{"id":3283,"date":"2013-11-14T01:16:15","date_gmt":"2013-11-14T08:16:15","guid":{"rendered":"https:\/\/tommorkes.com\/?p=3283"},"modified":"2018-12-06T08:30:20","modified_gmt":"2018-12-06T15:30:20","slug":"3-ways-pay-what-you-want-leads-to-more-profit-than-fixed-pricing","status":"publish","type":"post","link":"https:\/\/tommorkes.com\/3-ways-pay-what-you-want-leads-to-more-profit-than-fixed-pricing\/","title":{"rendered":"3 Ways Pay What You Want Leads to More Profit than Fixed Pricing"},"content":{"rendered":"

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

Truth is, I wanted to find out what was keeping these creators from using Pay What You Want<\/i> pricing.<\/p>\n

The question I posed was open ended (\u201cwhat concerns would you have about using Pay What You Want for your products or services\u201d<\/em>), and allowed me to discover a diverse range of fears.<\/p>\n

After a day\u00a0of compiling and reviewing answers, here is what I found:<\/strong><\/p>\n

    \n
  1. People are most afraid of not making enough money from their PWYW product or service to cover overhead and other basic expenses.\u00a0 They believe customers will undervalue their work and pay very little or nothing.<\/li>\n
  2. The biggest hurdle for creators regarding PWYW is technical know-how: they don\u2019t know what eCommerce solution to use, they\u2019re not sure how to accept payments, etc.<\/li>\n
  3. They don\u2019t know how PWYW<\/em> can work for services<\/li>\n<\/ol>\n

    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<\/i>?<\/p>\n

    All three concerns are legitimate.<\/p>\n

    I cover them at length in The Complete Guide to Pay What You Want Pricing<\/i><\/b><\/a>.\u00a0 I devote an entire section to setting up your PWYW<\/em> 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<\/em> services (in a nutshell, yes they can work \u2013 and consistently better than fixed pricing, if you apply the right strategy and tactics).<\/p>\n

    But today, I wanted to take some time to dissect the most common concern \u2013 if I use PWYW, will I be able to cover my costs and make a profit?<\/i><\/strong><\/p>\n

    Below, I explain 3 ways in particular Pay What You Want\u00a0<\/i>leads to more profit than conventional fixed pricing<\/i><\/b>, case studies to prove it, and actionable takeaways you can use right now in your own PWYW<\/em> offer.<\/p>\n

    Enjoy:<\/p>\n

    1. <\/b>Pay What You Want<\/i><\/b> Increases Reach (without destroying profit)<\/b><\/h2>\n

    Free spreads faster than expensive, low cost items are purchased more often and in larger quantities than luxury goods, and when price isn\u2019t a barrier, more people buy (and share).<\/p>\n

    Common sense, right? <\/i><\/p>\n

    So if you want to reach more people, you should lower your price. Free is the best option.<\/i><\/p>\n

    But free<\/i> has some seriously negative side-effects: <\/b><\/p>\n

      \n
    1. it destroys revenue<\/li>\n
    2. it lowers the perceived value of the offering<\/li>\n
    3. it does nothing to validate the good or service being offered (people take things for free even if they don\u2019t particularly care for them \u2013 for proof, just browse Costco on the weekend to see how people consume free samples but rarely buy any sampled products).<\/li>\n<\/ol>\n

      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?<\/p>\n

      Enter Pay What You Want<\/i>.<\/p>\n

      Pay What You Want<\/i><\/b> leverages the power of free without sacrificing profit.<\/b><\/p>\n

      Paste Magazine\u2019s <\/i>Pay What You Want<\/i> campaign proves this point.<\/p>\n

      Paste Magaizine <\/i>is an independent music magazine.\u00a0 In 2008, Paste<\/i> was getting hit hard (along with just about every magazine around the world at the time).\u00a0 So hard, in fact, that they wouldn\u2019t have enough income to make it through the year.\u00a0 They would have to shut down and declare bankruptcy.<\/p>\n

      Closing their doors, cutting their losses, and saying goodbye to their 200,000 plus subscribers was the only option\u2026<\/strong><\/p>\n

      Or was it?<\/i><\/p>\n

      Instead of closing up shop, the owners of Paste Magazine<\/i> tried something unconventional: a Pay What You Want<\/i> campaign to resurrect the sinking magazine.\u00a0 They rolled out this offer along with the support of hundreds of artists who recorded limited edition songs just for their PWYW<\/i> campaign to help get the magazine in the black.<\/p>\n

      The response was incredible: Paste<\/i> raised over $275,000 and gained 30,000 additional subscribers, which more than paid for itself through advertising.<\/strong><\/p>\n

      \n

      \u00a0\u201cAdvertisers immediately became concerned [with our use of <\/i>Pay What You Want<\/i><\/b>]. 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\u2019d be back when things stabilized\u2014and they\u2019re back now.<\/i><\/p>\n

      \n

      We want our advertisers to know that we have this chapter because it demonstrates a level of engagement we don\u2019t think many other magazines could talk about.<\/i><\/p>\n

      \n

      The good news is the sales activity is very strong right now, we\u2019re getting lots of RFPs and it appears as if it\u2019s not really an issue, we\u2019re publishing the magazine and it\u2019s great and we\u2019re here and advertisers want to hear about our creative ideas that we\u2019ve got going forward. In the last week I\u2019ve gotten inquiries from four or five advertisers we\u2019ve never had before. All non-endemic\u2014liquor, fashion, consumer electronics, across the board.\u201d<\/i><\/p>\n<\/blockquote>\n

      Source: AudienceDevelopment.com<\/p>\n

      Paste<\/i> not only survived the year, but made it through one of the industry\u2019s worst years with a profit.<\/strong><\/p>\n

      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.<\/p>\n

      All because of the clever application of Pay What You Want<\/i>.<\/p>\n

      Why it Worked<\/b><\/h2>\n

      1. Limited Time Offer<\/b><\/p>\n

      Paste Magazine only offered Pay What You Want<\/i> for a limited time.\u00a0 People could either take advantage of the offer now, or lose it forever.\u00a0 If you\u2019re a music lover and you knew of Paste Magazine<\/i>, their promotional campaign would be the ideal time for you to become a subscriber.<\/p>\n

      2. Bonus Material<\/b><\/p>\n

      Paste Magazine probably could have run a successful Pay What You Want<\/i> 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.\u00a0 Paste made a profit during one of the worst years in the magazine industries history.\u00a0 By offering a bonus, Paste<\/i> incentivized readers to contribute because the perceived value of the magazine increased.<\/p>\n

      3. Anchored Price<\/b><\/p>\n

      Paste Magazine<\/i> had been around for a while and magazines in general are priced within a particular range.\u00a0 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<\/i> normally charges for an issue.\u00a0 Because the value of the original offer was clear, new readers didn\u2019t have to determine fair-value (which can have disastrous consequences for a PWYW offering).\u00a0 The anchored price of a magazine subscription removed pricing ambiguity and encouraged people to pay at or close to fair-value.<\/p>\n

      4. Ad Based Revenue Model<\/b><\/p>\n

      Paste\u2019s Pay What You Want<\/i> 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.\u00a0 By expanding the audience, Paste<\/i> could charge more for their ads.\u00a0 Remember, just because you use PWYW for some things doesn\u2019t mean you need to use it for all things.\u00a0 Paste<\/i> used Pay What You Want<\/i> for their readers, not for their advertisers.<\/p>\n

      2. Pay What You Want<\/em> Increases Revenue per Purchase<\/h2>\n

      In September 2013, I sat down with Ryan Delk of Gumroad to talk Pay What You Want<\/em>.<\/p>\n

      Gumroad is my eCommerce platform of choice and allows me to run Pay What You Want<\/em> offers right from my website with ease (in the guide, I explain why it\u2019s better than the alternatives and I\u2019ll show you how to seamlessly integrate it into your website).\u00a0 By talking with Ryan, I was able to get some behind-the-scenes info on what they\u2019ve witnessed from vendors who\u2019ve used the platform to sell Pay What You Want<\/i> products and services.<\/p>\n

      The information Ryan divulged regarding the performance of Pay What You Want<\/i> products was incredible (although, based on my own results, I wasn\u2019t necessarily surprised)<\/p>\n

      In just one example of many that he\u2019s witnessed, Ryan tells a story of an author selling his eBook through Gumroad.\u00a0 The author originally priced his eBook at $3.<\/p>\n

      After three weeks and limited revenue, he decided to experiment with Pay What You Want<\/i> <\/i>(a feature seamlessly integrated into the Gumroad platform).\u00a0 He changed the price of his eBook to $1+ (pay anything at or over $1 for the eBook).<\/p>\n

      Can you guess what happened?<\/i><\/p>\n

      In the following weeks, the author made more sales than he had in previous weeks and the average price paid increased to $5.<\/p>\n

      That\u2019s a 60% increase in revenue.<\/i><\/b><\/p>\n

      In this story, Ryan sheds light on a common truth: that by simply giving people the opportunity to contribute more, they will.<\/i><\/b><\/p>\n

      Here\u2019s what Ryan had to say:<\/p>\n

      \n

      \u201cThe interesting thing about <\/i>Pay What You Want<\/i> is that people fundamentally underestimate how engaged and excited the top 1 to 3% of their audience is about the things that they do\u2026<\/i><\/p>\n

      \n

      What happens when you release fixed price products is you\u2019re capping how valuable [your customer can say it] is to them.\u00a0 <\/i><\/b>Because you\u2019re saying I\u2019m selling this for $100 or $10 or $1 and that\u2019s the price for this\u2026<\/i><\/p>\n

      So what we\u2019ve seen is that when someone releases a <\/i>PWYW<\/i> product, the average price paid...will increase pretty dramatically.\u00a0 There are a couple products that started at $3 and when they went to $1+ (<\/i>Pay What You Want<\/i> anything over $1), the average price paid went up to almost $5.\u00a0 So that\u2019s about a 60% increase in the average price paid (which is also equal to total revenue)\u2026<\/i><\/p>\n

      \n

      We\u2019ve seen in a lot of cases where the average price pays goes up significantly after switching to <\/i><\/b>PWYW<\/i><\/b> because you\u2019re letting people value the product for themselves.<\/i><\/b>\u201d<\/i><\/p>\n<\/blockquote>\n

      If this doesn\u2019t show you the power of generosity in business, I\u2019m not sure what will.<\/p>\n

      Why it Worked<\/h3>\n

      1. Low Cost Item<\/b><\/p>\n

      The difference between $1 and $5 is an inconsequential amount of money for most people, especially in regards to online purchases.\u00a0 The greatest hurdle here is getting someone to put in their credit card information for such a low contribution level.\u00a0 Once the credit card info is entered, however, the purchaser is much more willing to pay \u2018fair\u2019 amount for a low priced item than choose the lowest option of $1.<\/p>\n

      2. Clear Value Proposition<\/b><\/p>\n

      The average ebook on Kindle is anywhere from $3 to $10.\u00a0 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.\u00a0 In this case, around $5.<\/p>\n

      3. Personal Relationships<\/b><\/p>\n

      The writer in question had an audience he wrote for.\u00a0 He had established a personal connection with his readers.\u00a0 When he offered the book at a fixed price, he capped the amount his happy readers could contribute.\u00a0 By releasing the cap and lowering the barrier to entry, he inspired more people to pick up the book \u2013 and simultaneously inspired them to be more generous.\u00a0 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.<\/p>\n

      3. Pay What You Want<\/em> Maximizes Customer Value<\/h2>\n

      Customer Value Maximization (CVM)<\/em> 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.<\/p>\n

      Companies and individuals do this by offering \u201cthe right things to the right people at the right time.\u201d [Wikipedia]<\/p>\n

      For most companies, their CVM strategy includes lots of discounts, clearance sales, group purchase deals, limited time offers, upsells, etc.\u00a0 In some cases, there are hundreds of people in a marketing department working year round trying to increase this number.<\/p>\n

      With Pay What You Want<\/i>, though, you don\u2019t need a marketing team \u2013 the pricing technique itself maximizes customer value.<\/strong><\/p>\n

      How?<\/p>\n

        \n
      1. By removing the upper-cap on your price, the top 1-3% of your audience will pay more.\u00a0 The amount your top 3% of customers will pay will always be higher than where you would reasonably set a fixed price.<\/li>\n
      2. By giving fence-sitters a reason to purchase (no matter what their excuse).\u00a0 Price is no longer a barrier, so the question is one of WANT versus ABILITY.\u00a0 By removing the pricing barrier, you maximize the number of people paying for your good or service \u2013 people who would never have bought had the price been even a few dollars more expensive.<\/li>\n<\/ol>\n

        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).<\/p>\n

        Customer Value Maximization in Action<\/i><\/b><\/h3>\n

        Leah Hynes, the co-creator of The Circuit Breaker Series in Australia, launched her conference series at a fixed price.<\/p>\n

        In order to get more traction, she priced the conference affordably at $49 (many conferences charge $300 or more).\u00a0 She figured this would differentiate her from similar conferences, while also lowering the barrier to entry for those who weren\u2019t financially capable of paying for an expensive conference (people who nonetheless needed to hear the message Leah was delivering).<\/p>\n

        The first week brought only 3 paying customers.<\/em><\/p>\n

        Clearly, that\u2019s not enough people for a conference.<\/p>\n

        The whole thing would have gone bust, except Leah decided to try something unconventional.\u00a0 She kept the suggested retail price the same on her website, but also gave an option for people to pay less if they didn\u2019t have the means to afford the sticker price.<\/strong><\/p>\n

        According to Leah\u2019s own words:<\/p>\n

        \n

        \u201cWe 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.\u201d<\/i><\/p>\n<\/blockquote>\n

        What might be most surprising, however, is that of those who registered, many still paid full price.<\/strong><\/p>\n

        Gabrielle was one of those who registered after the price changed to Pay What You Want<\/i>.\u00a0 I asked her what she thought of the Pay What You Want pricing and if it affected her decision to go to the conference.<\/p>\n

        Here\u2019s Gabrielle\u2019s response:<\/p>\n

        \n

        \u201cI was at that Circuit Breaker event and the main reason I signed up was because it was PWYW. Normally, I feel like I can\u2019t 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.\u201d<\/i><\/p>\n<\/blockquote>\n

        Why it Worked<\/b><\/h3>\n

        1. Removed Price Barrier<\/b><\/p>\n

        A conference can be a fairly expensive splurge activity.\u00a0 It takes a compelling reason to justify the high price tag generally associated with conferences (not to mention travel and accommodation costs).\u00a0 For the average attendant, price is THE deciding factor \u2013 can I justify paying X amount for this<\/i>?\u00a0 By simply offering Pay What You Want, you immediately remove the psychological barrier to entry for the consumer \u2013 even if they end up paying full price when they purchase.<\/p>\n

        2. Congruent Message<\/b><\/p>\n

        Leah\u2019s Circuit Breaker Series is all about helping people create positive change in their lives \u2013 what could be more congruent than giving anyone, regardless of means, access to this event?\u00a0 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).<\/p>\n

        3. Attendance is More Important than Margin<\/b><\/p>\n

        For a new conference series, the most important thing a conference organizer can do is maximize (the appropriate level of) attendance.\u00a0 If this means sacrificing margin, it\u2019s probably a good trade off.\u00a0 However, based on the response of conference goers like Gabrielle, it doesn\u2019t have to be an \u201ceither - or\u201d trade off.<\/p>\n

        *note: I dig into these experiments, case studies, and results (and dozens more) in much more depth in the guide.<\/i><\/p>\n

        Why this Matters<\/b><\/h2>\n

        These are only 3 successful case studies of hundreds that I\u2019ve researched. These barely scratch the surface of what\u2019s possible with Pay What You Want<\/i>, but they also give us a great idea of what is possible if we use Pay What You Want<\/i> the right way. I\u2019ve seen PWYW<\/i> used successfully for:<\/p>\n