Research pick: Pay-what-you-want restaurants - "A pay-what-you-want pricing model for restaurants"

Haggling will be familiar to anyone who has visited a market during the last few thousand years! If a deal is to be done between hawker and customer, then the price has to be right. A modern twist on this is that the seller has no input and the customer simply pays what they want for the goods; although there has always been free access to some things where a donation is welcomed. It is rare that this approach becomes the predominant pricing model although there have been numerous experiments, such as pay-what-you-want for digital goods online, including music from famous artists.

Now, Vinaysingh Chawan of the Indian Institute of Management Indore, writing in the International Journal of Services and Operations Management explains that the pay-what-you-want pricing model whether for digital goods, services, or entrance to a museum or exhibition is perhaps counterintuitive. This is especially so given that the buyer may opt to pay nothing and so the seller makes no financial gain from the transaction. However, as counterintuitive as it may seem, the PWYW model does have its supporters and many companies give their customers the option.

It turns out that the vast majority of people will take the view that this “honesty box” type approach deserves to be rewarded and will pay what they perceive as a fair price. Few pay nothing at all. Some people might even pay more than the price the seller hoped for and this can offset the loss due to those who pay nothing. The seller has to assume a majority of fair-minded customers and few freeloaders.

Chawan has investigated with PWYW works for the restaurant industry. If the menu gives a fair suggested price rather than an obligatory price, then it seems customers will pay a fair price. There is always the option of setting an absolute minimum which precludes freeloading and allows the restaurateur to at least cover costs, perhaps with a small profit margin. Indeed, when a minimum is set and a guide price is given, profits commonly end up being higher than when the restaurateur sets absolute pricing. There is much research to be done before this paradigm becomes widespread if not universal.

Chawan, V. (2019) ‘A pay-what-you-want pricing model for restaurants‘, Int. J. Services and Operations Management, Vol. 32, No. 4, pp.431-449.