It pays to give

I highly doubt this scheme will work with engineers, we are trained to rationalize our decisions. If free is an option, why pay? Donating the money to the same charity separately yields better return, at least you can get the tax credit.

Economist, Jan 13 2011
Allowing consumers to set their own prices can be good for business; even better if the firms give some of it to charity

IN OCTOBER 2007 Radiohead, a British rock group, released its first album in four years, “In Rainbows”, as a direct digital download. The move drew a fair bit of attention (including from this newspaper) not only because it represented a technological thumb in the eye to the traditional music industry, but also because the band allowed listeners to pay whatever they wished for it. Some 60% of those who seized the opportunity paid nothing at all, but the band seemed pleased with the result; one estimate had it earning nearly $3m from the experiment.

One group outside the music industry taking an interest was a trio of professors then at the Rady School of Management at the University of California, San Diego: Ayelet Gneezy, Uri Gneezy and Leif Nelson (who is now at the Haas School of Business at the University of California, Berkeley). Inspired, they designed a series of experiments to gauge whether pay-what-you-want pricing would work for other businesses. Their most recent experiment, co-authored with Amber Brown of Disney Research and published in Science, also stirred in a new element: would it make any difference if firms donated some of the pay-what-you-want fee to charity?

The authors set up their pricing experiment at the exit of a roller-coaster ride at a large amusement park. Riders were offered a photograph of themselves, snapped mid-coast. The usual price was $12.95, but on one day riders were told they could pay what they wished, including taking the photo for free. A second group was charged the full price but told that half the money would go to a well-regarded health charity. Yet a third group could set the price and see half of their chosen amount donated.

Allowing customers to set the price dramatically increased the percentage of buyers—from less than 1% to 8%. Even accounting for those who took a free photo, the amusement park collected more revenue on the pay-what-you-want day than when selling for the usual fixed price.

The authors also found that of the customers who were allowed to pay what they want, those who were told that half the money would go to a good cause paid substantially more than those who were not told about the charitable donation—to the point that revenue more than tripled. (The charity did, indeed, get its promised cut.) The smallest number of purchases, meanwhile, came the day that customers had to pay the full $12.95 but half was donated.

Therefore more than simple altruism was motivating the customers who gave money for a photo they could have had for free. “One of the quirks about paying what you want,” suggests Mr Nelson, “is that it starts to signal something about who you are. Every dollar you spend is a direct reflection of how much you care about this charity and what kind of person you are. No one wants to go cheap with a charity.” He calls this phenomenon “shared social responsibility”: instead of passively accepting a firm’s assertion of its charitable donations, the customer must actively agree to give money to charity, and determine how much.

But how widespread could shared social responsibility be? Ms Gneezy is the first to point out that customer-determined pricing works best for products with low marginal costs. Since publishing their findings, the researchers have spoken to several companies interested in pursuing similar experiments with their products, including software developers and video-game designers. But offering flexible pricing on a virtual product online, instead of in person at an amusement park, may make it easier for people to “go cheap” even if a charity is involved. Combining customer-determined pricing, corporate social responsibility, and increased profits will be tricky to pull off, and not every company will be able to do it—just like not every band can put their album online for free and still profit.

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