Pay What You Want Is Not Pricing Strategy

Pay What You WantI have long advocated against Pay What You Want (or Pay What You Can) pricing. The lure of this however does not seem to go away. Recently it is back in vogue with Instpaper fame Marco Arment adopting this for his podcast app.  Predictably you see the social media latching on to this as a great approach. Had it not been for someone with the brand recognition of Marco, would anybody have noticed it?

Marco writes,

This year, with 2.0, I decided, for various reasons, to replace the “free with paid unlock” model with an “everything’s free, pay what you want” model.

His reasoning includes,

I’m trying not to repeat my mistakes, and one of the biggest mistakes I made was putting short-term gain from paid-app sales above long-term growth. I watched my biggest competitor clone all of my features, raise VC money, and hire a staff. I knew he’d go completely free months before he did. He wasn’t doing anything I couldn’t do, but I wasn’t doing it. I knew I was vastly outgunned, but I just sat back and let it happen.

I see Marco has clear understanding of alternatives available to customers, his competitor’s approach and that there is really no clear and defensible differentiation among the products in the minds of customers. So instead of competing on price he had adopted Pay-What-You-Want as is pricing.

One hand you might see this as perfect way to price – not leaving any customers. But the assumptions this is based on are just wrong because

  1. We the customers do not know value of a products like these let alone the price to pay
  2. Even if we did, the price we want to pay is influenced severely by the reference price (the price we pay for other alternatives)
  3. We are easily influenced by nudges like Goldilocks pricing and signaling like high-low pricing

When we leave pricing to customers to decide we are telling them we do not understand their needs (the customer job to be done), value created by our product and why our product is the right candidate to do the job.

Some define Pay-What-You-Want as a great experiment. If it is an experiment, what is the hypothesis are you testing? These experiments have been done before. You should not repeat experiments expecting different results just because, “this time it is different”.

Some say Pay-What-You-Want is the only way they would have made any revenue. Once again that points to lack of understanding of customers and what job we want customers to hire our product for.

Segmentation, Targeting and Positioning are the Diet, Exercise and Sleep of staying healthy and fit. But like our predilection to opt for dietary supplements and quick fixes we gravitate towards methods like freemium and Pay-What-You-Want. I will leave you with the wise words of Berkeley and Google Chief Economist Hal Varian said,

Success in selling digital goods does not require a whole new way of thinking about business. Rather, it requires the same kind of smart managing and smart marketing that have always set apart the best companies. The real power of versioning is that it enables you to apply tried-and-true product-management techniques-segmentation, differentiation, positioning-in a way that takes into account both the unusual economics of information production and the endless malleability of digital data.