Question 4: Industries

I think the success of "pay what you want" for a certain product or even a whole industry depends on the available substitutes. If the consumer has the choice to pay what he wants and knows, he can get exactly the same product from other company as well, his willingness to pay will automatically decrease. Why should he care if the manufacturer of the product (or service provider) will go down because nobody is willing to pay? It will not affect the customer, as long as there are substitutes.

The Radiohead example makes it quite clear. If Radiohead stopped producing music, because they can't make any money from it, there would be no replacement. They are unique. The fans would be really sad. So they know they have to pay some money for the CD or mp3, even if it might be an anonymous internet sales transaction.

For goods that are ubiquitous, people wouldn't pay (much). So the more unique the product, the better it is suitable to be sold using a PWYW pricing model.

tobias_off wrote:I think the success of "pay what you want" for a certain product or even a whole industry depends on the available substitutes. If the consumer has the choice to pay what he wants and knows, he can get exactly the same product from other company as well, his willingness to pay will automatically decrease. Why should he care if the manufacturer of the product (or service provider) will go down because nobody is willing to pay? It will not affect the customer, as long as there are substitutes.

The Radiohead example makes it quite clear. If Radiohead stopped producing music, because they can't make any money from it, there would be no replacement. They are unique. The fans would be really sad. So they know they have to pay some money for the CD or mp3, even if it might be an anonymous internet sales transaction.

For goods that are ubiquitous, people wouldn't pay (much). So the more unique the product, the better it is suitable to be sold using a PWYW pricing model.

I don't totally agree with you. When you have a unique product, I don't think you should use PWYW. You have a such huge competitive advantage that you should make it as profitable as possible. In the case of Radiohead, it's bit different because it comes under Radiohead's philosophy, Radiohead's spirit.
Moreover when you have a unique product customer have no idea about the value and therefore the price of this product so they won't pay correctly anyway.

Naomi_Karnovsky wrote:I think the paper mentions that products with high fixed but low variable costs are more appropriate for the application of PWYW because low variable costs limit the risk of prices below costs for the seller. Consequently, it fits really well with information/digital goods, in which most costs go into making the first copy, and after that the variable costs of making many copies is basically negligible in comparison. That is why the PWYW worked well for Radiohead and could also work well for other artists and other products like movies/TV shows.

The paper and Naomi put it best. Industries with low variable costs yet high fixed costs are more suitable for PWYW pricing strategies (reasons behind this are explained above) but another thing to concider is that many of the products sold through this pricing offer samples in order for the consumer to get a feel for what they're buying (Radiohead had their singles out for free and so did NIN, or you can listen to the whole album with out downloading it for no charge).

This strategy will only work perfectly with industries that can a) offer a sample of their product or b) have a tactible product (or result) that the consumer can see and examine... and after this is when the price setting will come.

I agree this could work for digital product, as it worked well for artists like Radiohead ... But what if the artist(/provider) isn't famous ? People might not want to pay a lot - or to pay at all for something they have never really heard about..

One more thing regarding tangible products and PWYW policy : what about subsitute products : a company using this kind of 'non-pricing' policy should be aware of the products provided by its competitors, which could be easily prefered by consumers (if the competitors advertises on a better quality for example).

I think the nature of the offering: experience offerings or non experience offerings will really change the nature of the transactions between buyers and sellers. Indeed, the experience offering can push a customer to try the product or service introduced by the company while no experience offerings is a customer waisted.

I think the PWYW would be successful in every industry where the cost structure of the product or service is basically integrated by sunk cost and fix cost, with very low variable costs. In those industries the costs of selling one additional product or service for a small price is always good and it can help to decrease the average cost, increasing the profit margin.

Alexandra_Engel wrote:Would the "PWYW" strategy work in other industries than the service industry? What kind of products would be most successful?

Software products would maybe work.

"PWYW" strategy work in industries where product selled can be copied by seller (smart IT solutions). What i mean is for ex. movie as itself is already product but after selling it the seller still can sell it to someone else because its more like selling the right to use it. In that case the risk of loosing money is lower than selling real products which once u sell it u dont have it.

kathia Morano wrote:I think the nature of the offering: experience offerings or non experience offerings will really change the nature of the transactions between buyers and sellers. Indeed, the experience offering can push a customer to try the product or service introduced by the company while no experience offerings is a customer waisted.

How would you explain the fact that a restaurant uses PWYW strategy? In most cases you don't experience anything when going for dinner

edwige_aoudiani wrote:I agree this could work for digital product, as it worked well for artists like Radiohead ... But what if the artist(/provider) isn't famous ? People might not want to pay a lot - or to pay at all for something they have never really heard about..

What about trying the product and then, if you like it and want to support the artist donate a small fee to him/her?

I must say that I strongly disagree with the point that PWYW is better associated with “high
fixed costs / low variable costs”-products.


I think your point is that one can look at your fixed costs as a sunk cost, meaning that
it is money that you have spent, and will never be able to claim back. Then
applying a PWYW-model should create return according to the customer’s marginal
utility, there seems to be a fair argumentation in a way, but..


Instead, try to look at it from a business risk perspective, for instance if you are a bank
which has to lend money to the PWYW-company. They come to you saying: “We have
this business model etc, our fixed costs will be USD 1,000,000, and our income,
well, it depends on what people are willing to pay. What do you think the bank
will say?


If instead that company proposes a different business model saying: “We have this business
model, our initial costs are quite low, because our costs are associated with
our sales, if we can see that we are starting to lose money we can terminate
the project. Will you lend us 1,000,000 Dollars?”


There is a clear difference, between the two models due to the riskiness of the business.


I think PWYW-models would apply better to companies backed by risk diversified private
equity or by a conglomerate, which company beta (company risk level) would
remain relatively unaffected.


/Anders