Across the street from my office is a museum full of fascinating collections that include paintings, sculptures, porcelains, and ancient archaeological finds. The chance to admire them all costs you nothing, as entrance is free. Except, to be more precise, visitors are allowed to pay whatever they want, with no strings attached, into a donation box at the entrance to the museum.
Written on the donation box is a plea in large print: “Thank you for helping us keep admission to our museum free.” The plea is there to encourage customers to pay what they think visiting the museum is worth. It’s known as an “honesty box” and has been the subject of my recent research. We found this system can actually be a viable way for companies to make substantial long-term profits.
Business sense
Using an honesty box, or paying what you want for a service, is a pricing system that’s been around for many years. For example, car parks in small towns and villages have used them for lack of other alternatives, as enforcing payment (like hiring cashier staff) would be too costly. Charities that offer services free of charge but ask users for donations arguably operate on a pay-what-you-want basis, because of non-profit-oriented principles.
But in recent years, even profit-oriented enterprises that have had no economic problem operating under fixed pricing have started trying out pay-what-you-want systems. Examples include bakeries, restaurants, independent music bands and this summer saw five hotels in Paris adopt the model.
To the cynica, the most surprising outcome of these exercises might be that there were customers who actually paid for the services they enjoyed and didn’t take advantage of the honesty box. In the case of the pay-what-you-want Parisian hotels, one of them claimed that the first guest who took part in their experiment was willing to part with €140 for a night.
The fact is that people do have some sense of decency: they care about fair dealings and they care about the morality of quid pro quo. As one commenter said about the Parisian hotels: “If … you only pay a euro or two for your stay, you’ll probably feel like an ass. As you should.” It would not be surprising if this sentiment is shared by many.
Bait and hook strategy
That said, counting on your customers’ sense of decency may not make sufficient business sense to justify pay-what-you-want. Left to their own discretion – however fair-minded they are – customers typically would not pay as much as the usual, going-rate prices (the going rates for the pay-what-you-want Parisian hotels, incidentally, were around €150 or more).
But, a pay-what-you-want deal may lead to indirect benefits for the seller. For example, if a visitor walks into a museum because admission is free, he or she might eventually decide to spend money inside the museum, from buying postcards and art books to enjoying afternoon tea in the arty museum café. The logic behind this is similar to the logic that leads to printers being sold cheaply to lock customers into buying their expensive ink cartridges – a commonly used pricing ploy that is called a “loss leader” or “bait and hook” strategy in business textbooks.
Publicity is another possible indirect benefit of pay-what-you-want. If a seller does something as counter-intuitive as letting customers decide what to pay, the policy is likely to make a headline or two, and the news might go viral. The seller would have its proverbial fifteen minutes, which could be a golden promotional opportunity that translates to additional revenues, improved brand reputation and a new customer base.
Keeping the service free
And then there is the idea captured in the donation plea: “Thank you for keeping our admission free.” If you make a donation to a pay-what-you-want museum that you would like to visit regularly and other people do likewise, then all the donations could help keep the museum financially afloat and prevent it from resorting to measures such as charging an exorbitant admission fee. Your donation today, therefore, may save money for you in the future.
If sellers could highlight the idea of “keeping us free” when persuading people to pay voluntarily, pay-what-you-want could be a sustainable pricing policy. We already have one prominent example of this in the digital age: Wikipedia.
Wikipedia never charges you a dime for taking a scoop (in fact any number of scoops) out of its vast ocean of knowledge. The website and its associated services survive on donations, and whenever it runs a donation campaign, one of its oft-used pleas is that if it does not receive enough donations this time, it might have to carry ads or charge for admission in the future.
Our research suggests that, with sufficient social momentum among customers to collectively support the seller, this type of plea could indeed drive up payment substantially under pay-what-you-want. Then an honesty box certainly isn’t a bad policy after all.