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3 Ways Pay What You Want Leads to More Profit than Fixed Pricing

Drinking Beer and Completing my guide on PWYW

Last week, I conducted a survey of hundreds of creators to see what concerns they had regarding using Pay What You Want pricing for their products or services.

Truth is, I wanted to find out what was keeping these creators from using Pay What You Want pricing.

The question I posed was open ended (“what concerns would you have about using Pay What You Want for your products or services”), and allowed me to discover a diverse range of fears.

After a day of compiling and reviewing answers, here is what I found:

  1. People are most afraid of not making enough money from their PWYW product or service to cover overhead and other basic expenses.  They believe customers will undervalue their work and pay very little or nothing.
  2. The biggest hurdle for creators regarding PWYW is technical know-how: they don’t know what eCommerce solution to use, they’re not sure how to accept payments, etc.
  3. They don’t know how PWYW can work for services

While these may not be the most surprising results, they do shed light on the fears we all have about our work: will people value what we create?

All three concerns are legitimate.

I cover them at length in The Complete Guide to Pay What You Want Pricing.  I devote an entire section to setting up your PWYW solution online (what eCommerce solutions are available, their pros and cons, which one is best, how to integrate them into your website, etc.), as well as another section entirely to PWYW services (in a nutshell, yes they can work – and consistently better than fixed pricing, if you apply the right strategy and tactics).

But today, I wanted to take some time to dissect the most common concern – if I use PWYW, will I be able to cover my costs and make a profit?

Below, I explain 3 ways in particular Pay What You Want leads to more profit than conventional fixed pricing, case studies to prove it, and actionable takeaways you can use right now in your own PWYW offer.

Enjoy:

1. Pay What You Want Increases Reach (without destroying profit)

Free spreads faster than expensive, low cost items are purchased more often and in larger quantities than luxury goods, and when price isn’t a barrier, more people buy (and share).

Common sense, right?

So if you want to reach more people, you should lower your price. Free is the best option.

But free has some seriously negative side-effects:

  1. it destroys revenue
  2. it lowers the perceived value of the offering
  3. it does nothing to validate the good or service being offered (people take things for free even if they don’t particularly care for them – for proof, just browse Costco on the weekend to see how people consume free samples but rarely buy any sampled products).

So where is that fine line between free and paid, where we can spread an idea to as many people as possible without all the nasty, negative side-effects?

Enter Pay What You Want.

Pay What You Want leverages the power of free without sacrificing profit.

Paste Magazine’s Pay What You Want campaign proves this point.

Paste Magaizine is an independent music magazine.  In 2008, Paste was getting hit hard (along with just about every magazine around the world at the time).  So hard, in fact, that they wouldn’t have enough income to make it through the year.  They would have to shut down and declare bankruptcy.

Closing their doors, cutting their losses, and saying goodbye to their 200,000 plus subscribers was the only option…

Or was it?

Instead of closing up shop, the owners of Paste Magazine tried something unconventional: a Pay What You Want campaign to resurrect the sinking magazine.  They rolled out this offer along with the support of hundreds of artists who recorded limited edition songs just for their PWYW campaign to help get the magazine in the red.

The response was incredible: Paste raised over $275,000 and gained 30,000 additional subscribers, which more than paid for itself through advertising.

 “Advertisers immediately became concerned [with our use of Pay What You Want]. Fortunately the campaign was so successful so quickly that I was able to begin to tell a story whether somebody was asking or not. One advertiser, as soon as they heard about the campaign, called up and asked to buy an additional ad. Another said they liked us, but they’d be back when things stabilized—and they’re back now.

We want our advertisers to know that we have this chapter because it demonstrates a level of engagement we don’t think many other magazines could talk about.

The good news is the sales activity is very strong right now, we’re getting lots of RFPs and it appears as if it’s not really an issue, we’re publishing the magazine and it’s great and we’re here and advertisers want to hear about our creative ideas that we’ve got going forward. In the last week I’ve gotten inquiries from four or five advertisers we’ve never had before. All non-endemic—liquor, fashion, consumer electronics, across the board.”

Source: AudienceDevelopment.com

Paste not only survived the year, but made it through one of the industry’s worst years with a profit.

The additional income put them comfortably in the black, kept their printing schedule on track, and inspired many new advertisers and investors to jump on board the magazine.

All because of the clever application of Pay What You Want.

Why it Worked

1. Limited Time Offer

Paste Magazine only offered Pay What You Want for a limited time.  People could either take advantage of the offer now, or lose it forever.  If you’re a music lover and you knew of Paste Magazine, their promotional campaign would be the ideal time for you to become a subscriber.

2. Bonus Material

Paste Magazine probably could have run a successful Pay What You Want campaign without any bells and whistles, but by teaming up with artists for exclusive songs, they compelled new readers to not only subscribe, but PAY for the added bonus content.  Paste made a profit during one of the worst years in the magazine industries history.  By offering a bonus, Paste incentivized readers to contribute because the perceived value of the magazine increased.

3. Anchored Price

Paste Magazine had been around for a while and magazines in general are priced within a particular range.  The average reader understood the value of the magazine without thinking about it, either by assuming its retail price was industry standard, or by actually seeing how much Paste normally charges for an issue.  Because the value of the original offer was clear, new readers didn’t have to determine fair-value (which can have disastrous consequences for a PWYW offering).  The anchored price of a magazine subscription removed pricing ambiguity and encouraged people to pay at or close to fair-value.

4. Ad Based Revenue Model

Paste’s Pay What You Want offer inspired 30,000 new subscribers who paid an average of approximately $9 per subscription (raising $275,000), but their long-term profit came from new, higher paying advertisers.  By expanding the audience, Paste could charge more for their ads.  Remember, just because you use PWYW for some things doesn’t mean you need to use it for all things.  Paste used Pay What You Want for their readers, not for their advertisers.

2. Pay What You Want Increases Revenue per Purchase

In September 2013, I sat down with Ryan Delk of Gumroad to talk Pay What You Want.

Gumroad is my eCommerce platform of choice and allows me to run Pay What You Want offers right from my website with ease (in the guide, I explain why it’s better than the alternatives and I’ll show you how to seamlessly integrate it into your website).  By talking with Ryan, I was able to get some behind-the-scenes info on what they’ve witnessed from vendors who’ve used the platform to sell Pay What You Want products and services.

The information Ryan divulged regarding the performance of Pay What You Want products was incredible (although, based on my own results, I wasn’t necessarily surprised)

In just one example of many that he’s witnessed, Ryan tells a story of an author selling his eBook through Gumroad.  The author originally priced his eBook at $3.

After three weeks and limited revenue, he decided to experiment with Pay What You Want (a feature seamlessly integrated into the Gumroad platform).  He changed the price of his eBook to $1+ (pay anything at or over $1 for the eBook).

Can you guess what happened?

In the following weeks, the author made more sales than he had in previous weeks and the average price paid increased to $5.

That’s a 60% increase in revenue.

In this story, Ryan sheds light on a common truth: that by simply giving people the opportunity to contribute more, they will.

Here’s what Ryan had to say:

“The interesting thing about Pay What You Want is that people fundamentally underestimate how engaged and excited the top 1 to 3% of their audience is about the things that they do…

What happens when you release fixed price products is you’re capping how valuable [your customer can say it] is to them.  Because you’re saying I’m selling this for $100 or $10 or $1 and that’s the price for this…

So what we’ve seen is that when someone releases a PWYW product, the average price paid…will increase pretty dramatically.  There are a couple products that started at $3 and when they went to $1+ (Pay What You Want anything over $1), the average price paid went up to almost $5.  So that’s about a 60% increase in the average price paid (which is also equal to total revenue)…

We’ve seen in a lot of cases where the average price pays goes up significantly after switching to PWYW because you’re letting people value the product for themselves.

If this doesn’t show you the power of generosity in business, I’m not sure what will.

Why it Worked

1. Low Cost Item

The difference between $1 and $5 is an inconsequential amount of money for most people, especially in regards to online purchases.  The greatest hurdle here is getting someone to put in their credit card information for such a low contribution level.  Once the credit card info is entered, however, the purchaser is much more willing to pay ‘fair’ amount for a low priced item than choose the lowest option of $1.

2. Clear Value Proposition

The average ebook on Kindle is anywhere from $3 to $10.  When you let someone choose their price for an item where the average price is clear, most people will choose to contribute at the average.  In this case, around $5.

3. Personal Relationships

The writer in question had an audience he wrote for.  He had established a personal connection with his readers.  When he offered the book at a fixed price, he capped the amount his happy readers could contribute.  By releasing the cap and lowering the barrier to entry, he inspired more people to pick up the book – and simultaneously inspired them to be more generous.  Because he had established a relationship with his readers, the writer was able to leverage the generosity of what Ryan describes as the top 1-3% of his audience.

3. Pay What You Want Maximizes Customer Value

Customer Value Maximization (CVM) is a marketing term that means getting as many sales as possible, for as much money as possible, from as many potential customers as possible.

Companies and individuals do this by offering “the right things to the right people at the right time.” [Wikipedia]

For most companies, their CVM strategy includes lots of discounts, clearance sales, group purchase deals, limited time offers, upsells, etc.  In some cases, there are hundreds of people in a marketing department working year round trying to increase this number.

With Pay What You Want, though, you don’t need a marketing team – the pricing technique itself maximizes customer value.

How?

  1. By removing the upper-cap on your price, the top 1-3% of your audience will pay more.  The amount your top 3% of customers will pay will always be higher than where you would reasonably set a fixed price.
  2. By giving fence-sitters a reason to purchase (no matter what their excuse).  Price is no longer a barrier, so the question is one of WANT versus ABILITY.  By removing the pricing barrier, you maximize the number of people paying for your good or service – people who would never have bought had the price been even a few dollars more expensive.

Pay What You Want, by its nature, offers the right thing (you choose the price) to the right people (anyone interested in your product or service) at the right time (any time you offer it).

Customer Value Maximization in Action

Leah Hynes, the co-creator of The Circuit Breaker Series in Australia, launched her conference series at a fixed price.

In order to get more traction, she priced the conference affordably at $49 (many conferences charge $300 or more).  She figured this would differentiate her from similar conferences, while also lowering the barrier to entry for those who weren’t financially capable of paying for an expensive conference (people who nonetheless needed to hear the message Leah was delivering).

The first week brought only 3 paying customers.

Clearly, that’s not enough people for a conference.

The whole thing would have gone bust, except Leah decided to try something unconventional.  She kept the suggested retail price the same on her website, but also gave an option for people to pay less if they didn’t have the means to afford the sticker price.

According to Leah’s own words:

“we went from 3 registrations to 50 in 10 days. Some people commented that this option gave them access to something they would have otherwise not been able to afford.”

What might be most surprising, however, is that of those who registered, many still paid full price.

Gabrielle was one of those who registered after the price changed to Pay What You Want.  I asked her what she thought of the Pay What You Want pricing and if it affected her decision to go to the conference.

Here’s Gabrielle’s response:

“I was at that Circuit Breaker event and the main reason I signed up was because it was PWYW. Normally, I feel like I can’t afford or justify the expense of attending something like that, but PWYW made it much more accessible. The irony was that I ended up paying the ‘suggested’ price, because once I had decided I was going, I mentally adjusted (increased) how much I thought I could afford.”

Why it Worked

1. Removed Price Barrier

A conference can be a fairly expensive splurge activity.  It takes a compelling reason to justify the high price tag generally associated with conferences (not to mention travel and accommodation costs).  For the average attendant, price is THE deciding factor – can I justify paying X amount for this?  By simply offering Pay What You Want, you immediately remove the psychological barrier to entry for the consumer – even if they end up paying full price when they purchase.

2. Congruent Message

Leah’s Circuit Breaker Series is all about helping people create positive change in their lives – what could be more congruent than giving anyone, regardless of means, access to this event?  This is important to note, too, because a congruent message means those with means will still pay full price to support those who cannot (Amanda Palmer does this to great effect when selling her music online).

3. Attendance is More Important than Margin

For a new conference series, the most important thing a conference organizer can do is maximize (the appropriate level of) attendance.  If this means sacrificing margin, it’s probably a good trade off.  However, based on the response of conference goers like Gabrielle, it doesn’t have to be an “either – or” trade off.

*note: I dig into these experiments, case studies, and results (and dozens more) in much more depth in the guide:

The Complete Guide to Pay What You Want Pricing: How You Can Share Your Work and Still Make a Profit

Why this Matters

These are only 3 successful case studies of hundreds that I’ve researched. These barely scratch the surface of what’s possible with Pay What You Want, but they also give us a great idea of what is possible if we use Pay What You Want the right way. I’ve seen PWYW used successfully for: 

    • video games
    • software as a service based businesses
    • consultation and coaching services
    • blue collar contracting work (think maintenance and plumbing)
    • live performances
    • eBooks
    • food
    • beer
    • wine

The list of successful uses of Pay What You Want pricing goes on… But I’ve also seen PWYW FAIL in many examples. Studying success is important – but just as important (and most often overlooked) is studying failure.

In The Complete Guide to Pay What You Want Pricing, I analyze dozens of successful PWYW, what makes them successful, and how to apply it to your business, writing or art… But I also analyze failed PWYW offers.  What kept them from succeeding?  Why didn’t it work?  How can we apply these lessons-learned to our own products and services so they don’t fail too?

Check it out here if you’re interested: The Complete Guide to Pay What You Want Pricing: How You Can Share Your Work and Still Make a Profit

***

In the comments below, I’d love to hear about your concerns or fears regarding PWYW. 

What’s stopping you from experiementing with this unconventional pricing technique?

And if you have any particular questions you’d like answered regarding PWYW, let me now.  I’ll either have the answer for you or I’ll research it and bring you back what I find.

Look forward to hearing from you!

This article began in the ruins (and reconstruction zones) of Christchurch, New Zealand.  I integrated and finalized the case studies along the rocky coastline of the south island (thank you Courtney for driving).   I initially tried uploading the blog post in the off-the-grid town of Haast (population 300), but wi-fi was nowhere to be found (a local at the town pub told me with pride: “we don’t even get cell reception here”).  Uploaded and published in Wanaka at approximately 0530 hrs Zulu time.  Celebrating with a double-shot, long black at a lakeside cafe.Total writing time: 15 hours

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