Sat July 26, 2014
Exploring The Economics Of Paying What You Want
Originally published on Sat July 26, 2014 7:29 pm
ERIC WESTERVELT, HOST:
From the studios of NPR West in Culver City, California, it's ALL THINGS CONSIDERED. I'm Eric Westervelt. The ability to name your price is tempting for most consumers and often translates into the option to not pay at all. Still, there are some businesses out there that are experimenting with letting customers pay what you want. Pooja Bhatia writes for the online magazine Ozy. Thank you for taking the time.
POOJA BHATIA: It's great to be here.
WESTERVELT: You write that there are some retailers who've tried this with limited success. And by that I mean not much at all.
BHATIA: Which is just what, you know, classical economic theory would predict. We're all rational actors. We are interested in paying as little as we can for as much as we can. Here's the surprising thing - is that in some circumstances, it actually does work. And these circumstances are - it seems like they're pretty limited. But at the same time, they become an object of kind of fascination for some academics and scholars.
WESTERVELT: Right, I mean, it seems like academics like this, but it hasn't exactly caught fire with the public.
BHATIA: It's true. There are retailers who have tried it, and they have not succeeded. People go in and they end up paying nothing. I mean, you might be surprised that in some cases, it's a success. So for instance, Panera Bread, the restaurant chain, has five Panera Cares cafes that are pay what you want. And they report bringing in about 70 percent of an average restaurant's revenues, which is enough to pay for their costs and also some job retraining programs. Radiohead famously in 2007 with its album "In Rainbows" allowed its buyers to pay whatever they wanted. And there's also, you know, some of these ride-sharing platforms have tried it out too. One of those is Sidecar. They don't do pay what you want anymore, but, you know, they reported it wasn't unsuccessful.
WESTERVELT: So the ride-sharing companies are no longer doing pay what you want.
BHATIA: You know, Sidecar decided not to do it. And the story there is not so much riders were choosing to pay zero often, it was just that when riders did pay zero, when they got - when they were free riders - the drivers ended up getting really ticked off. It was perceived as like, you know, an insult, offensive.
WESTERVELT: So when it's tied to a more charitable side, it's working.
BHATIA: I think that's right. You know - and one of the pricing strategists that I spoke to said that this would probably work best when the good or service on sale evokes the buyer's charity, guilt or vanity, which I thought was a really interesting idea. Under what circumstances would people not behave like rational actors, would they pay more than they have to pay? Her theory is - revolves around self signaling, which is basically this idea that when you decide what to pay someone in an exchange, your decision reflects on the type of person that you are, right? So if you get your shoes shined by someone and he tells you you should just pay what you want - if you don't pay him anything, I think a lot of us are likely to think that we would be pretty callous and kind of bad people.
WESTERVELT: Sometimes our self conceptualization might be we want a free lunch.
BHATIA: (Laughing) No such thing as a free lunch.
WESTERVELT: Pooja Bhatia writes for the online magazine Ozy. Thanks for taking the time.
BHATIA: Thank you, Eric. Transcript provided by NPR, Copyright NPR.