Warning: this article and the pricing model I’m about to talk about are not for the faint of heart. If you prefer “predictability”, by all means, stick to your $.99 kindle book pricing and your $25/hour service rate. There is nothing wrong with this pricing technique. If, on the other hand, you’re interested in reaching the edge of what your product or service is worth, then keep reading.
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Picture this: You’ve just finished your next book (or piece of software, painting, widget, whatever). Everything looks good – this is the best thing you’ve created yet. In fact, it’s way better than your last offering. It better be – you’ve spent even more time on this project than the last one. You’re proud (and you should be).
So you put the finishing touches on your baby – the thing you’ve been fully invested in for weeks, months, or years – and release it to the market…At $9.99…Or if it’s a piece of software, maybe $39… Maybe upward of several hundred if we’re talking a wall-size canvas… But is this really what your product or service is worth?
Problem #1. ‘Stuck’ in a Fixed-Price Mindset
This is the conventional approach to pricing: All products and services have an expected (from the consumers standpoint) range of pricing. Because of this, people and companies price their goods and services within this market rate of fixed-price ranges.
Take Ebooks, for example. What does an Ebook cost? If you said between $0 and $9.99, there’s good reason for this – Amazon has dominated Ebook sales for the past decade. And these are the prices they encourage (indirectly and directly, through things like decreasing royalty splits if you charge more than $9.99). Or what about a video game? What’s that cost? If we’re talking a new release, probably around $50. If you’re downloading it off of Steam, maybe $40. If we’re talking indie games (not an indicator of quality, simply an indicator of how much money went into the backend production), maybe $1 – $5. Again, these prices are this way for good reason – the upper end of prices have been established by console system creators like Sony, Nintendo, and Microsoft, and the indie and digital options through marketplaces like Steam and the Apple store.
What about an in-person retreat or business incubator program? $500 – $3,000? Maybe more if you’re catering to a wealthy demographic and have some star-power behind your marketin. Again, there’s limited wiggle room when it comes to pricing.
Problem #2. A Focus on Scarcity
Once we recognize that there is a market-defined, finite cap on what we can reasonably sell our widget for, another problem arises: How do we make sure we get to the high end of this price range? The solution for companies like Armani, Rolex, and Bentley is to spend billions every year merely trying to look expensive. It literally takes that amount of money to convince people their widgets are any better than budget options (they rarely are, of course). But if you’re not a high-end, multi-million dollar business, how do you find this edge? This is the question every creator wants an answer to.
Advice varies, but generally takes the following form: Ask any artist and he’s probably been told to never – ever – discount his art. To instead charge extremely high prices for his canvas pieces and KEEP them high. To charge less would devalue his work, which would lead to less pay for his pieces, etc. Ask any freelancer and the same rules apply. She’s been told to keep her rates high – to be on the premium edge of whatever her service is. Like the artist, the freelancer should never – ever – discount her work.
The only problem with this approach is when both the freelancer and artist are starving for new customers and clients – which inevitably leads to discounting their work.
This is the nature of living in a scarcity-minded world and the nature of clinging to scarcity-minded pricing:
When we choose market-defined, fixed-prices for our goods or services, we either end up with no buyers, or we’re forced to drop the price to unsustainable levels (a race to the bottom, as Seth Godin would say).
Flipping Pricing on Its Head
What if I told you it didn’t have to be this way? That there’s a pricing technique that can both increase sales and revenue at the same time without devaluing your brand? And that, when applied right, can help a person or company more than double their fixed-price revenue? The technique I’m talking about is simple: let the customer choose his price.
Before you say I’m crazy, here are a few case studies where letting customers choose their price – also known as Pay What You Want pricing – resulted in more revenue, sales, and reach than fixed-priced methods:
Pay What You Want Case Study #1: Ebooks
I released my first book, 2 Days with Seth Godin, in April of 2013. At the time, I had about 150 subscribers to my blog. This is tiny compared to many established blogs, which have 10,000 – 100,000 subscribers. My 150 happy readers barely register a percentage point compared to these bigger blogs…I released my book anyway. Now, if I went the conventional route, I’d use Amazon and price my book competitively (I’d have to because I was an unknown author at the time and I was self-publishing), so I’d probably charge $4.99. But there’s actually quite a bit of competition at $4.99, so I’d probably lower it to $2.99 just to be safe. Who knows, even that might be too high.
Instead of using Amazon and charging a fixed-price, I decided to offer my book on my own platform (which is what Selz allows you to do) and give it away for free. I left it up to my readers to decide what they’d pay.
Here’s what happened:
- Purchase price range: from $0 to $100 (several people paid $25, $50, or $100 for the book)
- % of people who took it for free: 49%
- First month total revenue: almost $500
- First month total sales: 69
- Average contribution price: $15
Could I have charged $15 in the Amazon Kindle store? No way. And to make $500 through Amazon, I would have had to sell a minimum of 150 copies – as in every single one of my readers would have had to pick up a copy. And that’s IF I received a 70 royalty from the book at $4.99, which sometimes doesn’t happen depending on what region the book is being sold in. As an experiment, I decided to publish on Amazon the following month, just to see what my real results would be (and to see if I was crazy for avoiding the platform). Here are my results.
In the end, PWYW tripled my revenue versus conventional, fixed-price alternatives.
Pay What You Want Case Study #2: Videogames
Joost van Dongen is a video game developer. He’s built lots of games in his life and he’s very good at what he does. A few years back, he decided to create a hobby project in his spare time. Since it was just a hobby project, Joost didn’t want to charge for it. But he also wanted to be compensated in some way for the hundreds of hours he sunk into developing this game. So he did something unconventional: he made his game Pay What You Want.
Here are the results 3 months after release:
- Total revenue: $23,000+
- Total installs of the game: 250,000
- Average price per paid download: $5.23
$23,000+ for a free game. Not bad. It’s true the majority of people took the game for free. But games are heavily pirated as is, so this is nothing shocking. Joost believes that he could have done better selling on a platform like Steam. But he also freely admits that the awareness and popularity of the game is due to offering it as PWYW (something that more companies are doing now – check out HumbleBundle.com for a great example of this).
Clearly, this is something you can’t split test, so it’s hard to say which route would be more lucrative. But what remains is a hobby project that made thousands by letting people choose their price, created extremely loyal fans, and continues to grow his brand through exposure and awareness.
Pay What You Want Case Study #3: High-End Business Incubator
I’m currently consulting with a new business incubator program. For reference, a program like the one they developed would normally run about $3,000 per student. For the past few months, I’ve been helping them design their pricing structure – or, in some ways, lack thereof. They brought me on board to take the Gift Economy and Pay What You Want pricing to its edge. This meant removing price altogether. You might think I’m crazy for doing this – this program has very real overhead. We’re talking housing, work space, and personal food catering, not to mention high-end designers and videographers on call as well as a half dozen mentors working daily to help these entrepreneurs launch their businesses. Most people in their right mind would laugh at removing price from the equation. Luckily, this company was different and decided to test out my crazy idea. We’ve recently opened the program up to the first batch of entrepreneurs. Within the first few days, we received offers ranging from several thousand to a payment of over $10,000.
Think about that for a minute.
By removing price from the equation, we more than tripled revenue from applicants. These kind of results are literally impossible to get when you put a fixed price on your product.
Why Pay What You Want Works
Some people may still be skeptical of these results. That’s fair – it means you’re still evaluating if Pay What You Want pricing can work for you. You’ve seen examples, but it might help to understand exactly why it works:
#1. Pay What You Want Increases Sales by Lowering (or Removing) the Barrier to Entry
Barrier to entry generally refers to how hard it is to enter a given market (as a producer). In the case of goods and services, it refers to pricing that limits how many people can actually afford what you’re selling. Every product with a fixed cost has a barrier to entry; even a $10 book. When you remove this price (or lower it to $1+), you remove the barrier to entry. Yes, for some people, $10 for a book is too much. These are generally the people who would never buy your product to begin with. But when you remove the price, these same people may be willing to throw in a couple dollars for your effort.
What’s interesting to note is that many times people will still pay full ‘retail’ price for a PWYW product, yet would have been turned off from purchasing had the product retailed at a fixed price.
Here’s a quote from customer who purchased tickets to a conference that offered Pay What You Want pricing:
“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.”
Pay What You Want encouraged this person to consider an event that she would have normally ignored because of a fixed-price. Yet when she went to buy, she still paid full price. This increased sales and kept revenue consistent.
#2. Pay What You Want Increases Revenue by Removing the Upper Limit of Contributions
Every athlete has a fan, every company a cheerleader, and every writer / artist / blogger / entrepreneur a small group of followers that love what they do. And I’m not talking regular fans – I’m talking super-fans. The people that come to every game, rain or shine; that buy ever product on day one; that star and retweet everything you write…We all have super-fans (even if it’s usually just our moms). When we put a fixed price on a product, we essentially say: “I’m glad you like how much value I’ve given you, but I’m going to limit how much you can give back to me.”
Why would you do this!?
The reality is the top 1-3% of your audience are super-fans. They want desperately to contribute to what you do, to support your work. All they need is an opportunity and an incentive (often times as simple as offering a product as Pay What You Want). When I sold my first book, the $50 and $100 contributions were the outliers. Yet they made up over 15% of the revenue. And they MORE than make up for the people who took the book for free (many of whom repaid the favor by sharing the book – that type of marketing is priceless).
In the story I told about the incubator program, that one person – the single, enormous outlier – will be able to float a large portion of the program by themselves, which gives the creators of the incubator the opportunity and flexibility to offer the program to others who wouldn’t normally have the means to afford something like this. Point is: don’t ever discount the power of your biggest fans and supporters, and always give them the freedom and opportunity to contribute as much as they want.
#3. Pay What You Want Increase Reach and Impact by Encouraging Generosity
Contrary to what you might expect, people are generous. The title of a Harvard Business Review says it best: “When the rule is “Pay What You Want,” almost everyone pays something.” Yes, you’ll come across the people who take advantage of your generosity; people who look for an opportunity to get the best deal and lowest bill at the expense of others. The good news is these people are the minority. The majority will give something.
This is even true for physical products and services.
I started offering my consulting service as Pay What You Want recently. While I don’t have enough data collected just yet for extensive research, I have found that everyone has paid something; some quite a bit (double what I would have charged) and others, quite a bit less (about a quarter what I would have charged). What’s important to realize here isn’t the range of contributions, it’s that everyone contributed. They didn’t have to (although I do make it quite clear that PWYW doesn’t mean free – an important note for anyone considering this type of pricing technique for their services).
There are two things I can deduce from my experiential research:
- People are generous and they want to be generous (which means we have to actually ASK for contributions)
- People are motivated by generosity and guilt simultaneously
Many people have told me they wish they could give more, but aren’t in a financial state to. Some people have said they didn’t want to work with me simply because they wouldn’t be able to pay me what they thought I deserved (I told them we could try it anyway). Regardless if we as human beings are driven more by the want to be loving and generous, or the want to avoid being seen as stingy and selfish, the results are the same: the majority of people contribute when it’s optional.
Use With Caution
Pay What You Want works.
I know it does from my own experience and from the experience of my clients. But like other pricing techniques (from freemium, to tiered prices, to bonus packaging, to limited time discounts, etc.), it only works in some conditions and under certain circumstances. In my guide: The Complete Guide to Pay What You Want Pricing, I explain exactly what these conditions are (what I call The 5 Essential Components of Pay What You Want), and how to create the circumstances around your product or service to make it work (in the guide, I call this The Perfect Pitch Framework). And, not ironically, I’m offering this guide as Pay What You Want at $1+
The beauty of a platform like Selz is that it give us creators the power to easily and effectively sell our goods and services using Pay What You Want (something you would have had to hire an expensive coder to do for you just a few years ago).
My challenge to you is this: if you’re on the fence about using Pay What You Want pricing, or this is the first time you’ve considered it and you’re rearing to go, consider testing out a small product or service using Selz.
Then, simply send out the link to your product or service to your audience (or friends and family) and see what happens (Selz makes this incredibly easy to do). When you do something small in this way, risk is mitigated and there’s very little downside. If it doesn’t work, it doesn’t work. But, of course, I don’t think that’s what will happen. I think you’ll find a crazy pricing technique that actually works for your growing business.
Let us know in the comments below in what creative ways you could use Pay What You Want pricing for your goods or services.
About the author:
Tom Morkes is the founder and CEO of Insurgent Publishing. He is a West Point grad, an Iraq War veteran, and he got paid to jump out of helicopters for a while. You can read his thoughts at www.tommorkes.com where he applies what he learned leading troops in combat to entrepreneurship, art, and writing.