'Pay-What-You-Want' Pricing Trend
What's the price of a bowl of chili? Whatever you want it to be-at least at some Panera Bread cafes in the St. Louis area. The cafes are at the forefront of a trend: letting consumers set their own price.
As reported by ABC News and the Associated Press, other businesses are experimenting with this same model. Among restaurants, Salt Lake City's One World Everybody Eats has tried it; so, too, has Cafe Gratitude in California.
Video game downloads are available for whatever buyers want to pay through sales site Humble Bumble. Way back in 2007, rock band Radiohead used the same model to sell their album "In Rainbows."
Ron Shaich, founder and CEO of the Panera chain, says the purpose of his pricing is partly charitable: If customers pay more than the chili costs Panera to make, the profit subsidizes meals for customers who cannot afford to pay as much. Diners are told upfront, when deciding what to pay, that this is how the system works.
Lief Nelson of the Haas School of Business at the University of California, Berkeley, published in the July 2010 issue of Science magazine the results of what he and three co-authors called "a field experiment" with pay-what-you-want and charitable pricing.
They presented more than 113,000 visitors to an amusement park with different ways to buy a souvenir. A first group was given a traditional fixed price. A second was allowed to pay whatever price they wanted, including zero. Of this second group, half were told that 50 percent of whatever price they paid would go to charity.
Nelson found that at a standard, fixed price, the charitable option increased demand only slightly. "However," he writes, "when participants could pay what they wanted, the same charitable component created substantially more [profit]."
So far, says Ron Shaich, Panera's cafes with experimental, charitable pricing are bringing in only 70 to 80 percent of what his fixed-price cafes make. Still, he says, that's enough to make a profit and to do good.