Imagine you are about to check out from your overnight stay at a hotel in Paris. You get to the counter and the receptionist smiles and asks “how much would you like to pay?”
Say what? A hotel where you can choose to pay what you want?
It’s not a dream. It’s happening right now in Paris where a group of hotels allow you to book one of their rooms and pay only what you think the stay was worth.
Is this risky business? Surely people will jump at the opportunity to short change the hotel, paying much less that the standard rate. After all, we all love getting stuff for free.
Well it’s probably not as risky for the hotel as it first appears. Availability is limited to a set number of rooms and the interest the promotion has generated will probably outweigh any margin they lose on the standard rate. But more importantly, behavioural economics suggests that most guests will probably pay a fair amount anyway.
As the name suggests, pay what you want (PWYW) pricing leaves it up to the customer to pay what they think the product/service is worth and has been trialled in a number of ways.
PWYW pricing gambles on the promise that people will pay for something they find valuable. But when customers can get something they need for free, why on earth would they pay?
Whether we think so or not, we are influenced by what we see others do and by what we think they think about us. Social norms mean we are more comfortable following what the normal thing to do is. This has an influence on PWYW in two ways:
1. We behave differently when we are being watched
A 2011 study by Ernest-Jones, Nettle & Bateson (PDF here) tested whether being watched changed behaviour. In this case people contributed more to the honesty box when it was decorated with a picture of eyes rather than a picture of flowers. The subconscious sense of being watched was enough to change behaviour.
This suggests that a PWYW scheme can improve the likelihood of fair payment if the customer has to look the service provider in the eye when deciding how to settle their account.
2. We do what others do
In the absence of explicit pricing, if we see other people paying a certain amount for a service, we will be more likely to follow suit. No one likes looking cheap.
For a PWYW scheme it would therefore be helpful to provide “most people pay…” messages to help the customer come to a decision.
Ask Australians what one of the biggest fears of visiting the US is and it’s likely to be tipping. Coming from a country where tips are relatively rare, Australians seek guidance as to what an adequate tip entails: 10%, doubling the tax, $1 per drink –these are the social rules that outsiders cling to so they don’t insult the service provider.
In the case of the Parisian hotels, customers will at least be able to judge the price relative to what a normal room rate would be, so they are not without a price ‘anchor’ against which they can assess value. This is important because it will mean they are most likely to pay nearer the anchor price than they would have without any frame of reference.
In situations where no frame of reference is available however, it is likely that your customers will feel anxious about determining a fair price. This can result in underpayment, over-payment or, worst of all, avoidance.
I am probably not alone in admitting that I steer clear of situations where I have to pay what I want because the anxiety about how I should value the service outweighs the experience. Pricing is something I would prefer not to burn mental and emotional energy on and I’d rather deal with a business whose pricing is unequivocal.
And this is the risk that perhaps is least expected by PWYW businesses: avoidance due to anxiety. How many people might you be turning off because they are too anxious about determining fair payment?
If you do trial a PWYW system, here are some suggested safeguards to make sure people pay:
PWYW pricing is a novel approach that depends very much on your ability to persuade customers to behave in a way you would prefer. It’s not for the faint of heart but can set you aside from others in your market.
Bri Williams runs People Patterns, a consultancy specialising in the application of behavioural economics to everyday business issues.
Bri Williams is an authority on behavioural economics applied to everyday business and personal effectiveness.
