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Journal of the Academy of Marketing Science

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14-06-2019 | Original Empirical Research

Consumer response to design variations in pay-what-you-want pricing

Authors: Ranjit M. Christopher, Fernando S. Machado

Published in: Journal of the Academy of Marketing Science | Issue 5/2019

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Abstract

Recent literature has identified consumers’ fairness and image concerns as the primary drivers of payments under pay-what-you-want (PWYW) pricing. Consequently, managers have employed a variety of design variations to invoke/alleviate these concerns to attract more customers and increase payment magnitudes. We develop a theoretical approach that combines both prosocial and self-interested motives to examine consumers’ four possible responses to design variations in PWYW exchange: (1) opt-out, (2) free-ride, (3) default to recommendation, or (4) other payment. We confirm model predictions using an empirical approach that jointly estimates the multipartite customer response. We report findings pertaining to four managerially controllable variables namely, ‘payment visibility’, ‘information on payment recipients’, ‘timing of payment’, and ‘explicit price recommendations’ using both secondary data and controlled experiments. We show that design variations have a heterogeneous effect on different types of consumer responses leading to countervailing effects on revenues. We derive several actionable managerial recommendations.

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A sample list of businesses (trademark names) that have recently used PWYW pricing to sell their products: Panera Bread, Radiohead, Larion Studios, Humble Bundle, Magnatune, Everlane, OpenBooks, Perlin Winery, Zoho, Headsets.com, Big 4 Holiday Parks.

https://www.cnet.com/news/humble-bundle-has-something-to-brag-about-100m-to-charity-so-far/

Although online payments can guarantee a high level of anonymity, some donation websites choose to share payer identity to others threatening anonymity. Frequently, firms assure customers that their credit card information will not be stored in their servers unless customers provide an explicit approval. This can guarantee a relatively high level of anonymity.

Although consumers’ personal valuation is latent at the outset, we can employ a variety of statistical techniques to derive the distribution of consumer willingness-to-pay (reservation price) for a good sold under PWYW (Wertenbroch and Skiera 2002; Ding et al. 2005; Meyer et al. 2018).

We thank an anonymous referee for making this point.

Equation (8) describes the log-likelihood with independence assumption between marginal distributions as a base case. However, when using this modeling approach to analyze data pertaining to our empirical studies, we test for possible dependence between marginal distributions corresponding to the non-zero payments and choice variables (opt-out decision, defaults to recommendation) using a copula function.

‘Creative commons’ is an alternative to the ‘All rights reserved’ copyright that retains some rights to the authors but provides as much flexibility to buyers for modifying, copying etc., within the confines of the license specification adopted. See https://creativecommons.org/ for more details.

The fixed-fee subscription model was in line with the general shifting trend in online music from downloading to streaming for which a subscription fee was a better fit. As the marginal cost of reproduction was negligible, almost all of PYWY payments were profits for the firm. The company employed PWYW for subscriptions in 2008.

We acknowledge that this is not the same as total anonymity, which we address in subsequent studies. It is hard to guarantee complete anonymity in an online payment setting where sellers are generally not privy to at least some personally identifiable information such as customers’ credit card numbers. This is more a relative measure of anonymity.

The visitors of the website did not have an equivalent fixed price option to opt out of PWYW and the pricing design was relatively unchanged over a long period. Moreover, visitors always had the option to choose the explicit recommendation price. As a result, we believe the possible dependence between participation decision and freely chosen payments is not of serious concern in this case. Nevertheless, we acknowledge that we can generalize the findings only to the participating population with customer self-selection potentially biasing the estimates. We address this weakness using controlled experiments.

Unlike the snack sale experiment, in this study, students selected for the real exchange get a cash payment in addition to course credit. As wine is more expensive and can entail larger valuations, we were unable to enforce that students bring their own money to fulfill the exchange on the same day. We realize that this can introduce a possible endowment effect. However, we show that PWYW payment distributions are different from actual WTP for the product. We do this by first conducting a BDM auction to elicit their maximum WTP before explaining the rules of a PWYW mechanism.

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Title: Consumer response to design variations in pay-what-you-want pricing
Authors: Ranjit M. Christopher
Fernando S. Machado
Publication date: 14-06-2019
Publisher: Springer US
Published in: Journal of the Academy of Marketing Science / Issue 5/2019
Print ISSN: 0092-0703
Electronic ISSN: 1552-7824
DOI: https://doi.org/10.1007/s11747-019-00659-5

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