Pay what you want is a pricing strategy where buyers pay any desired amount for a given commodity, sometimes including zero. In an interesting presentation from a recent Zürich Behavioral Economics Network meet-up organized by Fehr Advice, Prof. Dr. Martin Spann (Institute for Electronic Commerce and Digital Markets, Ludwig-Maximilians-Universität Munich) outlined the principles under which this pricing model can also be part of a marketing strategy. You can find his presentation below.
For further reading, I recommend Martin’s paper in “Management Science”. From the abstract:
Pay what you want (PWYW) can be an attractive marketing strategy to price discriminate between fair-minded and selfish customers, to fully penetrate a market without giving away the product for free, and to undercut competitors that use posted prices. We report on laboratory experiments that identify causal factors determining the willingness of buyers to pay voluntarily under PWYW. Furthermore, to see how competition affects the viability of PWYW, we implement markets in which a PWYW seller competes with a traditional seller. Finally, we endogenize the market structure and let sellers choose their pricing strategy. The experimental results show that outcome-based social preferences and strategic considerations to keep the seller in the market can explain why and how much buyers pay voluntarily to a PWYW seller.
We find that PWYW can be viable on a monopolistic market, but it is less successful as a competitive strategy because it does not drive traditional posted-price sellers out of the market. Instead, the existence of a posted-price competitor reduces buyers’ payments and prevents the PWYW seller from fully penetrating the market. When given the choice, most sellers opt for setting a posted price rather than a PWYW pricing strategy.