Specializing in Contemporary American cuisine, Restaurant Blu is typical of an upscale highly rated restaurant in an affluent suburban community. There is only one difference. As you can see below, they ask diners to Pay What You Want (PWYW).
Where are we going? To how PWYW distorts price.
Restaurant Blu’s PWYW is temporary. As they explained in a NY Times article, they will be closing at the end of August and wanted to thank the community with a month of letting diners decide what they want to pay. The response has varied.
This review in Open Table is an example of a consumer who paid because of “reciprocity.” The meal was excellent so she paid for it:
Free riders would perfectly characterize the group of five individuals that paid $15 and a $5 tip for 25 dishes. As you would surmise, free riders are group members who use the goods and services that their group can access. However, they do not and need not pay because the entire group is willing to share the cost unequally.
The PWYW phenomenon typically attracts a cohort that believes in fairness. Those people try to determine what their consumption is worth and then pay that amount. For them it helps to have a reference point–a price from the restaurant’s usual menu or perhaps from comparable establishments. Or, the amount they leave could reflect a good or bad dining experience.
When some of us PWYW, our behavior reflects what we think of ourselves. To try to capture that self identity rationale, in another PWYW experiment that involved online video games, researchers included a questionnaire. Asked to check what best described the decision making process, people could check, “they were “a cheap bastard and proud/ashamed of it.”
Maybe also, the family that left the following note fits in the self-identity category. “The food and service were worth way more than we were able to leave…As a kid in college and a mother doing inconsistent freelance, without the deal we wouldn’t have gotten the chance to come.”
Another consideration for some people was social pressure. If they knew the chef, other diners, or planned to patronize another establishment owned by the same people, these individuals felt an external pressure to pay a fair or high amount. In other words, they felt compelled to observe a social norm because others would be judging them.
Our Bottom Line: Price Mechanisms
Because prices at restaurants relate to supply and demand, they provide information. On the supply side, we have firms that use price to make decisions about their land, labor, capital and profits. Meanwhile, on the demand side, price is a handy way to assess quality and and quantity.
So, we can say that with the owner of Blu averaging half his old menu’s prices through PWYW, price is sending him a pretty potent message.