![econlifelogotrademarkedwebsitelogo[1]](/wp-content/uploads/2024/05/econlifelogotrademarkedwebsitelogo1.png#100878)
How a Soap Opera Affected Brazil’s Fertility Rate
December 29, 2015The First and Last Places to Celebrate the New Year
December 31, 2015
Online clothing retailer Everlane is letting us pay one of three prices for selected items. From what I could tell as I moved from item to item, it appears to apply solely to overstocked merchandize.
When you click $30, you learn that…
With $36 they tell you, “This helps cover production, shipping and overhead for our 70-person team.” And if you select $54, you get a “Thanks!” and the message that, “This helps cover production, shipping, our team, and allows us to invest in growth.”
Where are we going? To what behavioral economists say about pay-what-you-want.
How We Respond to Pay-What-You-Want
In 2007, the band Radiohead experimented with pay-what-you-want (PWYW). For their album, “In Rainbows,” they simply said online, any amount is okay. The aggregate result was hundreds of thousands of dollars in revenue.
I wondered what was going on and checked an academic study on PWYW from behavioral economist Uri Gneezy. In one experiment at a buffet style restaurant, diners were given the choice of PWYW anonymously in an envelope or giving the money directly to the owner. Seeing that the anonymous payments were larger than what people gave to the owner, the researchers concluded that self-image boosted a diner’s anonymous payment. The owner however got no more than they had to pay. Similarly, faced with an anonymous payment option that depended solely on their conscience, the Radiohead fans had “self-signaled” a self-image.
Self-signaling does have a downside. When the amount that retains our self-image–like $54 for the Everlane sweater– is more than we can afford, rather than paying less, researchers have observed that we walk away with nothing.
This 19-minute video on PWYW is fascinating:
Our Bottom Line: Profit
With PWYW, on the demand side consumers have the incentive of low prices competing with the social norm that says we should not be selfish. On the supply side businesses have the profit motive. Putting it all together, Dr. Gneezy demonstrated that a firm could maximize revenue when its customers were told part of their payment would go to charity.
I suspect Everlane is very aware of our tendency to self-signal our unselfishness.
1 Comment
Very interesting. Never before heard of PWYW, though I have, on at least one occasion negotiated a price down at a conventional retail store. (Simply because I thought I had a reasonable argument and wanted to try)