When Pay-What-You-Want Works

During a longer mediation on the economics of journalism, Rohin Dhar passes along some fascinating research on the subject:

In 2010 Berkeley researchers performed an experiment selling souvenir photos to people after they rode a roller coaster. They tried 4 different pricing schemes. The first was a flat fee of $12.95 for the photo. The second was a flat fee of $12.95 for the photo, but half the money went to charity. The third was to pay what you want for the photo. The final scheme was to pay what you want for the photo, with half the money going to charity.

Allowing people to name their own price was a complete disaster. Everyone lowballed the researchers. But when customers paid what they wanted and half the money went to charity, the researchers raked in money. It generated 3X more revenue per rider than any other option. Adding a charity component to the flat fee had basically no effect on whether someone would buy it.

When people can pay what they want, this experiments indicates it helps if there is a worthy cause attached to it. In that case, it works well. Otherwise, customers will choose to pay almost nothing.