Tools

Deciding how much to charge customers is crucial for most businesses, and many create complex pricing schemes. Not all, though: some businesses turn the whole task over to customers. 'Pay what you want' is a new business fashion — but is it taking customer sovereignty too far? And is the model sustainable?

Cleverly, pay what you want attracts customers and publicity, and affluent or price-insensitive customers tend to pay more. Any well-run business will try to offer low prices only to customers who demand them, not to everyone; pay what you want might achieve the same result without the fuss.

The Achilles heel of pay what you want is obvious: what if people don’t want to pay anything? No wonder the model has caught on in two specific contexts: digital goods such as music files or blogs, and cafés or restaurants. With digital goods, the cost of providing an extra copy is close to zero, and collecting real money is hard due to piracy and a customer base used to getting what it wants without paying. Inviting contributions is better than nothing. In a café, customers are used to tipping staff and find it hard to accept service from a smiling waitress and then pay little or nothing. Honour — or guilt — is a powerful motivator. So are social norms: Americans, well used to tipping, paid much more than others when invited to pay what they wanted to download Radiohead’s album In Rainbows.

My concern is that when the novelty wears off, pay what you want will collapse as a model, at least for restaurants and cafés. Not only will the free publicity ebb away, but customers may start to exploit the offer.

Economists Uri Gneezy and John List hired temps to perform various tasks, and paid some of them way above the agreed hourly wage. The question was whether the workers would put in extra effort out of guilt or simple gratitude. At first they did, but the effect wore off in hours. Selfish exploitation of the generous wage became the norm by lunchtime. I suppose if the same thing happens to restaurateurs, they can always install a cash register.

Financial Times columnist Tim Harford is author of The Logic of Life