Pay what you want: IIM-Kashipur study finds participative pricing model can make consumers shell out more

New Delhi: Imagine a scenario where one is asked to set a product's price, paying any amount they wished. This pay-what-you-want pricing model can be a wonderful strategy to make consumers shell out more by offering them control over the pricing, researchers at IIM-Kashipur have found.

The team, led by Indian Institute of Management (IIM), Kashipur, Assistant Professor Preeti Narwal, conducted a study to examine how customers lower their motivation to pay more for products offered under the pay-what-you-want model by morally disengaging from reciprocity concerns.

In the pay-what-you-want "participative" pricing model, sellers provide individuals with the opportunity to be actively involved in the price determination process beyond accepting or rejecting the offer.

In return, it is expected that the customers would reciprocate the appropriate behaviour by rewarding the seller with higher prices or at least regular market rates.

The IIM-Kashipur team found that the increasing need for creativity in business processes and proliferation of the Internet has led to the extension of participative pricing to a wide range of products and services across industries such as digital products, hospitality, consulting and entertainment, among others.

According to Narwal, the findings indicate that customers' moral disengagement via displacement of responsibility towards reciprocity concerns is negatively associated with the willingness to pay more.

However, the model is likelier to be embraced more by customers who seek great, awe-inspiring happiness and a distinctly perceivable reputation.

Hence, the offerings should be positioned as superior products that satisfy the ego and the status needs of individuals.

"Participative pricing like the pay-what-you-want model has several advantages over regular pricing. Participative pricing leads to higher purchase intentions due to increased perceived control and greater customer engagement. It provides opportunities for price customisation like travel-related booking sites such as Orbitz, priceline.com that target each website visitor with a customised price to match their threshold price," Narwal told PTI.

"Even in the financial services industry, BBVA (Banco Bilbao Vizcaya Argentaria) seeks customer participation in pricing to tailor-made interest rates. The other advantage of participative pricing lies in its low implementation cost due to the Internet. The pricing model also helps in differentiating the product or service, thus increasing the offering's overall attractiveness to the customer," she added.

Narwal said the pay-what-you-want model is one such type of participative pricing that empowers the customers to choose the prices, ranging from zero to any infinite higher amount.

The fundamental essence of the pay-what-you-want model is the complete delegation of price-setting control to buyers, without allowing sellers to withdraw their offer even when they freeride, she said.

"The pay-what-you-want (model) allows the highest degree of control over price setting to the customers by enabling them to estimate their prices themselves. In the case of participative pricing models such as auctions, customers feel restricted and have a lower sense of perceived control with declining purchase and payment intentions," she said.

"Managers should try to increase an individual's sense of control directly through active engagement in setting the minimum and the maximum threshold prices and new product prices," Narwal added.