- even though plenty of people still chose to pay nothing, and the average price was a lot lower than standard. But average price is kind of meaningless when judging the success of such a program. It's really the net that matters, and on that front, Radiohead did quite well.

We've seen the general model work elsewhere as well. A taxi driver had some success with it, as have many musicians who have used it with merchandise at shows. Even Panera Bread is testing it out. Earlier this year, there was a lot of attention paid to the really, really successful story of the Humble Indie Bundle that did pay what you want for a group of video games. That had an added component as well. Some portion of what you paid could be designated to go to specific charities (EFF and Child's Play).

It seems that the folks behind the Humble Indie Bundle are on to something.

A fascinating new study has shown that "pay what you want" offerings seem to maximize the net take for those using it if they include charitable giving. The study was done at an amusement park, where people could buy a photo of themselves on a roller coaster, and four different situations were tested: (1) the standard "pay a fixed price" (2) a straight "pay what you want" (3) fixed price with part of the money going to charity and (4) pay what you want with part of it going to charity.

What's amazing is that the fourth one was the best one in terms of the net amount to the seller (yes, after giving the portion to charity). Sales were much higher and the net dollar amount to the seller was much higher than the straight "pay what you want."

Specifically, when people were asked to pay the flat price of $12.95, only 0.5% did. The $12.95 price, where half went to charity, barely increased the number of buyers. Then only 0.57% of people bought, and (obviously) after the charities cut was taken out, the net was way down. If it was pure "pay what you want," a lot more people bought: 8.4%, but the amount was much, much lower (average: $0.92). In terms of overall revenue, the gross is up, but the net definitely depends on the cost of the photos. If there's no marginal cost, then net revenue would go up as well (what Radiohead found). But in the final scenario, where it was pay what you want, but half went to charity, the overall reaction was the highest. 4.5% bought, and the average price was $5.33. Even when you take out the half going to charity, the revenue is much, much higher.

Now, there are a few caveats I can think of here. The $12.95 price appears to be pretty high. It's entirely possible that there could be another, lower, price that would do a better job maximizing profits. Perhaps at $5, the results would be somewhat different. So I'd definitely like to see more research done with different pricing points. Separate from that, I also find it... odd, that the yield rate when charity is added to pay what you want seems to be almost half of the pure pay what you want. Perhaps I'm missing something, but I can't see how that makes much sense. The "cost" to the user is the same, effectively, and clearly a lot of people value it a lot more. But nearly half don't value it at all? That seems... odd. Perhaps there are some more details that are missing from the summary of the study.

Overall, though, a fascinating experiment that shows how helping a charity can not just be good for the charity, but can also maximize your own efforts. Just don't tell that to the financial columnist who thinks charitable lemonade stands are destroying America.

Filed Under: charity, pay what you want, studies

18 Comments

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Marcus Carab (profile), 21 Jul 2010 @ 10:50am

My only thought on your final question (about decreased turnout for the Charity PWYW) is that people perhaps feel guilty about paying small amounts to charity and thus feel obligated to give more, so they avoid it altogether.

In other words, it's easier to cheap out on a vendor than a charity.
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Anonymous Coward, 21 Jul 2010 @ 11:49am

I think there's a guilt-trip factor that people (I, particularly) don't react well too. I mean, a pay-what-you-want with a charity involved implies that you're chip if you're not paying enough. And since the model doesn't specify what that "enough" is, there's a risk involved. I personally would skip that entirely.
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- Mike Masnick (profile), 21 Jul 2010 @ 12:09pm
  
  Re:
  I think there's a guilt-trip factor that people (I, particularly) don't react well too. I mean, a pay-what-you-want with a charity involved implies that you're chip if you're not paying enough. And since the model doesn't specify what that "enough" is, there's a risk involved. I personally would skip that entirely.
  
  What if it was an option? *Check here to give 20% of your fee to charity*? Would that be more appealing? Then youc an choose.
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  - JC, 21 Jul 2010 @ 12:37pm
    
    Re: Re:
    I agree with the AC but I'm guessing people who want to pay nothing (or very little) would feel guilty about not giving to charity (hence the overall participation reduction).
    
    I think the "check here to give option" would be a wash. It may help alleviate the guilt of the non-giver; but it may also make the people interested in the charity aspect think twice because of the "marketeese" that would surround such a check box.
    
    "50% of proceeds go to charity" sounds much better than "you can optionally give 20% of your donation to charity."
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    - Modplan (profile), 21 Jul 2010 @ 12:50pm
      
      Re: Re: Re:
      In actual fact, the Humble Indie Bundle did give users the option of deciding what share of the money you gave to charity.
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      - JC, 21 Jul 2010 @ 2:05pm
        
        Re: Re: Re: Re:
        I was discussing the roller coaster ride photograph situation specifically.
        
        Also, the humble indie bundle wasn't an experiment trying to determine the effect of charitable donations on participation and overall giving. I applaud them giving money to charities, but from a marketing perspective they weren't playing up the charity as a big part of the promo - more like an afterthought.
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      - Andrew F (profile), 21 Jul 2010 @ 2:23pm
        
        Re: Re: Re: Re:
        Also, the charity option is checked by default.
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  - Anonymous Coward, 21 Jul 2010 @ 12:42pm
    
    Re: Re:
    Yeah, absolutely. As a matter of fact, I was a day late for the Humble Indie Bundle, but I found it extremely appealing. The other factor was that in the bundle there was an average of current donations, so I could measure my donation with that of others (meaning, I wouldn't feel like a cheap bastard for donating 5-7 dollars).
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    - Anonymous Coward, 21 Jul 2010 @ 12:44pm
      
      Re: Re: Re:
      I just read my original post, Mike's and JC's and I think that what I wanted to express is that transparently stating an average may increase participation. I still think that not having that is what drives the percentage of participation down.
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      - JC, 21 Jul 2010 @ 2:08pm
        
        Re: Re: Re: Re:
        I read this right after posting above.
        
        Showing a running percentage of how much is going to charity would probably be a great way to solve the problem of making it optional but also advertising it more clearly.
        
        Something like 22% of proceeds have been designated for charity.
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harry, 21 Jul 2010 @ 12:10pm

Perhaps Charity helps but the restaurants keep dropping
Here's a generally positive article from the NY Times that still notes that many of the earlier attempts failed.
http://www.nytimes.com/2010/05/21/us/21free.html

Such skepticism, coupled with a fair amount of freeloading, has all but killed the concept in other places. The phone at the Java Street Cafe in Kettering, Ohio, which last year embraced the pay-what-you-want strategy, has been disconnected, and it appears to have closed.

And Tierra Sana in Queens folded — though it offered customers a pay-what-you-want option only one day a week.

The Terra Bite Lounge, a cafe in Kirkland, Wash., operated as a pay-what-you-want restaurant for a year or so. But Ervin Peretz, its owner and a lead technical designer at Google, said the cafe now charges for its meals. He said he dropped the model in part because of issues particular to its location — it is in a neighborhood popular with teenagers.

It looks like those meddling, filesharing kids again.
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- Modplan (profile), 21 Jul 2010 @ 12:23pm
  
  Re: Perhaps Charity helps but the restaurants keep dropping
  I guess it helps when the thing you're charging for in the first place doesn't cost anything (or very little) to reproduce.
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- Mike Masnick (profile), 21 Jul 2010 @ 12:34pm
  
  Re: Perhaps Charity helps but the restaurants keep dropping
  Here's a generally positive article from the NY Times that still notes that many of the earlier attempts failed.
  
  Yeah. I've never been a huge fan of pay what you want for scarce goods. That can backfire badly.
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Comboman (profile), 21 Jul 2010 @ 1:03pm

A few thoughts
1) I believe if it was worded "Pay what you think it's worth" rather than "Pay what you want" it might change the results (especially if a suggested price is given like "similar items typically sell for around $10"). I don't ever WANT to pay for something, but I am willing to give what I think the fair price should be.

2) I believe the "pay what you want"+charity had lower participation but higher average revenue than pure "pay what you want" because the "freeloaders" (people who paid zero or close to it) would be somewhat discouraged from participating (taking a free photo from a successful business is one thing, taking it from a charity is another).

3) Personally, I am more likely to participate in this sort of charity thing if I can choose the charity (even from a fairly short list of 4 or 5 charities). I don't like having others choose where my donation should go, and there are some "charities" (eg PETA) that I would rather die then let have any of my hard-earned money.
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JoshuaJ, 21 Jul 2010 @ 1:07pm

Cognitive cost
I don't think it's surprising that fewer people bought when half went to charity. It's exactly what you write about all the time mike: the "cognitive cost" of purchasing. "Pay what you want, and half goes to charity" is the most complicated and "weirdest" of the payment models. People have to stop and think about it, then they'll try to figure out if there's a catch, maybe wonder if they'll be asked to provide their address or phone number, worry about what's a fair price for the picture and how much they're comfortable donating, etc. That's a lot more thinking than is usually expected of people in an amusement park, and many people just won't bother.
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cram, 22 Jul 2010 @ 1:44am

The success of this model depends on the customer profile. If the vast majority of your customers are not the freeloading kind, you have a viable and even profitable model.

http://www.annalakshmi.com.sg/index_files/EatAsYouWant.htm

These guys have made a huge success of this model due to a variety of factors: the charity element, the ambience and quality of food, and of course the guilt tripping.
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