Can Pay What You Want Work For Tangible Goods? Perhaps With Kickstarter...

from the neat-to-see dept

Mon, Mar 28th 2011 2:30pm — Mike Masnick

While we're not huge fans of pure "pay what you want" business models, which often feel more like give it away and pray models rather than complete business model concepts, I do think it can be part of a larger business model when done creatively. Of course, for the most part, I had considered pay what you want not to make much sense outside of the realm of digital goods. While some restaurants have found that it can work to do a pay what you want model, it seems a lot riskier, since the marginal cost is pretty high, and you can easily lose out. That's different in the case of a digital work, where the marginal cost is zero. So, for the most part, I haven't thought too much of doing "pay what you want" for tangible goods.

However, perhaps it can work, if it's done in combination with a minimum funding goal, using the Kickstarter type model (where people pledge, but no one has to pay until a certain total is reached). Some designers who wanted to create a better stylus for the iPad are running just such an experiment on Kickstarter. They've designed a prototype and need about $50,000 to manufacture the first batch, but they're setting up a "pay what you want" system... while making it clear that they'll only produce the product if they can make that entire $50,000... and they only have 3,000 slots open. You can pay as little as a dollar, and you'll still get the stylus (which they plan to sell for $25 eventually)... but only if the other 2,999 buyers pony up enough to get them to $50,000.

Now, I can already hear the complaints, where some will point out that the "suckers" who "overpay" are subsidizing the "freeloaders" who only pay $1. And, if you're not up on basic economics, perhaps that makes sense. But the fact is that everyone in the group is paying what they feel is appropriate to get this product to market in the first place. That some may end up subsidizing others is really meaningless, if they feel what they're paying is worthwhile. As for the other argument that the freeloaders will take over, and thus the product won't get to market at all... well, that's what we're going to see, which is what makes this an interesting experiment.

I think part of the problem is that too many people are concerned about the relative issues, in terms of how much others are paying. But, that's mostly meaningless from an economics standpoint. The real question is what is it worth for you to pay to help get this product to market, and plenty of people are perfectly happy to pay a larger amount, knowing that it (a) helps these developers, (b) will make sure the product exists at all and (c) also gets them one of these styli faster than anyone else. And, to them, that's worth it... even if some others get it cheaper.

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Filed Under: ipad, kickstarter, pay what you want, stylus

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Anonymous Coward, 28 Mar 2011 @ 2:39pm

It also creates an economic model for the manufacturers. They can determine demand and value before investing much money. Better than manufacture an item, spending a lot of money on the goods, then finding out no one will pay what you want for it, and losing money.
They only drawback is how long between pledge and production. Are people willing to wait 3-6 months or more...for a product like this?
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iamtheky (profile), 28 Mar 2011 @ 2:47pm

"a non-profit restaurant dubbed Saint Louis Bread Company Cares Cafe"

It pained me to read the post the first time when it was offered as a business model, it simply compounds the inanity when used as a comparison for dissimilar efforts.

Now learning how much of an average write-off Panera is getting per entity....
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Anonymous Coward, 28 Mar 2011 @ 2:55pm

It does always come back to the same problem: When enough people figure out they can get it for cheap or nothing, most of the people just won't pay. The current numbers, even with the $1 minimum, are coming up almost $2 short per user of what they need to make the 50,000 they "need". So unless the other half of donors are more willing to shell out above the average, it is unlikely they will make their goal.

Would they not get about the same orders and sales by offering it for "pre-sale" at a given price, rather than this complex scheme that seems mostly setup to reward people who want something for $1?
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Suzanne Lainson (profile), 28 Mar 2011 @ 3:06pm

Average price
Dividing $50,000 by $3000 means the average price for each pledge needs to be $16.67. So for each $1 pledge, you need another pledge for $32.33 to make the numbers work. That means as 3000 slots fill up, and if the total average per pledge isn't $16.67, then the later pledges have to go higher and higher to make up the deficit. So it isn't just going to be a matter of pledging what you think is fair. You may need to pledge what is necessary, even if it isn't fair.

For example, what if there are only 10 slots left, and yet the project is $2000 short? Will the last 10 people be willing to pay extra to cover the necessary funds?

But so far so good. Dividing the amount raised by the number of pledges, the current average is $15.65 per unit, which isn't too far off the goal.
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Suzanne Lainson (profile), 28 Mar 2011 @ 3:24pm

Re: Average price
What they probably need is a system like people have when they are trying to decide what to chip in for a group dinner at a restaurant. Everyone contributes their share of the bill and tip, and if the final total is still short, then you go around the table again in hopes that either those who underpaid figure out what they still owe, or that various people chip in some extra to cover the shortfall.

With the current payment system for this project, it automatically falls to the final group of slot takers to make up the difference if the project is falling short of the goal.
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Anonymous Coward, 28 Mar 2011 @ 3:26pm

Re: Average price
It should be possible to set up a system where if you don't get to your goal those with the lowest pledges can be dropped off to open up more slots for higher pledges until the minimum average cost is met.
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Stuart, 28 Mar 2011 @ 3:26pm

Re: Average price
I would think that there would be a way to edit your pledge.
So if you only pledged $1 and as the slots started to fill and it was coming in under the target that people would be allowed to change the pledge amount.
As the slots fill and the target becomes more real I would expect that some people would would become to pay more as the item gets closer to reality.
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DJ (profile), 28 Mar 2011 @ 3:47pm

Re:
"When enough people figure out they can get it for cheap or nothing..."

The problem with that statement is that if they don't get the $50k, then NOBODY gets the item. So, those people who find the product worthwhile, will, inevitably, pay more than those who offer very little.
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Michael, 28 Mar 2011 @ 3:59pm

Re: Re: Average price
What cheap people are you going out to dinner with?

You should send them somewhere with a dollar menu so they can handle the math...
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Mike Masnick (profile), 28 Mar 2011 @ 4:14pm

Re: Re: Average price
It should be possible to set up a system where if you don't get to your goal those with the lowest pledges can be dropped off to open up more slots for higher pledges until the minimum average cost is met

That's a really interesting idea, and presents a neat game theory challenge. Would be cool if someone implemented such a system...
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Mike Masnick (profile), 28 Mar 2011 @ 4:15pm

Re: Re: Average price
I would think that there would be a way to edit your pledge.
So if you only pledged $1 and as the slots started to fill and it was coming in under the target that people would be allowed to change the pledge amount.

Yes, you can change your pledge, so Suzanne's concern is not accurate. If it's getting close, people can ratchet up their pledge.
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Suzanne Lainson (profile), 28 Mar 2011 @ 4:15pm

Re: Re: Re: Average price
Sometimes people leave early and forget to pay. And yes, sometimes people don't add everything up right. It's definitely happened more than once where the total comes up short.
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Markus (profile), 28 Mar 2011 @ 7:25pm

Re: Re: Re: Average price
I assumed the model was 3,000 slots available, come pay what you want and the highest 3,000 supporters get the stylus. Instead, it only has 3,000 slots period? It seems like the uncertainty of determining who gets it once funding has closed would be a way to get people to compete with higher prices, rather than paying as little as they think they can get away with to fund the project. Then again, I can also see the uncertainty causing some to not give at all, wary that their contribution will be just barely not enough once funding is closed, and if enough people felt that way, it could cause the project to not meet the goal at all. Time for another experiment to find out which works better?
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Markus (profile), 28 Mar 2011 @ 7:26pm

Re: Re: Re: Average price
(Meant to reply to this comment, not the other, sorry Mike...)

I assumed the model was 3,000 slots available, come pay what you want and the highest 3,000 supporters get the stylus. Instead, it only has 3,000 slots period? It seems like the uncertainty of determining who gets it once funding has closed would be a way to get people to compete with higher prices, rather than paying as little as they think they can get away with to fund the project. Then again, I can also see the uncertainty causing some to not give at all, wary that their contribution will be just barely not enough once funding is closed, and if enough people felt that way, it could cause the project to not meet the goal at all. Time for another experiment to find out which works better?
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Suzanne Lainson (profile), 28 Mar 2011 @ 7:44pm

Re: Average price
Based on the latest numbers, the remaining slots need to average $18.38 to meet the goal.

But if everyone can go back and increase they pledge, then if it appears the project is falling short of its goal, perhaps those who are pledging considerably less than $16.67 will increase their pledges
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Narcissus (profile), 29 Mar 2011 @ 2:31am

I think it would probably work better if it was some kind of bidding system, as mentioned above. That way you'll get a better idea of what people are prepared to pay and will thus gain important market info. Right now it will be too easy for people to start making calculations and that will mean they'll probably end up on or around the 50.000 mark.

I've just read a book from Dan Ariely titled "Predictably Irrational". According to his research it is relatively easy to get people to offer in the right price range, provided they have no direct product to compare it with. To do that you need to "anchor" the price. Funnily enough it can be just random numbers. He asked people to write down the last 2 digits of their social security number and then asked them to bid on certain items. People with high numbers also bid significantly higher. To anchor the price in this case they should just open the bids and mention that comparable products retail for $ 25, something like that. Right now they've anchored it at the 16.67 mentioned above.
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JustMe (profile), 29 Mar 2011 @ 9:38am

I am active on Kickstarter
and recently received a very nice Thank You note from some high school students who needed funding to perform at Carnegie Hall.

I recommend doing what you can, the cosmic karma points are a bonus.
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Suzanne Lainson (profile), 29 Mar 2011 @ 8:00pm

The latest results
I was curious how they were doing.

This was posted about 2 hours ago in the comments section: "Well, that's a wrap. 3015 backers so far - 15 opted to not receive the item and simply back the project. Total average pledge at this point is $14.77 per backer. Now let's watch and see the total increases from $44,531 without the number of backers increasing (indicating people raising their existing pledges), or if the total number of backers increases (indicating more people supporting the project without wanting to receive a Cosmonaut)."

Now (9PM MDT 3/29) the amount is up to $44,724 as some people go back and add more to their bids. So for the initial round, 3000 people didn't pledge the necessary average amount. This project still has 21 days to go so I would imagine more people will kick in a bit extra until it hits $50,000.
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Suzanne Lainson (profile), 29 Mar 2011 @ 9:07pm

Re: The latest results
At 10 PM MDT 3/29

3,024 Backers
$44,925 pledged
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Suzanne Lainson (profile), 29 Mar 2011 @ 9:36pm

The pay-what-you-want part is now over
The Cosmonaut: A Wide-Grip Stylus for Touch Screens by Dan Provost & Tom Gerhardt "The Experiment"

"While this has been a great experiment, let�s be honest, we want to make the Cosmonaut, and we want you to have it! It would be a shame to sit here for 21 more days, begging the $1 backers to raise their pledges. When it comes down to it, we think making this project a reality is more important than our pricing model....

So, we have decided to add two more tiers, which are both unlimited. One for $25, which will get you a Cosmonaut, and another for $50, which will get you 2. You are of course more than welcome to switch to either of those tiers if you so choose, but there is no need to. All current backers will be getting Cosmonauts. The advantage you all gained by being one of the first backers is you could set your own price, and will still be able to do so up until the campaign ends."
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