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ThinkWicker

The Pay-What-You-Want Penalty

Writer: Soren Aldridge
Soren Aldridge
11 minutes ago
5 min read
A dense pile of US pennies glowing in warm amber light, filling the frame.
Photo by Dan Dennis

When buyers can name their own price, fewer buy because the price they choose becomes a statement about who they are.


Flexible pricing rests on a simple assumption: remove the barrier of a fixed price, and more people will buy. Let customers decide what something is worth to them, and nobody is priced out. Restaurants, museums, musicians and community clinics have all run on some version of that logic, and pay-what-you-want pricing is its purest form.


A set of field experiments by Ayelet Gneezy, Uri Gneezy, Gerhard Riener and Leif Nelson, published in PNAS in 2012, found that the assumption often fails. When people were allowed to name their own price, fewer of them bought than when the price was fixed and low. The researchers' explanation points to a cost that most pricing models leave out, which this piece calls the pay-what-you-want penalty.



What was studied


The paper reports three field experiments, each run with real customers making real purchases.


  • A theme park ride photo. Riders at a large amusement park were photographed and offered the print. One condition let them pay what they wanted (28,263 riders). A second let them pay what they wanted, with half of the payment going to a charity (25,968 riders).

  • A tour boat photo. Passengers on sightseeing boats were photographed and offered the print on return. Price conditions were randomized by cruise, with 20 cruises per condition: a fixed $5, a fixed $15, and a pay-what-you-want option.

  • A buffet restaurant. At a pay-what-you-want restaurant in Vienna, 257 customers were randomly assigned to a table and asked to pay either in front of staff or anonymously in a sealed envelope, with or without being told the average prior payment.



What was found


On the tour boats, 64 percent of passengers bought the photo at a fixed $5. Under pay what you want, 55 percent bought, a statistically significant difference. At a fixed $15, 23 percent bought. Those who named their own price paid an average of $6.43, more than the low fixed price, and profit per photo under pay what you want was close to profit at $15.


At the theme park, 8.39 percent of riders bought the photo under the plain pay-what-you-want option, paying an average of $0.92. When half of each payment went to charity, only 4.49 percent bought, and they paid an average of $5.33.


In the restaurant, customers who paid anonymously without information about prior payments paid €0.71 more than customers who paid in front of staff. The researchers state that they could clearly reject the hypothesis that customers pay less when they are not observed.


A low fixed price sold more photos than an invitation to pay whatever the buyer wanted.


Why it happens


The authors explain these results through self-signaling. In their account, people are not fully certain of their own character, and they read their own choices as evidence of it. A fixed price asks only whether the product is worth the money. A chosen price also asks what kind of person the buyer is.


In the authors' words, individuals feel bad when they pay less than the appropriate price, so some forgo the purchase altogether. The charity condition raised the stakes of that signal. Paying a small amount toward a good cause felt worse than paying a small amount for a photo, so fewer people bought, and those who did paid more.


The restaurant result points the same way. When others could see the payment, the signal to others appeared to crowd out the private signal, and people paid less than when they paid alone.



The limits of the evidence


These are strong designs, run with tens of thousands of real buyers, and they carry clear limits.


  • The products were small, optional purchases. A souvenir photo is easy to walk away from. The penalty may be smaller where the purchase is necessary.

  • Most buyers were one-time visitors. The authors note that very few boat passengers were returning customers. Repeat customers may settle into a payment pattern that reduces discomfort.

  • The restaurant effects depend on setup. The authors caution that their result is an existence demonstration that adding a signal to others sometimes reduces payment, and should not be read as a rule.

  • The study is from 2012. Pay-what-you-want has since spread, and familiarity may have changed how buyers feel about setting a price.


None of the experiments involved health care or professional services. Anything said below about those settings is Wickersham's inference, not the study's finding.



What the pay-what-you-want penalty changes for flexible pricing


What this suggests is that the moment of choosing a price carries its own cost, separate from the price itself. Any pricing model that asks a buyer to place themselves on a scale asks them to make a statement about who they are.


Several familiar models do exactly that.


  • Suggested donations and "pay what you can" programs. Museums, food programs and community events that invite people to choose an amount may lose the visitors most worried about paying too little.

  • Self-declared income for discounts. Health centers can allow patients to self-report their income and family size for the sliding fee discount. That flexibility lowers the paperwork burden. It may also ask patients to make a statement about themselves at a front desk, in front of staff, which is the condition that reduced payments in the restaurant.

  • Name-your-fee services. Consultants and nonprofits that ask clients to propose a budget may see some clients go quiet rather than propose a number that feels too small.


The research suggests a design principle: keep flexibility, and remove the self-statement. A clear, low, fixed price for each tier lets a buyer say yes without judging themselves. A sliding fee schedule presented as the standard price for each income band, applied the same way to everyone, asks a different question than one that invites the patient to argue for a discount.


The penalty is also hard to see in the data most organizations keep. Revenue reports show what paying customers paid. They do not show the people who looked at an open-ended price and left. On the tour boats, the authors could count those people because every passenger was photographed. Most organizations have no equivalent count, so the people the penalty removes never appear in a report.


Any price a buyer must choose is also a statement the buyer must make about themselves.

The study cannot tell a health center or a service firm how large the penalty is in their setting. It does change the question worth asking. Organizations usually ask whether their flexible pricing is generous enough. The sharper question is how many people never reached the price at all, because choosing it meant saying something about themselves they did not want to say.



References



Some ideas are worth discussing in the context of your organization.



 
 

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