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Pay-What-You-Want Business Models Work but not Always

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Behavioral science experts said that the pay-what-you-want business model must work. Otherwise, establishments will not use it. But while the PWYW model works, it does not work all the time.

Ayelet Gneezy, an associate professor of behavioral sciences and marketing at the Rady School of Management at the University of California, believes the concept would more likely be effective for a small, local, independent coffee shop than a big coffee shop chain. She cited the example of the Metro Café in Santa Monica, California, which is one of the latest small businesses to try PWYW.

Wanting to do the right thing

She explained that customers of large café chains like Starbucks would never feel they care about the coffee shop. In contrast, the system is hinged on the notion of people who want to do the right thing. Their actions are motivated by self-image.

Gneezy said that when establishments allow customers to pay anonymously, using a sealed envelope, people who actually pay more than what they would pay a restaurant owner. It is a self-signal that the customer is a generous person.

Although there hardly are customers taking advantage of PWTW by bundling in and getting something for nothing, not one person paid zero in an experiment at a restaurant by Goethe University Frankfurt researchers. But on the average, the diners paid 19 percent less than the previous fixed price, although, because the concept brought in more customers, overall sales still grew, The Guardian reported.

The business model also works for services such as photos of people on a rollercoaster. In another experiment that Gneezy conducted, she said that customers paid an average of 92 cents. However, when they were told that 50 percent of the proceeds would go to charity, the average amount given rose to $5.33. But fewer people purchased a photo.

She said that there were fewer people who bought the picture because while they may have decided on a fair but higher price, they nevertheless were not willing to pay it. They would rather not buy the photograph than appear cheap paying at a lesser amount.

Panera social experiment

Lifezette reported that a famous bread chain, Panera, which is known for its soup and sandwich meals that are amazing but slightly overpriced, held a social experiment in 2010. Ron Shaich, the founder and CEO of Panera, opened a Panera outlet at a very affluent Chicago neighborhood on a PWYW concept.

His purpose in using the business model was to shame the rich members of the area into subsidizing meals for the poorer members of the community. Shaich turned over the store to the Panera Bread Foundation, the firm’s tax-exempt wing, to free the outlet from the requirements to make a profit for shareholders.

Located in Lakeview, the Chicago Tribune noted that the store was an ideal place for a community store due to the presence of million-dollar townhomes and people on the street. The large potential foot traffic could work both ways in attracting paying diners who would support the café and people in need who would benefit from free food.

Besides providing a free meal, the Panera outlet also hired at-risk young people who completed job training as an additional social service. Soon, three pilot Panera branches using the PWYW business model opened and all were turning a profit.

However, the Chicago Tribune reported on January 4, 2018, that the Panera Bread PWYW near St. Louis was about to close. Only one Panera outlet out of seven locations in the US remains open.  Shaich shared that in seven years, Panera has probably served half a million meals all at no set prices. On the average, he said that the customers paid about 85 percent of the suggested price which is proof that people are fundamentally good and the business model worked well.

Lifezette pointed out that while the intention of Shaich in the social experiment was very altruistic, he had failed to anticipate the unintended consequences of such actions. The website cited the aftermath of Hurricane Andrew that battered Florida in August 1992. A lot of the people that filled their vehicles with food and relief goods “never saw a drop of rain from the storm” but “saw an opportunity to get something for nothing and took full advantage of it.”

Beyond 30 days

In the case of Metro Café, the social experiment that was meant to last only 30 days has now been operating on the PWYW business model for two years. Steve Snook, the owner, said that after 30 days they have matched what the store had done before, so they continued the concept. He disclosed that the revenue has remained stable at an average of $12,500 monthly.

He shared that first-time diners tend to ask what the price of coffee was before Metro Café went PWYW. About 50 percent pay the old price, while 25 percent pay more and the remaining 25 percent less. Snook said they still treat the very small percentage who tries to take advantage with honor and respect.

[메디컬리포트=​Vittorio Hernandez 기자]

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