[MUSIC] Now let's take a look at a really interesting concept called pay what you want. As illustrated by this quote from Thomas Nagle, picking the right price is a very important part in the firm's marketing strategy. The price is too high, a firm will lose potential sales, if it's too low, it will lose potential revenue. Thus the key is to find a price that's just right, the problem is that what's just right for you, may be too high or too low for me. Thus allowing price to vary according to the value that a product provides to various potential customers makes a lot of sense. Now firms tried to do this in a number of different ways, for example, here in the US, movie theaters typically offer discounts. To demographic groups that traditionally have lower incomes, such as students and senior citizens. This approach is called price segmentation, is a very commonly employed pricing strategy. The setting of these different price segments has been usually determined by firms, rather than customers. For example, my local grocery store,offers discounts on donuts that are 2 days old. However, I can't walk into the store and say I want to pay this discounted price for a set of freshly baked donuts, it just doesn't work that way. However in recent years, a few firms have been experimenting with the idea of allowing their customers. To segment themselves by letting them name their own price. This rather unorthodox strategy is quickly gaining popularity and is being called pay what you want or PWYW for short. Although this pricing strategy has been employed in physical stores, it is ideally suited to a digital marketing environment. Because of the increased ability of firms to control the distribution of their product and to track customer payment activity in a digital setting. In addition, since the marginal cost of a digital good is close to zero, this strategy is relatively low risk in a digital setting. Now let's take a look at some examples, a wide variety of different firms have experimented with the pay what you want strategy. First of all, Radiohead, way back in 2007, the British rock band, Radiohead offered its new album In Rainbows for sale. Using a pay what you want strategy, you may remember this, now this approach received worldwide attention. And was the launching pad for the broader pay what you want movement. Another example comes from an online retailer called headsets.com. In recent years, this retailer has experimented with a pay what you want strategy as a means of rewarding customer loyalty. Now nearly all of its customers paid the suggested price or close to it for the headsets offered via this strategy. According to its CEO, this approach has resulted in a 30% increase in his return on investment. Finally, Wikipedia, you're probably familiar with Wikipedia by now, certainly in this course. If you're like most people, you've used Wikipedia for free, but have you ever wondered how Wikipedia makes money and stays in business? Now, although its content is user generated and offered for free, Wikipedia has lots of other expenses, such as the cost of its servers. Support and attorney fees, thus, in order to stay in business Wikipedia relies upon PWYW. Through donations to its Wikimedia Foundation and has currently collected over $75 million in assets. Pay what you want is a pricing strategy that lets customers decide how much they want to pay for a particular product. Although a firm may suggest a price, it's customers are free to pay less, or even more than this price. Indeed, several pay what you want offerings let customers pay even nothing, now let's take a bit of a deeper dive into this intriguing concept. Now there are lots of interesting issues surrounding PWYW, in this lecture, I want to focus on three specific issues. First of all, do people actually pay when they don't have to? This is a really good question, now according to standard economic thought, customers are seeking to maximize their utility. You may remember this from your economics courses, in other words, customers want to get as much as they can for as little as they have to pay. So from a strictly economic perspective a PWYW strategy seems rather foolish. Since economic actors would simply take a product without paying anything for it. However, in reality, many people, including you, are not just self-interest economic actors. But we're also social beings who are governed by norms of honesty and fairness. So while some do behave as economists suggest, many people do not. For example, a recent two year study on the buy behavior of patrons at a pay what you want restaurant in Vienna. Found that over 99% paid something for the food that they ate, 99%. Second, how can a firm make money by giving its product away for free? Another really good question, clearly a firm can't make money or stay in business if it keeps giving its products away for free. This simply will not work, fortunately, many people will pay something for a product, even under a pay what you want strategy. For example, Radiohead found that some people actually paid more than they would in a typical price and condition. When they were asked to name their own price, also because a PWYW strategy is novel and newsworthy. Firms often get a lot of attention when they employ this approach, this added attention results in increased traffic, and a higher degree of customer volume. For example, the US National Aquarium in Baltimore recently held a pay what you want day. In which its patrons could set their own admission price, this event attracted over 7500 visitors and raised more than $33,000. Both of these amounts are well above their typical levels, third, is this pricing strategy sustainable? As we'll discuss shortly, the emerging academic research in this area suggests that a pay what you want strategy. Is more likely to be successful if it was offered for a limited duration. Available for only a small subset of a firm's product offerings or limited to a certain set of buyers. Also, most these successful examples of this strategy have employed pay what you want on a rather limited basis. Again, Radiohead's used this strategy during the release of it's In Rainbows album, but used a more traditional approach for its subsequent albums. So pay what you want appears to be an approach that is a good change of pace. But not sustainable as a long term pricing strategy.
