Charity: the trick to consumer-set pricing

This economic depression has forced marketers to be more creative.  It’s kickstarted a renaissance in pricing.  I wrote earlier on Daily Deals in I Can Get it for you Wholesale.  Another trend is letting the consumer set his own pricing.

The difficulty with such variable pricing is that there are no standards, norms, or techniques  to prevent freeloaders who wouldn’t normally buy or “selfish” consumers who maximize their own value at the expense of the seller and pay nothing or close to it.  This is a classical Tragedy of the commons situation.

Typical tactics to increase pricing include:

  • Suggested price. Provide a minimum, suggested amount, or related guidelines, similar to donations in the public sector world.
  • Peer Pressure. Displaying what other users paid.
  • Premium. Award a bonus or publicity scaled by payment amount.
  • Transparency. Disclose actual costs so the consumer can hopefully make an informed decision about how much profit he’s willing to let you make.

Add Charity share to the list.  Giving an amount or percentage to charity has long been a part of the marketing toolset to raise sales or conversion.  But it works especially well with consumer-set pricing.  The Freakonomics blog  points to a wonderful study in  How to Maximize Pay-What-You-Wish Pricing where donating a major share of the payment has a huge impact on both consumer sales and price.

Ayelet Gneezy, a marketing professor at the University of California-San Diego, conducted a field experiment at a theme park (sample size: over 113,000).  Gneezy presented four different pricing schemes for souvenir photos: a flat fee of $12.95; a flat fee of $12.95 with half going to charity; pay-what-you-wish; and pay-what-you-wish with half going to charity.  At a flat fee of $12.95 per picture, only 0.5% of people purchased a photograph; when customers were told that half the $12.95 purchase price would go to charity, a meager 0.59% purchased a photo. Under the simple pay-what-you-wish variation, 8.39% of people purchased a photo, but customers paid only $.92 on average. The final option — pay what you wish, with half the purchase price going to charity — generated big results: purchase rates of 4.49% and an average purchase price of $5.33, resulting in significant profits for the theme park. “When the charity factor is introduced, these casual freeloaders balk at the idea of paying nothing, because it’s more likely to reflect badly on them,” writes Ed Yong. “Rather than naming a higher price, their preference is to avoid buying altogether -– for them, it isn’t worth it. Sales fall, but the actual profits go up because the remaining customers are motivated by their desire for the product and for the cause, will pay for both.”

What other techniques have you seen?

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