The use of alternate revenue models to price your product or service can encourage purchases by prospects who might otherwise hesitate to buy.
One well-established alternative to traditional pricing is "freemium." Under this model, the basic product is free, but a premium is charged for advanced features. Newer on the scene is the pay-what-you-want (PWYW) or pay-what-you-can (PWYC) approach that allows customers to set prices.
Where It Works Best
Digital content (such as e-books, downloadable instructional videos and private access to websites) is particularly well suited for PWYW or PWYC models since costs of serving an individual customer are minimal. At the same time, incremental sales can generate profits nearly equal to the revenue amount, so that lower prices (or any price at all) can mean a win-win for both business and customer.
In theory, PWYW/PWYC seems like the perfect solution to the pricing dilemma. It places the burden of assigning value on the customer and frees the business owner, entrepreneur or artist to develop compelling content and get rewarded for outstanding performance by generous fans. It also makes valuable products or services accessible to anyone, regardless of income or wealth.
Nevertheless, having reviewed standard offers and limited-time deals with pay-what-you-can pricing, I have a few concerns about the model.
PWYC seems to be an egalitarian approach to business, the perfect combination of capitalism and generosity. Those who can afford to pay full price, do, and those who can’t, pay less. Superficially, companies using this model may intentionally or unwittingly send the message that their pricing structure values customers independent of their ability or willingness to pay a certain price.
But there are nuances that nevertheless separate customers, giving an advantage to those who are able or willing to pay more. For example, a digital content consolidator sells PWYW packages containing baseline content for free while bonus content must be purchased for a minimum amount.
Although such segmentation is perfectly reasonable and still very generous, an uninformed prospect may feel slighted or confused by the pricing model.
Business owners want to be creative, not deceptive. But, whereas digital products distributed using the freemium model are truly free, PWYW and PWYC models tend to deviate from the promise of allowing customers to pay what they want or what they can.
For example, a limited-time promotion of a digital program that I received via e-mail required approval of the customer’s price (low prices were discouraged). Likewise, a subscription to online lessons for teachers starts at $5 per month, not zero. In both, the pricing may be bargain basement, but the terminology is misleading.
What About Loyalty?
Unlike some innovative business models, cheapness is rewarded more than loyalty in the PWYC world.
One of the pay-what-you-can offers that I studied was made weeks after a product release, which may have caused long-time customers to feel cheated for buying earlier rather than later.
Similarly, as businesses seek to fill empty seats and space that would otherwise be unused, those paying full price to attend a theatrical performance, live concert, yoga class, etc. may feel slighted to learn that last-minute customers paid whatever price they named. Fickleness and indecisiveness seem to be valued more than loyalty in these examples.
A Hybrid Model
In contrast, faithful readers of The Domino Project are rewarded periodically for their attention. For example, when one of the project’s titles, Read This Before Our Next Meeting, was released, the Kindle version was free for seven days. Loyal customers could get a free copy, spread ideas about how to use the book’s advice, and encourage others to buy the book.
People at all levels of wealth and willingness to pay understand the clarity of free much more readily than they get the meaning of pay-what-you-can, particularly when this pricing scheme is laced with restrictions.
Free pricing of fully functioning products is a great way to create product evangelists and put decision-makers into the sales funnel for premium lines. Businesses such as Survey Monkey and HARO that are successful with freemiums clearly mark the path of conversion from free to paid pricing.
The PWYW/PWYC pricing model, by its nature, promotes ambiguity. Should the deal create a one-time boost to profits or initiate the beginning of a meaningful relationship? The model holds promise. But businesses that ask their customers to take such an alternative pricing path should be honest and clear about their intentions.
Has your company successfully adopted a pay-what-you-want or pay-what-you-can revenue model? How is it working for you and your customers?Julie Rains is a senior writer at Wise Bread, a leading personal finance community dedicated to helping people get the most out of their money. Get daily money tips by following Wise Bread on Facebook or Twitter.