How many times have you begrudgingly paid for a service you felt was unworthy of its price tag? Chances are, pretty often. There’s no use in complaining because set prices, with no option to haggle, often give out the ‘take it or leave it’ vibe. After all, price determines value of a product, right?
Perhaps, but businesses of all stripes are trying on an alternative pricing model for size: ‘Pay What You Want’ (PWYW), one that lets customers pay what they think is fair for a service.
In 2014, American financial startup Aspiration launched a “pay-what-you-will” money management service, an approach that differentiated themselves from other asset managers. Within two months of operations, the startup picked up 700 customers and also received US$2 million to manage for its clients. At last look, TIME covered the company four months ago and they seem to be doing well under their fee structure (or lack thereof).
In a commonly-cited PWYW restaurant trial, American fast-casual cafe chain Panera
Bread launched a non-profit restaurant in 2009 to much success that they subsequently opened four more locations. While the concept, which offered up turkey chili for whatever customers felt was fair, did very well in the early days — interest and donations waned as the years went on.
In Hong Kong, yoga practitioners are also taking a leaf from Panera’s book. Instead of chili, they’re peddling fitness classes and students are encouraged to pay what they think is fair for each session.
Sports medicine doctor and organiser of ‘Pay What You Wish Yoga HK’ Dr. Bryan Lau teaches community yoga classes that run the gamut of restorative to purely cardio. He rents out fitness rooms at government gyms in Tsim Sha Tsui and Wan Chai on a weekly basis and claims his roving studio was the first to start with the PWYW pricing model.
“Yoga teaching is a highly competitive field in Hong Kong. There are a lot of graduates from teacher training but not enough vacancy for them in the Hong Kong market. So using the [PWYW] model will help attract more students for new teachers, but the challenge will be whether this pricing model still works well after the honeymoon period,” he said.
While Panera’s not-for-profit cafes suffered after an initial surge of success, Lau describes payments for his weekly sessions to be “stable” — although he admitted that there’s a chance he’d run into issues if he ever went full-time.
Payments for Lau’s classes are collected semi-privately in a small covered bin just outside the venue, but recommended donation amounts are not set. Lau believes that his students should pay whatever they feel is fair, based on what they’ve gained from the class.
Donations for Lau’s classes are far from uniform: “I receive [donations] from one dollar coins to thousand dollar bills (roughly $128 USD). Obviously the average payment will be largely influenced by several factors: How much is in the student’s pocket, (we usually get less at the end of the month); how many students are in the class (we get paid less when there are more students in the venue). New students also tend to pay more at first but once they become regular students, they’ll pay less,” he said.
What’s interesting is that there’s a ‘safety in numbers’ effect in these PWYW yoga classes, and Lau said that he pulls in lower donations in larger classes. This is keeping in mind that Lau runs large classes ranging from 40 to 60 students at one time.
Based on his observation, he thinks that a larger class means a lower chance of judgement from peers — which sometimes results in a smaller donation.
To get to the bottom of the psychology behind the PWYW model, we reached out to Z. John Zhang — an expert on targeted pricing strategy. He also co-wrote “Four Key Qualities of Any ‘Pay As You Wish’ Pricing Strategy,” a book that dissects whether the PWYW pricing model is a good fit with your business.
“When you use ‘Pay As You Want’ pricing, you are telling a customer to pay what they feel comfortable with, not ‘pay this or go somewhere else.’ In other words, you appeal to the good, gentle side of the customer. In that case, when the customer does not know how much to pay, they tend to err on the high side rather than on the low side, especially after a good emotional experience,” he said.
Yoga studios, which are in the business of selling positive meditation and fitness experiences to customers, are likely to be a good fit for the PWYW model. Besides yoga instruction, Zhang said that education and charities are also areas that are harnessing the pricing model well. “These are industries where the customer experience and personal touch matter a great deal. You surely do not want to be selling gasoline with this pricing mechanism,” he said.
In Hong Kong specifically, there are other factors at play and Zhang uses Ten Thousand Buddha House, a successful PWYW restaurant, as an example. By ensuring all customers reserve a table ahead of time, the restaurant eliminates the sense of anonymity that comes with drop-in dining.
Besides not wanting to “lose face by looking cheap” in front of strangers at the restaurant, Zhang notes in his book that they also want to preserve their image in front of their friends and family seated at the table. This need to “save face” in front of others at a restaurant is very similar to what students at Lau’s yoga classes experience when determining what is appropriate to pay.
As instructors around the world adapt to the PWYW pricing model, is it one that works with Hong Kong culture where the locals have perfected the art of penny pinching?
Lau said his classes, which are largely attended by locals (80 per cent local and 20 per cent expat), rely on the support of both sides which bring something complementary to the table. “Expats pay more usually but locals tend to be much more loyal to the teachers. So to make it work, you need both of them. And if instructors can cut off luxury expenses involved in teaching, like renting a cheaper venue with minimal facilities, it will allow room for this pricing model to work in Hong Kong.”
As for Zhang, he believes that, despite the thriftiness of the locals, Hong Kong businesses could employ the PWYW model using a couple targeted strategies. “I don’t see why the pricing mechanism cannot be used successfully in Hong Kong if you carefully select the product or service as well as customers… besides, one can always suggest a price or take real name reservations,” he said.
If startups in Hong Kong are interested in giving the PWYW pricing model a whirl, Zhang suggests using it in a novelty marketing campaign which would attract media attention.
Case in point, American restaurant chain Just Salad launched last year in Hong Kong and invited diners to pay (for one day only) whatever they felt was fair for a salad or wrap — with proceeds of a dollar per meal going to a New York City food bank.
English alternative band Radiohead also tried out this model to much media fanfare. In conjunction with the 2007 release of their Grammy-winning album ‘In Rainbows,’ the band allowed fans to set their own price points in a ‘pay-what-you-want download option.’
Although their album release provoked more piracy than actual downloads through the legal channel, the band’s choice to try an unconventional pricing model was heavily pressed by mainstream publications — TIME, NPR, Rolling Stone and the New York Times all weighed in.
The verdict is in. Whether you plan on running a marketing campaign to generate media buzz or leverage behavioural psychology to make more money, the ‘Pay What You Want’ pricing model might work for your business.
By Iris Leung