The Essential Guide to Pay What You Want Pricing
– Tom Morkes
In April of 2013, I did something a bit mad, and it’s changed the way I view business (and life) forever.
Before I explain, here’s some background for context:
I started building my personal website www.tommorkes.com in the fall of 2012. For the first 5 or 6 months I gave everything away for free.
No price tag – just take it.
In that time, I created a lot of content too: several blog posts a week, an 80 page book, a bunch of mini-guides and workbooks, a podcast, etc.
All for free.
In this time, I’d built of a list of about 150 readers.
Fast forward to the beginning of 2013, and I’m in my car listening to a podcast featuring the Vennare brothers of Thehybridathlete.com. They were telling a story about their successful fitness business, which was bringing in 6 figures a year.
Cool, but no big deal, right?
But then they said something that blew my mind:
They were making this money in a completely unconventional way: by letting their customers CHOOSE their price.
In other words: Pay What You Want (PWYW) pricing.
I let the idea float around my brain for a bit and realize this is the technique I needed to use for my writing.
I still wanted as many people as possible to have access to my work, but also wanted to validate the worth of my writing (as in, I wanted to know if my writing was good enough to pay for).
My next book was a small ebook – a compilation of notes from a Seth Godin conference. After getting permission from Seth to share the book with my audience, I created a simple splash page on my website, uploaded the file to Gumroad.com, and let my 150 subscribers know I had a new, free eBook for them…
With one catch: for the first time ever, I gave them the opportunity to contribute to my creative work?—?as much or as little as they’d like.
I expected to make nothing, but why not try, right?
The next day, I had $80 in my bank account.
“Wow – very cool…”
By the end of the week, $340.
“This is incredible…”
At the end of the month, I was closing in on $500.
“All for something I gave away for free. Amazing…”
Was it Just Luck?
Trust me, I get it.
This seems like a one off anomaly. As a random success story that doesn’t prove it can be repeated.
Normally, I would create a long list of examples to disprove this; to show it’s been done many, many times before in much bigger ways than what I did (including examples like Disconnect.me, Humblebundle.com, Radiohead’s In Rainbows album, Joost van Dongen’s $20k PWYW video game, Panera Bread’s PWYW based cafes, Perlin Winery in Berlins, and many others)…
But instead, I’d like to share a couple new ways I’ve personally used the pricing technique this year and the results.
How Pay What You Want Pricing Can Work for In Person Events with Expensive Overhead
In the spring of 2014, I co-launched a new business called TheFlightFormula.com.
The Flight Formula is a heart-centered business incubation program – it’s a 1 week, live, in-person training event to help you launch a heart-centered business from scratch.
I initially came on as a pricing consultant (and then latter as a cofounding partner) because of my work in Pay What You Want pricing.
My suggestion: let’s take Pay What You Want pricing to it’s edge.
In other words: let’s remove price altogether.
Now – to give a clear context for how crazy this is – The Flight Formula in person even had about $15,000 – $20,000 in overhead (housing, catered food, mentors and coaches, etc.).
Removing price would be an insane proposition, right?
The results prove otherwise.
We were able to raise over $40,000 in commitments for the event. I write all about that experience here.
How Pay What You Want Pricing Works Even Better for Services Than Digital Products
A lot of people who happen upon Pay What You Want pricing immediately think it can only work for digital products.
What they’re unconsciously recognizing is that low marginal cost ought to make Pay What You Want more successful and lower your overall risk.
While this isn’t untrue, it misses a bigger point:
Pay What You Want pricing works best when there’s a personal connection.
To prove this, I tested Pay What You Want consulting this past year. After consulting with over a dozen people in March of 2014, from Argentina tourism companies, to African Telecom companies, to solopreneurs, to artists, here are the results:
The lowest contribution per hour of my time: $28.53
The highest contribution per hour of my time: $250.00
Average consulting rate per hour: $182.26
That means, on average, I was making more per hour than the average doctor or lawyer (here’s an article where I show the experiment and the results in more depth).
How (and why) Does Pay What You Want Pricing Work?
These results may seem incredible, but the reality is – it’s the result of basic principles in psychology and human interaction.
There are four primary reasons Pay What You Want pricing works:
1. Pay What You Want pricing removes the barrier to entry
Fixed-price products by their nature create a barrier to entry for consumers. By lowering the price to zero (or close to zero), you remove the barrier to entry.
Yet, while free destroys revenue, PWYW does not?—?people still contribute, and often more generously than you’d imagine.
2. Pay What You Want pricing removes the price ceiling
In an eye-opening interview I did with Ryan Delk of Gumroad.com, I found out something incredible:
Based on the results of multiple uses of Pay What You Want, Ryan discovered that the top 1-3% of our audiences contribute way over the average?—?so much so that they often more than make up for those who contribute the minimum.
“The interesting thing about Pay What You Want is that people fundamentally underestimate how engaged and excited the top 1 to 3% of their audience is about the things that they do…”
I found this to be true in my case.
When I released my first book as PWYW, the majority of my income came from the top 3% of my audience who contributed $50-$100 per download.
3. Pay What You Want pricing encourages impulse buying
The majority of buyers on the planet are looking for a deal.
When something is discounted – even if we don’t need the product or service – we often buy.
That’s an impulse buy and it happens to varying degrees for different people.
With PWYW, because we’ve lowered the barrier to entry, we can inspire the same impulse buying (ESPECIALLY when we make our PWYW offers limited time events).
4. Pay What You Want inspires generosity
Contrary to popular belief, people are not self-serving by nature.
The title from a Harvard Business Review article says it best:
“When the Rule Is “Pay What You Want,” Almost Everyone Pays Something”
The study goes on to explain that 95.95% of customers contribute money when paying is optional. The question is…how MUCH do those 95.95% actually contribute. Matt Homann of LexThink is a consultant for lawyers, accountants and large corporations like Microsoft.
He switched from fixed price invoicing to what he calls You Decide Invoicing.
Here’s what he had to say about his results:
“Since I’ve been doing this, my sense of the value I give my clients has increased. I’ve recognized that my clients don’t care about the time I spend working for them, but rather the results they get from working with me. Quantitatively, my income has doubled in the past year, because clients pay me more on my blank invoices than I would have charged them. I’ve also increased my per-engagement price (when I’m asked to give one). I know charge roughly three times what I would have quoted before my pricing experiment began.” Source: You Decide Invoicing
Double your fixed rate price…
How’s that for generous?
How to Apply Pay What You Want Pricing to Your Product or Service
Now it’s time to apply the Pay What You Want pricing to your products or services.
This is the framework I use and teach all my clients: what I call The 6 Step Perfect Pitch Framework
This framework will show you HOW to offer your product or service so people not only contribute, but contribute GENEROUSLY to your offer. And at the end of the day, that’s what we want, right?
So let’s get to it:
1. Clarify the Offer
The same rules apply to fixed priced products and services as they do to PWYW products and services.
If people don’t know what you’re offering, how can you expect them to contribute (let alone contribute generously).
2. Show the Customer You’re Human
We don’t give to corporations. We give to people.
If Applebees rolled out a line of PWYW appetizers, why would anyone pay extra?
But if the artisan baker down the street, who you’ve known personally for years, is offering his hand-crafted baked goods as Pay What You Want, now all of a sudden there’s a reason to contribute (and generously).
A couple ways to show people you’re human online:
add your picture to the website and sales page
write casually and passionately (i.e. not like a robot)
3. Appeal to Idealism
Pay What You Want pricing is all about giving people a reason to contribute generously.
We do this by appealing to virtue, generosity, karma, and any other ideal that encourages giving. Sometimes, just mentioning the word is good enough. Other times, we need to elaborate on what and why we’re using PWYW.
Remember: people buy stories. So give them a good story that appeals to their idealism (they’ll be more willing to contribute and to spread the word).
4. Anchor the Price
If you’re selling a premium product as PWYW, you need to anchor a premium price in the buyers mind.
Price anchoring is a psychological technique marketers use to get you ready to buy expensive stuff, like iPads – a $500 iPad by itself is ridiculously expensive compared to a laptop (it doesn’t even do as much)…
But if we compare it to more expensive iPads – up to $800 or more – it’s not so expensive. This is price anchoring (showing really expensive alternatives so your original product doesn’t seem so expensive).
With Pay What You Want pricing, since the price is up to the buyer, we need to anchor our product or service to similar but premium fixed priced products.
5. Steer the Customer to the Right Choice
Once you’ve price anchored the product, you need to actually steer the customer to the right choice.
PWYW is ambiguous in some ways, and ambiguity scares people. We need to be clear not only with our offer (see above), but with what an average contribution would look like, and, even better, what a generous contribution would look like.
6. Rally around a Purpose
When people see a Pay What You Want item, they’re going to ask themselves (either out loud or subconsciously):
Why let me choose the price?
Is this a trick / ploy / ruse?
That’s why it’s so important to rally your PWYW pricing around a purpose – to explain the purpose behind the pricing, which is just as important as explaining clearly the product or service.
Explain why you’re using the pricing technique; show your customers why the pricing technique is important (to them and to their community)
7. (BONUS) Add Charity to the Mix
While it’s true that a simple PWYW offer can increase revenue compared to fixed-pricing, it’s statistically proven to be more effective when you add charity to the mix. This ties into the ‘appeal to idealism’ I mentioned earlier but creates an even greater incentive to give and to give generously.
Of course, you need to integrate charity authentically, honestly, and congruently with your message, otherwise it comes off shady or forced and people won’t contribute.
No, you can’t ‘game’ the system with charity, so only use it if it fits.
So that wraps up a brief overview of Pay What You Want pricing.
If you’re interested in learning more, I created a free 7 part email series to go into each of these topics in more depth, including case studies, copy-and-paste PWYW pricing copy (for your sales page) and more.
Other than that, let us know in the comments below what questions you have or if you’ve tried out PWYW pricing – what your results have been.
Thanks and see you in the comments!